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Miners Seeking Profits Beyond Rough
Some large diamond producers have been trying to conquer manufacturing and retail, but will independent businesses pay the price?
Jan 23, 2019 5:17 AM
By Leah Meirovich
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RAPAPORT... De Beers has been dabbling in the retail end of the
diamond industry for more than 15 years, but recently, other miners have begun
to follow suit, breaking out of the production box and entering other aspects
of the trade.
The move into retail was a natural step for De Beers,
says David Johnson, the company’s head of strategic communications.
Initially, De Beers undertook category marketing for the
entire industry, which required the business to be active in other parts of the
diamond pipeline. When circumstances changed, the company chose to invest that
money in building its jewelry brand so as to continue promoting diamond demand.
While the retail business is only a small part of the
group’s overall finances, it is no less important. It provides not only
revenue, “but also insight on trends and opportunities downstream, as well as
other key strategic benefits, such as driving demand for the products we mine,”
Johnson notes.
Plans in store
Other miners are progressively seeing the benefits of
diversifying. Alrosa has already segued into cutting and polishing its own
colored diamonds, which it offers for sale directly to consumers, and is
mulling over the possible purchase of diamond manufacturer Kristall. The
Russian miner is also working on a number of projects aimed at the end consumer
to make buying natural diamonds more appealing, says Dmitry Amelkin, head of
strategic projects and analytics for Alrosa.
Rio Tinto is likewise looking beyond a purely
mining-driven business. Senco Jewels — an India-based chain of franchise
stores — partners the Australia-based diamond producer with many of India’s top
jewelers. The venture offers retail customers “access to Australian
diamond jewelry collections by sourcing from the jewelry manufacturers who are
authorized suppliers under Rio Tinto’s Australian Diamonds program in India,”
according to Robyn Ellison, communications manager for Rio Tinto. All the
diamonds in the jewelry products at the Senco stores will be sourced from the
miner’s Argyle asset.
‘One has to consider the risks’
These moves are not altogether unexpected for some of the
large mining companies, says Kieron Hodgson, an analyst with London-based
investment bank Panmure Gordon.
“The larger players have clearly identified additional revenue
[and] profit potential in the downstream market,” he says. “I think vertical
integration lends itself to the higher-volume producers [as well as] the
smaller-volume, higher-value diamond producers.”
Stephen Wetherall, CEO of Australia-based miner Lucapa
Diamond Company, agrees with Hodgson’s assessment, but believes not every
company that can move into manufacturing or retail avenues should. While his
own company recently expressed interest in other aspects of the trade, he notes
that “one has to consider the risks and barriers to entry that you will face,
the likelihood of success, and if the returns you expect to garner for your
stakeholders from deploying a downstream strategy will be worth making the
step.”
Lucapa plans to move into the midstream next year with
cutting and polishing. One of the reasons behind this choice, says Wetherall,
is the hope of mitigating risk at that level. “In the past, the industry was
somewhat opaque and had a number of layers where margins were taken, but no
actual value was added by those layers. Margins were merely made by those
middlemen who really took no risk. Today, with the much-improved transparency
in the trade, and relationship development between the miner and the
manufacturing market, these middle layers can be circumvented, and that value
gained by both the mine and the retailer.”
The bottom line, he says, is that “for no material
additional risk, we can increase revenues.”
Cutting into the market?
But while the move toward a “side business” may prove beneficial
to big mining companies, what effect will it have on the smaller companies that
rely on the mid- and downstream part of the trade for their entire livelihood?
Will miners — which can likely offer consumers cheaper goods with
fully-disclosed provenance by cutting out middlemen — push existing
manufacturers and retailers into a smaller corner of the market?
“Personally, I am not sure mining companies will want to
‘own’ the mid-market segment,” says Hodgson. As that segment requires
specialized skills and the ability to process returned goods, he notes, “my
view would be for more joint ventures/partnerships in the medium term.”
Wetherall backs up this sentiment. While Lucapa is not
currently interested in moving into retail, that may change down the line, he
suggests. If the right opportunity arises, the company would be open to working
together with retailers.
“We do not believe venturing into the retail pillar on
our own is in our strategic future,” he says. “That side of the diamond value
chain is best left to those that know it best — the retail experts, who
themselves make considerable investments in their brands and retail outlets.”
Nonetheless, he continues, “consumer demands are
changing, and the industry needs to adapt to meet those changing demands.
Today’s consumer is showing interest in knowing where the diamonds they buy
were sourced, polished and set in jewelry (and by whom). If, in working with a
strategic partner, we can offer that certainty and comfort to their retail
customer, then it may be a natural progression.”
The downstream viewpoint
For their part, manufacturers and retailers don’t seem
overly worried about the potential encroachment on their territory.
“[While it’s possible] it may hurt some small businesses,
it will facilitate growth in others,” says Stanley Zale, vice president of
diamond and gemstone procurement for US-based manufacturer Stuller. He points
out that the longtime presence of De Beers in the space hasn’t taken away from
existing businesses.
“What about the trend to shop local?” he asks. “It will
be difficult for a multinational company to offer the same service as a jeweler
who is a member of a community. Never say never, but let’s not discount the
expertise and value that the independent jeweler provides to its customers.”
Harris Botnick, the owner of Worthmore Jewelers in
Georgia, sees the potential drawbacks, but doesn’t believe the miners’
expansion will ultimately change industry dynamics.
“No doubt, more competition muddles up the market,” he says,
and independent jewelers must “continually work to reinvent themselves and grow
so we can be the ones to deliver the final piece of jewelry to the end user.”
However, he points out that the day-to-day details of running a downstream
businesses — such as selling one item at a time and dealing with warranty
issues — may be difficult for miners to adjust to.
And while some consumers might be swayed by the cheaper
prices and easy traceability the mining companies can offer in the retail
space, Botnick believes others will still rely on independent jewelers when it
comes to purchasing quality pieces.
“We are selling memories, special occasions and love,” he
says. “That part of the equation cannot be achieved [by miners] at this time.”
This article was first published in the January 2019 issue of Rapaport Magazine.
Image: A colored diamond from Alrosa’s polished-diamond unit. (Alrosa)
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Tags:
Al, De Beers, Dmitry Amelkin, Georgia, Harris Botnick, Kristall, Leah Meirovich, lucapa, Lucapa Diamond Company, Panmure Gordon, Stephen Wetherall, Worthmore Jewelers
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