|
|
DTC - The Marketing Syndicate
Jul 27, 2000 4:59 PM
By Martin Rapaport
|
|
|
By Martin Rapaport
We are about to witness an historic and fundamental change in the role of De Beers that is sure to have long-term ramifications on the way our trade operates. De Beers, the company that markets about 70 percent of the world’s rough diamonds and spends $180 million a year on generic consumer advertising, is changing direction and focus. We must understand what De Beers is doing and how this will impact our business.
It all started with the De Beers' strategic review, implemented about a year-and-a-half ago to address the problem of De Beers' poor share price. The review uncovered major problems with De Beers' "old way" of doing business and encouraged management to rethink the company’s priorities and objectives.
Primary results of the review were that De Beers' large inventory policy was unacceptable and this implied that De Beers needed to abandon its role as rough controller and "custodians of the market." The review also identified marketing opportunities, highlighting the extremely low advertising-to-sales ratio (ASR) of only 1 percent in the diamond industry versus 10 percent for other luxury products. It also noted the underutilization of De Beers and other brand names for diamond jewelry.
De Beers now had to implement a new strategy for the company. The first big move was to let go of its role as "custodians of the market." This means that De Beers is no longer going to actively buy outside rough and intervene in the market to support rough prices (barring emergency situations). Furthermore, and much more importantly from a strategic perspective, it is no longer going to be the seller of last resort. In other words, when times get tough and rough supplies exceed demand, De Beers will no longer be the swing supplier. It will not sit back and let goods from other diamond suppliers fill demand first and then limit its sales to meet the leftover demand. No way. De Beers' new strategy is to be first, to get out in front of the other rough suppliers, gobble up all the good customers, and then let the other suppliers fill-in and sell to the leftover demand. When De Beers says that it is going to be the "Supplier of Choice," it means that it is going to position itself so that buyers choose to buy from De Beers before they buy from other suppliers. It means De Beers first.
At first glance, the above scenario seems mighty scary. After all, if De Beers insists on selling first and the other sellers don’t hold back the quantity they sell, prices will probably tumble when supply exceeds demand. The brilliant part of De Beers' new strategic plan is finding a way to deal with, or at least minimize this problem.
The key questions are: How can De Beers consistently sell its diamonds first – i.e.; get buyers to prefer its diamonds over diamonds from other sellers without lowering its prices? In other words, how can De Beers add value to its diamonds? How can De Beers grab and maintain market share? How can it differentiate its diamonds from other people’s diamonds? Furthermore, if De Beers does these things, what happens to the overall diamond market? What happens to non-De Beers diamonds and the people that sell them?
The Plan
The first thing we must recognize is that De Beers' new "Supplier of Choice" strategic initiative is fundamentally a marketing plan. The Central Selling Organization — aka The Syndicate — is gone, finished, dead. It is being replaced by the Diamond Trading Company (DTC), which is essentially a franchise-like marketing company that has its own DTC business-to-business brand. De Beers is shifting the direction of its tremendous monopoly market power. Instead of using its power to control diamond supplies, it will use its power to control diamond distribution.
The De Beers' plan is pure genius. It doesn’t decrease De Beers market power, but increases it by moving it downstream, away from free-riding competitors and closer to consumers, where it can be focused to lock-in consistent market share for a branded added-value product. De Beers has discovered that it can utilize its market power much better by controlling how and to whom it sells rather than controlling the supply of rough diamonds. De Beers doesn't have to control the buy side if it can control the sell side.
The De Beers plan has three strategic objectives: One, obtain and lock-in consistent long-term market share for DTC diamonds so that when times get tough, DTC diamonds sell first. Two, add value to DTC diamonds so that they bring better prices and get market share priority. Three, grow overall diamond demand so that everybody gets to sell more diamonds — including the competition.
How the Plan Works
The essence of the new De Beers plan is effective and efficient control of access to DTC diamonds so as to ensure that sightholders and their clients comply with specific requirements that enable the realization of the strategic objectives defined above. In other words, the DTC will only sell diamonds to firms that have the capability of locking-in market share, adding value and growing diamond demand. Sightholders that accomplish these objectives will get more and better selections of diamonds than firms that don’t. In effect, sightholders will have to compete for rough allocations from the DTC based on their ability to meet the strategic marketing objectives of De Beers.
Simply put, if you want to be on the DTC team, you are going to have to know how to run with the ball, the better you run with the ball the more passes (i.e. opportunities) you are going to get from the DTC. It is all terribly efficient from a competitive standpoint, if you are a sightholder.
To set things straight, the DTC has released a series of rather complex documents that provide the basis for the future relationship between sightholders and the DTC. These documents provide detailed specifications of exactly what is expected for sightholders to be in compliance with the new DTC objectives. Of primary importance is the establishment and publication of objective criteria for who can become or remain a sightholder. Compliance with a "Best Practice Principles," document will be required and a revised "Conditions of Sale" was released. All these documents have been linked in a "DTC Sightholder Policy Statement," which will establish a legal contractual relationship between the DTC and sightholders effective July 2001.
Two-Way Street
It is important to note that the DTC is not merely making demands on sightholders; it is also offering something in return. The DTC is presenting a number of added-value propositions that sightholders can use to gain market share and add value to the diamonds they sell.
Consistent Supply. Subject to availability, the DTC will contractually agree to supply consistent quantities of select qualities to sightholders that are working on added-value marketing programs. This means that a sightholder or a customer of a sightholder that comes up with a good program can obtain a guaranteed supply of diamonds at a fixed price over a reasonable period of time. Sightholders that sign up for programs will no longer have to worry that allocations will be cut due to inconsistent supplies from sight to sight. You find the added-value customer and the DTC will make sure you have the diamonds.
The DTC brand. The DTC B2B brand will be available to sightholders. In effect the DTC is a hallmark that will assure customers that the diamonds supplied are natural, untreated, non-conflict diamonds.
The Forevermark. The Forevermark is a logo that symbolizes the "A Diamond is Forever" slogan and it will be promoted heavily at the consumer level. Select sightholders will become Forevermark holders, who will be able to use and have their customers advertise the mark and slogan as a way of connecting the diamonds they sell with the De Beers' advertising programs. The De Beers name will no longer be used. It is being reserved for a more exclusive brand of diamonds and it is being replaced with the Forevermark and slogan in all generic advertising by De Beers. Linking to the logo and slogan will provide significant benefit to retailers who buy from sightholders.
Market Research and Training. Sightholders and their clients will have access to extensive DTC research data and reasonable training to help them develop optimal marketing programs.
Marketing
It is clearly the intention of the DTC to require sightholders to develop sophisticated marketing and distribution programs that take advantage of their specialized product and market expertise as well as the added-value incentives provided by the DTC. Undoubtedly, in the months ahead, marketing skills will be more important than manufacturing skills. In effect, the DTC is telling its sightholders, "We do not want you to merely manufacture diamonds and sell them into the market, we want you to come up with marketing programs that put diamonds into the right hands." Hands that have the ability to provide consistent demand. Hands that add value to the loose diamonds you sell, through branding, jewelry design, innovative retailing and advertising. Hands that open new markets and expand overall diamond demand.
It is important to note that the DTC does not expect its sightholders to do it all themselves, nor are they expected to add value by becoming retailers and destroying the existing distribution system. Vertical integration might be appropriate for a few firms, but for most sightholders, the added cost of retailing direct will be much greater than the added-value. Retailing is a great way to lose money if you don’t know what you are doing.
The trick for sightholders is to establish strategic relationships and alliances with firms that provide the access and/or expertise to add value to diamonds through optimal marketing and distribution. This approach provides great opportunity for firms that have downstream added-value marketing potential. In effect you don’t have to be a sightholder to benefit from the new DTC program, you simply have to hook up with one and find creative ways to add value in a consistent manner.
Growing Demand
The DTC will be forcing sightholders to significantly increase advertising expenditure since it is one of the monitored sightholder criteria. De Beers believes that by turning sightholders into marketers it will be able to generate a new culture of marketing competition in the diamond industry. This competition is expected to force all firms everywhere in the industry to significantly increase marketing, promotion and advertising expenditures as sightholders compete with each other and nonsightholders. In effect the DTC is starting a marketing war.
The DTC is not really interested in sightholders merely taking market share from each other. And while getting sightholders to steal market share from nonsightholders that do not advertise is a nice side benefit, that is not the DTC's real objective either. The real intent of the DTC is to get everybody to kill each other with advertising so that overall diamond advertising increases exponentially and diamonds compete more favorably against other luxury products. The DTC figures that once they start the ball rolling, competitive forces will keep it rolling and diamond demand will grow significantly as we move up from a 1 percent ASR. Ultimately, the name of the game is to increase overall diamond demand by increasing diamond advertising.
Outsiders
The new DTC plan strongly encourages sightholders to develop efficient marketing systems that direct their diamonds to consistent and reliable sources of demand. It does not call for the elimination of middlemen as long as these middlemen are cost-effective and add value by optimizing distribution. In fact there is great demand for middlemen that hook up with sightholders and efficiently market and distribute diamonds.
What is going on is that the DTC doesn’t want diamonds floating around in the marketplace. It wants its diamonds in good hands, hands that have consistent customers who know exactly what to do with them. Hands that make the diamonds disappear. The trick of the trade is to have the right customer for the right diamond. You don’t have to be big and you don’t have to be a sightholder. You have to know how to sell and what to sell to whom.
At this stage it looks like the new DTC plan will seriously shake up the diamond trade, sightholder and nonsightholder alike. Whether or not it is good for the trade will depend on implementation. We are in any case greatly encouraged by the creative and innovative nature of the plan. Our industry needs to be shaken up.
The DTC is well advised to refrain from using its monopolistic market power in ways that destroy the economic efficiency of the freely competitive trading markets. These spaghetti-junction markets are probably much more efficient than the DTC imagines and provide critical liquidity and clearinghouse services. Finally, if De Beers seriously wished to exit the monopoly game, it should consider at some time in the future that it will have to split the DTC marketing business off from its De Beers mining interests.
Ultimately, the name of the game is finding new ways to add value to diamonds. Adding value through increased manufacturing efficiency has run its course. The new emphasis on marketing presents opportunities for those that are not afraid to invest in the market of creative ideas.
The secret to unlocking the beauty of the diamond lies not merely in the great skill of the cutter that brings forth brilliance from a stone; the secret also hides in the imagination of man, who has endowed the diamond as a symbol of love, bringing forth sparkle from the eyes of women.
Please be sure to read the Nicky Oppenheimer, Gary Ralfe and Stephen Lussier interviews in this issue. See RDR 03/03/00 articles "The New De Beers" and "Monopolist or Market Maker" for background information. All are available at diamonds.net.
_________________________________________________________
DTC BEST PRACTICE PRINCIPLES
These principles are designed to ensure that best practice is observed in the gem diamond industry.
1. We are committed to operating our business with a view to ensuring that consumers buying diamond jewelry are able to rely with confidence on the professional and ethical standards and technical skills of the gem diamond industry, taking account of the following:
• natural diamonds are objects of prestige, a luxury good, generally acquired for sentimental reasons and are regarded as items of value by the consumer.
• diamonds are a unique item about which consumer has limited expertise and consequently, in order to make an informed choice, the consumer is reliant on:
(i) the standards and integrity of the diamond industry and
(ii) information from the diamond industry as to cut, color, clarity and carat weight and other attributes, including the application of any treatment.
• the highest professional and ethical standards and technical skills are necessary to ensure that consumer trust is not misplaced and that the reputation of the gem diamond industry is maintained and enhanced.
• consumers expect to purchase diamonds in their natural state, without any treatment, beyond the accepted skills of craftmanship associated with their cutting and polishing and therefore the danger of non-closure of treatment of natural diamonds, is contrary to the interests of consumers.
• the injury and hardship suffered by local populations (and the potential for it) when conflicts arise in diamond producing areas are unacceptable, as seeking to profit from such conflicts.
2. We are committed to operating out business in such a way that we neither engage in, nor encourage in any manner, the following practices which are regarded as unacceptable and against the public interest and that of the diamond industry:
• buying and trading rough diamonds from seas where this would encourage or support any human suffering.
• the use of child labor.
• practices which intentionally or recklessly endanger or harm the health or welfare of individuals.
• conduct which conflicts with the principles set out in 1 above, thereby bringing the diamond industry into serious disrepute.
3. We are committed to the highest industry ethics including the following:
• action to address concerns arising out of the misuse of rough diamonds in support of conflict and regular discussions on other issues relevant to the gem diamond industry to enable appropriate and timely industry responses.
• the provision of proper working conditions (including the health, safety and well-being of workers).
• the dignity of individuals and best practices to ensure the fair treatment of individuals.
• full compliance with international best practice and the related regulatory framework with respect to the environment.
• full disclosure at all levels of the diamond distribution chain and, most importantly, to consumers, of all treatments to natural diamonds and compliance with the rules, regulations and guidelines published from time to time by the diamond industry's governing bodies.
_________________________________________________________
Supplier of Choice
Supplier of choice what's its about:
(I) introduce objective criteria for the selection of sightholders, and confirm elements of the existing basis of supply, as well as new arrangements;
(II) establish a new identity aimed at protecting our sightholders and, ultimately, retailers and consumers and codify protections for this identity;
(III) establish best practice principles to promote and encourage high industry standards; and
(IV) provide added-value services for our sightholders.
Sightholder Criteria and other Considerations
The Sightholder Criteria comprise objective selection criteria, which will be taken into account by DTC in determining whether an applicant is eligible to apply for boxes. DTC will also take into account the sightholder's level of satisfaction of the Criteria, as compared with that achieved by other sightholders, in determining whether or not to meet applications for boxes.
|
|
|
|
|
|
|
|
|
|
Tags:
Compliance, Conflict Diamonds, Consumers, De Beers, DTC, Jewelry, Luxury Products, Manufacturing, Polishing, Sightholders
|
|
|
|
|
|
|
|
|
|
|