De Beers has announced the formation of a new company, Lightbox, which will be selling man-made diamonds (MMDs), mounted in earrings, pendants and bracelets - no rings.
I will assume everyone has read the details, and heard their rationale for claiming that this move will have little or no impact in the natural diamond business. Briefly, they will be selling MMDs in finished jewellery with total weights up to one carat, mounted in silver or gold, and with simple pricing - $800 per carat. There is no grading of the stones, which are white, yellow, blue or pink; the jewellery is meant for “moments” not “milestones” (like weddings).
De Beers has arrived at this moment after a few decades of seeing their business transformed from a monopoly into a commercial venture facing all the pressures of a competitive market.
At the turn of the century, Rio Tinto, with their major mine at Argyle in Western Australia, went their own way, sensing that they will do much better by selling directly to cutters, especially Indian companies, than by contracting to sell productions through De Beers. Then came the EU, forcing Russia to cease selling their productions through De Beers.
Then Botswana started to take larger and larger share of the profits in their major mines. De Beers, in what seems like an appropriate response, liquidated most of their $5 billion stockpile, as its function as a market buffer was coming to an end.
De Beers initiated or supported a variety of actions aimed at maintaining their market position. That included Supplier of Choice; CSR; the Kimberley Process; beacon programmes; the co-venture with LVMH to open De Beers stores (now fully owned by De Beers); and developing a brand, Forevermark.
Beneficiation became the new word in Africa, as De Beers was induced to yield more profits and control in Botswana, South Africa and Namibia. It would be fair to say that all these efforts, aimed at maintaining industry leadership, have met with mixed success.
All of this occurred during a period in which diamond prices became more volatile and many mines began to approach end of life. Major productions of diamonds are in decline, not only for De Beers but all producing nations, and will continue that way in the future. Some mines have already closed, others will be closing almost annually.
None of this was lost on anyone in the industry, and De Beers, who have always planned well ahead, must have gone through continuing reevaluations of their position and what their future might be.
De Beers had been very successful over many years in nurturing their sightholders, with three main objectives in mind, aside of maintaining their monopoly. See to it that they made money, but not too much. Get diamonds downstream with the lowest possible intermediate markups, partially by generating competition amongst the sightholders. See to it that diamond supply stayed close to demand so prices could rise, achieved most of the time by controlling stock levels and mine management. And, of course, all that would work as long as De Beers was a monopoly.
Now, all of that is essentially out of the window. So the thinking had to turn to imagining the company’s business in the future. For one thing, start producing MMDs if mining did not have long term viability. GE and Sumitomo had already been doing it for decades, and supplying industrial grades would keep De Beers in that business.
And, unlike GE and Sumitomo, De Beers would also have the objective the acquiring of the skills to produce gem quality diamonds. Selling diamonds for $800 a carat is a lot better than $1 a carat for industrial bort. It must have been clear that the historical core business, mining gem quality diamonds, would hit a wall some day. That wall is now in view.
This would put De Beers into a new three-part structure: Producing MMDs owning retail stores, holding an international brand, and manufacturing jewellery.
Those internal discussions must be continuing daily, as none of this comes easily. But the tilt is clear. The miners are steadily being edged out by the marketers. What better evidence is there of evolution from the old De Beers than the Oppenheimer family selling their interest and stepping away?
The decision to develop Lightbox is, by far, the most momentous move the company has ever made, one that many observers in the industry have long been expecting. De Beers has the skills in the Element Six division to mass produce gem quality MMDs. So here is how I guess the decision process might have gone in developing a 10-point programme: OK, we have a decade or two to convert the business from mining naturals to producing MMDs and essentially become once again the major producer of “diamonds.”
We have advanced the technology to the point where we have an edge, but if we wait too long, other producers will catch up.
We need to protect our sightholders because they need to be there for at least another 10 to 20 years.
Some sightholders are already developing MMD capability, wholesalers and retailers are not hesitating selling MMDs, so that wave has started. We need to act to try and kill that kind of competition.
We need to make a dramatic start, but in such a way as to damage the competition but keep our sightholders from screaming.
This will not be easy. To minimise the damage, let’s keep the price down; do no grading,
We cannot say that Lightbox will impact sales of naturals, which of course it will. No, that’s no good.
We cannot say that we do not know what impact it will have, because that will really drive the market nuts. No, that’s no good.
Let’s conduct a survey on how this range of jewelry will sell. It should be fairly direct to show that we are addressing a big piece of the market, sort of upgraded costume jewellery, that has been poorly serviced, and that will only act to enhance jewellery sales.
Moreover, to demonstrate that this is a “new” business, let’s disintermediate our entire established distribution and go direct to the consumer (DTC).
This survey, which I have not seen, gave them what they wanted - an indication that the major impact will be on costume and Moissonite. Given a choice, will a consumer not pick MMDs over wannabe simulants like Moissonite or CZs? That’s an easy one.
The reality is that retail price points up to $1,000 are critical to all jewellery retailers. It represents the bulk of the traffic for all mass and mid-market retailers. The range is important for establishing relationships with consumers. This is not an underdeveloped range in the market, but a good deal of it has been taken over by silver, lower karat gold, and non-precious materials, especially with gold prices staying high. And diamonds have very much been in this range. So I do not buy the claims based on this survey at all.
So far, De Beers cannot be faulted in what they have done. This is straightforward business planning for a company that is feeling the obsolescence of its business model.
The question remains, what else are they planning, and what will be the real impact on the industry?
It seems very unlikely that De Beers would be taking this direction, plunging into a product that has been attacked by many diamond people, just to pursue this very limited range of fashion jewelry. That would leave them a minor player in the future diamond business. Also, spending about $100 million to build a new factory in Oregon could not be justified to sell “moments” jewelry. Nobody can reasonably think that is their short or long term objective.
I have always thought of MMDs as the logical product to fill what will be a growing hole in the supply of diamonds as mines expire, the earnings gap grows, and a large, new middle class rises in Asia. We already see retailers hastening to add MMDs on top of their selections, a trend that will accelerate and competitors feel obligated to follow suit. The timing of such a trend really booming is hard to predict, but it is approaching quickly. If De Beers wants to position itself to be the key supplier when that trend matures, it cannot wait until it happens and then try to plunge into the market with MMDs. It needs to start now with this innocuous effort and work to establish its position well in advance.
And clearly, it is willing to do so knowing that it will potentially create chaos and disrupt the natural diamond business. This is a calculated risk, but one that De Beers almost has to take if it will remain a factor in the business over the long term. And long term is what De Beers has always focussed on.
No one should mistake the effect that Lightbox will have. It is going to disrupt the natural business. Lightbox has made MMDs a totally acceptable product. It will incentivise those already producing MMDs to ride this new coattail and to increase production and pursue technological advancement. It will force many retailers to seriously consider carrying MMDs, from Lightbox, and undoubtedly from many other companies.
It may also accelerate the decline in natural productions because MMDs, in the most popular sizes, will be far better quality than naturals and at far lower prices. Exploration and development of new diamond mines may slow considerably as companies will seek near assurance that the productions will have high value. The recycling of existing diamond stocks will boom further. Most importantly, there will be little reason for naturals and MMDs not to be mixed in the manufacture of popular jewellery, and fully disclosed as such.
There are many other aspects of this evolutionary and revolutionary moment that occur to me, a subject for future blogs. To believe that De Beers will not expand the range of this line to include rings and more expensive products is foolish. The same is already true for many other manufacturers using MMDs - and De Beers will have to be there eventually if they are in fact going to be the big dog.
The attempts by various institutions in the industry to fight the expansion of MMDs, even punish dealers who would dare to carry MMDs, is not only counterproductive, but will also guarantee that the disruption to come will be even more painful than it needs to be.
*Ben Janowski, founder of Janos Consultants, has been providing service to the jewellery industry for two decades. The article is reproduced with his express permission