Forget the news of the revised Diamond Trading Company (DTC) Sightholder list. A far more significant De Beers decision, which was posted this week through an innocuous letter on the DTC intranet, will have far more ramifications than anything else on future Sightholder status and the meaning of Sightholder value.  De Beers has decided that the Forevermark, which hitherto was a specific privilege held by Sightholders, will now become accessible to any diamantaire in the world and apply also to non-De Beers mine output. There’s only one limitation: the diamantaire must meet certain criteria such as Best Practice Principles (BPP).

This BPP “limitation” has no real meaning since, as we’ve written before, De Beers – so far - has lacked the political will or the commercial sense to enforce BPP. (I won’t even mention the “zero tolerance” policy that was contained in the former managing director Gary Ralfe’s various statements on introducing BPP.) As it stands today, a fraudulently upgraded certificated stone or a stone bought with laundered money would still be entitled to a Forevermark.  Having said that, from a De Beers perspective, this new Forevermark policy – if successful – will have consequences far beyond the composition of any Sightholder list or rough allocation policy. It is a brilliant (though not unexpected) move by the company.

In the pre-Supplier of Choice (SoC) days, De Beers was a pure monopoly, controlling the diamond market through manipulating the rough supply creating artificial shortages.  It firmly was the industry’s price-setter. Under SoC, that rough control exercise was moved somewhat downstream to controlling the behavior of distributors (i.e. the Sightholders), who were compelled to make marketing investments, develop brands, link up with retailers, etc.) in order to grow the market. That policy was only partly successful and became unsustainable when the rough distribution was re-channeled through local African DTCs.

Now we’re entering the third stage. De Beers is again moving its market control functions further downwards to the level of worldwide diamond jewelry retailers – albeit in a more limited manner. The overall strategy is to make the Forevermark not just the dominant brand but the leading, universal standard for integrity of the product. It is like the Woolmark or, in the words of De Beers, “the universal reference point for consumers.”

The Forevermark promotions and marketing will be supported by the $200-plus million advertising budget that was moved from the DTC to De Beers a few months ago. A huge team has been built at De Beers under the management of Francois Delage, the Chief Executive Officer of the De Beers Group Marketing. In this group there are geographic sections for some 10 different regions in the world for the management of the Forevermark. A huge support bureaucracy has been created.

And here comes the catch: De Beers owns the proprietary technology to “insert” the icon and identification number on the crown of the polished diamond. De Beers is running a similar program already in various Asian markets with retailers which also attach an icon to the crown. If the Forevermark becomes a universal brand , and if consumers will only buy or will prefer purchasing diamonds with the Forevermark guarantee, De Beers will have at its fingertips a databank of virtually every polished stone that moves anywhere, will know the manufacturers, will know the region, will know the stores, etc. The company will have a comprehensive, global view of what moves and doesn’t move anywhere in the global market.

Any Angolan, Russian, DRC, etc. diamond will have the Forevermark, provided that the manufacturer meets the De Beers’ criteria. De Beers will “see” diamonds which they have never seen before. As the Forevermark ceases to be mostly a promotion tool but will become a major profit center within De Beers, it is difficult to expect that the it will tighten it enforcement of BPP – as long as they can avoid further erosion of their own (and Forevermark’s) brand equity.

No Anti-Trust Concerns

Needless to say, prima facie, this might raise antitrust concerns, though I have a feeling that this time De Beers finds itself well protected. The settlement agreement in the United States, which settles all present and future antitrust actions against De Beers, provides the company with immunity against future actions as long as it doesn’t materially change the marketing agreement agreed with and approved by the European Commission (EC). [SO far there is no Forevermark in the U.S.; apparently De Beers awaits the final settlement of the cases.] The EC has clearly approved of De Beers’ use of the Forevermark, and it seems quite unlikely that a widening of the group of users would constitute a breach or material change of the agreement with the EC.

Its main effect will impact the DTC Sightholders. Hitherto, they have been made to believe that the Forevermark icon was something for the exclusive use of specifically licensed DTC Sightholders.  The extremely complex Signature License that is part of the SoC contract with clients contains dozens of clauses and hundreds of sub-clauses, which governs the use of the Forevermark and which specifically makes clear that the right to use the Forevermark terminates whenever the Sightholder loses a Sight. It’s clearly implied, if not specifically stated, that the Forevermark is a part of the Sightholder’s privileges. This is not the case anymore.

The removal of the Forevermark from the privileges enjoyed by DTC Sightholders clearly diminishes the benefits of being a Sightholder. From a good governance and ethical perspective, it would have been much nicer and certainly more appropriate if this would have been brought to clients’ attention well before applications for the new contract period had to be made. It may not have made a big difference in the decision whether or to apply, but it certainly would have impacted the marketing programs that were based on the Forevermark. Some clients might have made different programs, and might have had a need for different goods. When the marketing was moved from the DTC to De Beers, the latter surely knew already what it was planning.

In his announcement to Sightholders, Francois Delage wants to soften the blow to those who are going to lose their Sightholder status next week. “Existing and recent DTC Sightholders through their continuing compliance with De Beers Best Practice Principles will certainly meet one of the fundamental criteria to be a Forevermark Diamantaire.” Ex-Sightholders will now have a chance to become a “Forevermark Diamantaire”. Doesn’t seem to me like much consolation: not only they can – everyone else can qualify for such status.

The timing of the announcement is interesting as well as puzzling. Why now? Is it because all Sightholders are so concerned about their own future and the new list that they don’t immediately internalize the indications of this move?  The letter to the Sightholders states that decision to make the Forevermark available to any manufacturer in the world is based on feedback from the market including Sightholders. We called a dozen Sightholders. None of them said that they had suggested that the Forevermark privilege should be given to non-Sightholders. This never crossed their minds. Actually, none of them had ever personally met Francois Delage, who recently joined De Beers from LVMH. The letter was his very first direct communication to Sightholders, some of whom were amazed that it didn’t include some introductory paragraph on “who I am”. [Said one insider: “Apparently, though coming from a client-orientation, he has quickly adapted to the more monopolistic behavior in dealing with those who basically create the income from which the salaries are paid.”]

Controlling the Retailers

From a De Beers perspective the move is near-genius. Its future profits will not be overly dependent on rough sales. It has created a new profit center through the licensing of the Forevermark privileges and collecting fees for the branding, for the licenses, and for the participation by the retailers. It will certainly not only have a realistic chance to recuperate all of its marketing costs, but at the end, it will make money – lots of money. And then there are all the additional benefits. De Beers itself, through its joint venture through LVMH, is becoming a leading diamond jewelry retailer in the world. The organization will have the best possible marketing information at its disposal, and will enjoy a significant competitive advantage.

There is another aspect worth mentioning. The Forevermark will apply only to natural diamonds. De Beers will now be able to enter the synthetic markets as well, as they themselves have clearly created a control for product differentiation. In a market with synthetics, consumers indeed may want to insist on having natural diamonds with a Forevermark. Taking this to the extreme – every non-Forevermark diamond might potentially become “suspect.”  The more synthetics – the better for Forevermark. It is truly mind-boggling.

A key question is: what will other producers do? Will Alrosa also decide to spent $200 million and create a quality identifier for its goods in support of their clients? What about Rio Tinto and BHP? Will there be competition or will all defer to De Beers?

As DTC clients are anxiously awaiting the phone call on Monday on whether they are “in” or “out,” meaningful discussions on the Forevermark is delayed for another time. But the subject needs to be discussed.  It is one of the most significant moves made by the DTC since it announced SoC. But, as I indicated, this has also significance for other producers.

Let’s look into a crystal ball. Nothing will happen immediately. Ten years down the road, when it has become (in De Beers words) “the universal reference point”, De Beers may steadily increase the price charged to retailers for the privilege of selling Forevermark diamonds….  Then retailers will become like DTC Sightholders: they’ll have no choice and pay – and subsequently increase the price of polished. De Beers will literally earn significant money on both sides of the value chain. Needless to say, that diamond manufacturers will be perennially squeezed in-between. It is brilliant. 

Have a nice weekend.

After our press deadline, we received the following comments from Ellie Goss, the International PR Manager of De Beers Group Marketing:

1. The details of the eligibility criteria, including BPP compliance, and how to apply to become a FOREVERMARK Diamantaire, have not been communicated yet - they will be communicated in Q1 2008

2. De Beers Group Marketing is currently reviewing how non-DTC sourced diamonds need to live up to the FOREVERMARK promise and how these standards will be implemented - these will be communicated in Q1 2008

3. It has been made very clear to Sightholders that the FOREVERMARK icon was not going to be available for use by DTC Sightholders from the end of this contract period.