Upon asking for feedback from Diamond Trading Company (DTC) Sightholders about the launch of the De Beers Forevermark brand presentation, which was attended by select clients in London at the last Sight, they all mentioned “the umbrellas.” It had been raining when clients arrived at the presentation venue, and a De Beers Group Marketing (DBGM) representative held an umbrella over the DTC Sightholders’ heads all the way from the taxi to the entry.

That kind of courtesy had never been encountered before - and represents quite a change from the time in the 1970s when DTC Sightholders were not allowed to enter the main entrance of Charterhouse Street 17. Instead, they needed to access the building through a small side entrance, which, today, is mainly used for service suppliers and deliveries.

The presentations themselves, made by Francois Delage (DBGM’s CEO), David Lamb (DBGM’s Chief Strategic Officer), and Jonathan Kendall (DBGM’s Head of Operations), were so professional that some participants remarked that “almost for the first time, we are getting a feeling that those presenting the strategy know what they are doing. They’ll be successful.” There is a consensus, said one observant, “that they [i.e. De Beers] now got it right.”

What actually happened at the presentation launch itself, we don’t know. This DBGM management isn’t too concerned about the diamond trade press. Actually, it isn’t too concerned about DTC Sightholders either – and that probably is the best way to summarize the new De Beers Forevermark strategy. De Beers has now commenced the final phase of a strategy that has moved the company’s control from the rough supply level to the retail level of the value chain.

When the Sightholders entered the lavish Forevermark launch, it probably signified the last time they would enjoy the “protective cover” of DTC Sightholder status – or what has remained of it. When Supplier of Choice (SoC) first started, Sightholders enjoyed the exclusive right to the so-called Forevermark – which was presented as a quality symbol, comparable to the woolmark that certifies the genuineness of the materials from which the product is made. DTC clients were encouraged to develop their own diamond brands – often at great costs. The Forevermark could be used as a further guarantee that the diamonds were sourced from “good” sources, manufactured by people adhering to Best Practice Principles (BPP), and, therefore, that the product was natural and not-treated.

The Forevermark was seen as something wholly for DTC Sightholders, and the symbol appeared on all of their business cards, publicity materials, etc. However, this is no longer the case. In July 2007, it was already announced that under the new supply contract, which commenced in April 2008, there would be no more exclusivity to DTC Sightholders – and that polished from (almost) any source could qualify for Forevermark brand usage.

So what was this lavish brand launch all about? The Forevermark officially changed its status: from a woolmark certifying the characteristics of a branded or generic diamond, it has suddenly become a full-fledged brand in its own right.

Suddenly, DTC Sightholders have been confronted with a new fact of life: all (or most) of the moneys invested in their own diamond-brand development over the past few years were probably totally wasted. Their brand must now compete with a full-fledged Forevermark brand. And what a brand it will be! As Francois Delage proudly stressed, it will become “the world diamond brand” – a strong diamond brand that is slated to evolve into “the point of reference for the trade and the consumer.”

Through the Forevermark brand, De Beers has become a company in competition to all other brands, including the brands of its very own clients. Anticipating this reaction, De Beers Managing Director Gareth Penny tried to reassure clients that “the Forevermark brand is designed to be non-confrontational to existing brands and businesses,” but the very fact that he needed to say so underscores the validity of the clients’ unease. It seems like a breach of an implied promise.

Some of my DTC sources tell me that my interpretation is wrong: other brands, such as the Leo brand, the Elara brand, or you name it, will be able to claim that “it carries the Forevermark inside” – something similar to Intel chips in an HP computer. That sounds nice – but it isn’t so.

The Forevermark brand will be supported by a few hundred million dollars worth of advertising and promotion support. With few exceptions, none of the recently developed diamond brands will be able to compete successfully. The pilot marketing of the brand that was done in Hong Kong, through select DTC Sightholders and retail outlets, was cited as tangible evidence of success to date. For instance, the pilot program generated Forevermark sales greater than $240 million in retail value; more than 143,000 stones had been inscribed; and it had already captured 10 percent of Hong Kong’s retail market.

What David Lamb failed to say is that one of its strong Forevermark brand partners was convicted recently for having paid bribes to get bus drivers, taxi drivers and tourist agencies to generate customer traffic to the stores. The jeweler has now been removed from the Forevermark client list, but may be reinstated some time later in the future.

Empowerment of Retailers

One might argue that the Hong Kong pilot program should have given a sufficient indication of what DBMG was up to. Not so. The Forevermark brand marketing mechanism will marginalize DTC clients and empower retailers. It will further enhance their bargaining position vis-à-vis polished suppliers.

DBMG will scout around the world for “good retailers” who will be convinced to carry the Forevermark brand. These retailers will have to pay some $50,000 per store per year to De Beers just for the right to sell the brand. So a small chain of some 10 outlets will have to pay De Beers some half a million dollars up front even before the chain’s owner actually knows who will supply him. De Beers is giving the retailer “the right to nominate his Forevermark Brand” supplier. If the favorite supplier to the retailer is not a DTC sightholder and is not using De Beers’ rough, that doesn’t matter.

Such a nominated supplier needs to be able to show that he is a manufacturer (who converts rough into polished), that he adheres to BPP and that he is in compliance with Forevermark standards of pipeline integrity. My DTC sources tell me that, in fact, it means that suppliers to the retailers are basically all DTC Sightholders, as they meet all these standards. That is, however, a very temporary situation. It may give them a first-mover advantage – but, in the end, the retailer will decide from whom he wants to take the Forevermark brand, and he will be able to play out one party against another.

At this point not all diamonds will be allowed to be branded with the Forevermark. It is my understanding that, size-wise, only goods of 0.18 carats and up will qualify, with colors and qualities being better than J and SI2, respectively. Fancy colors qualify as well, while all stones must have a “good” make or better.

Assuming that De Beers’ Forevermark will generate attractive price premiums for the retailers – a profit they share directly with De Beers through the annual fee plus a possible charge per stone – and assuming that De Beers will fully control the choice of retailers that will become Forevermark “empowered,” the DTC clients will see the market for their better polished output “shrink” in terms of potential retail buyers. This will further weaken their price-bargaining leverage. The “profit” on the brand, i.e. the brand-premium, will basically be shared between the retailer and De Beers. When it becomes a huge success – which we think it will – De Beers will simply increase the annual fees to the retailer.

What is brilliant in the whole concept is the realization that generic advertising, something De Beers has done since World War II, has only a limited impact on increasing demand – probably not more than a half of a percent for $200 million spent. Focusing the advertising on brands may not trigger a greater incremental market growth – but it will enable raising the product price considerably, thus increasing the yield (benefit) derived from each advertising dollar.

Just think ahead. A few years down the road, no respected High Street retailer, who has the privilege of being one of the chosen few, can afford NOT to sell a Forevermark diamond. Like the DTC Sightholders of the past, they will all be “working for De Beers” in one way or the other. They will also be less inclined, or motivated, to sell generic products or competing brands.

De Beers will have selected market partners combining national and regional chains and local high-end independents. It will focus on specific stores selected in each city where the Forevermark brand will be available. Does it sound familiar? Are we indeed seeing a return to monopolistic behavior?

Dominancy Argument May Not Hold Water

Everyone that I talked to outside of De Beers itself noted possible anti-trust concerns. My instant reaction is that the hundred-or-more lawyers on the De Beers payroll must have explored it, and they obviously know what they are doing. This initiative seems professional from A to Z, so chances that they have it wrong are slim. My second reaction is that the lawyers of De Beers have been wrong so often in the past that nothing is impossible now.

Before anyone starts running to the authorities, it may be useful to look at the figures. In spite of all the branding efforts, the diamond jewelry industry is still one of the most fragmented industries in the world. The world's largest diamond jewelry brand has a circa one percent market share. Because of the huge volumes of small and cheap goods, it is virtually impossible to achieve anything beyond low single-digit global market share in the branded end of our business. 

In terms of carats, less than 20 percent of total annual polished supplies to the market is above 0.18 carats in size. If we actually start counting stones on the polished markets, less than 1.4 percent would be larger than 0.18 carats – and if we look at the color and clarity limits, in terms of number of stones, it would not surpass one percent. That these stones may account for the lion’s share of the money is a different story altogether.

De Beers is not ignoring the trend in which some of its biggest clients prefer selling directly to “private clients,” simply bypassing the retailers. To accommodate these players, a special Forevermark brand license can be issued to those having stones of +5 carats, which are to be sold privately to individuals, to non-program high-end jewelers and auction houses.

So talking about dominancy needs to be qualified as meaning dominancy in a very tiny segment of the market – and I doubt that authorities will be in a hurry to define this small segment legally as a “separate market.” In other words, legal dominance may well be impossible to achieve.

Officially, De Beers is still avoiding the formal introduction of the new brand in the United States – and that must have its reasons. A gradual introduction is planned for Hong Kong, China and Macau later this year, followed by Japan, Taiwan, India and South Africa in the first half of 2009. We don’t know who is next; we assume by that time the United States would become the logical target.

The Forevermark brand will develop new classic concepts. The next one will be the so-called “The Forevermark Setting,” showing four points - North, South, East, West – allowing the lucky jewelry recipient to "Navigate the world through relationships.”

One of the reasons of my confidence in the success of the effort is that – just as with SoC at the time – there seems to be no plan “B,” no fallback position. “All De Beers Group marketing’s resources, imagination, investment and reference is now to be put behind this brand,” noted one of the speakers at the launch. It is the intention for the Forevermark to be universally recognized – “such as Nike’s Swoosh and Apple’s Apple.” Whatever that means, I should add.

The $50,000 per store fee may be waived or reduced in the early phases of the Forevermark brand introduction – purely because the supplies will still be rather limited. That said, it is not entirely clear what retailers actually will get for
the money. If it includes a commitment to huge marketing spending in the local market, perhaps it is a reasonable amount. The retail “experience” will be adjusted accordingly. So will the packaging in black and white, Chanel-like boxes.

The key challenge to De Beers remains the “exclusivity” in the high end of the market. As one Antwerp dealer commented: “If they are indeed successful with this, it may become a victim of its own success. Why would retailers want to continue paying up fees when everyone else in town is offering the same stuff as you? The Tiffanys and Cartiers of this world do not need this gimmick to start with, but will be even less inclined to use it once they see it being used
amongst lesser retailers.”

Introducing: The De Beers Grading Report

It certainly hasn’t been lost on De Beers that the Gemological Institute of America’s (GIA) profits on the sale of grading reports are about half of their turnover. We are talking huge margins. Why not collect some of this grading money?

As the inscribing of the Forevermark brand registration number and logo requires the stones to be submitted to a De Beers lab anyway, it is only logical that De Beers will now be offering its own grading reports on Forevermark brands. However, its involvement in the diamond’s value chain, its financial involvement and stake in making the sales a commercial success (also for the retailer) makes De Beers the “wrong party” for issuing grading reports, where independent third-party verification should be the key to inspiring customer confidence.

De Beers will probably argue that other grading reports have “failed to live up to diamonds,” to phrase it gently, and that their decision to enter the certification business should be seen almost as a “rescue mission.” I am just guessing here.

In an attempt to differentiate, De Beers stresses that its certificates will employ proprietary technology for color grading (haven’t we heard that before in context of the Dubai lab?) and that each stone will pass five separate inspections in a “blackout” environment, so the identity of the owner of stones will be unknown to the grader.

De Beers already has a lab in Antwerp; in a few months, De Beers’ labs will be opened in Hong Kong and China, followed by a laboratory in Mumbai in the first half of 2009.

There seems little doubt that a De Beers lab will cut into the market share of GIA certificates, certainly more than into the market of other labs. It might even trigger a reduction in the costs of GIA certificates, something for which the market will be grateful.

The De Beers lab will also cause problems for this writer. “Chaim, every time you will write about the GIA from now on, it will help De Beers. Keep that in mind,” remarked one industry leader attending the Shanghai Congress. I laughed - I don’t think De Beers needs any help.

Nicky and Jonathan Oppenheimer may be inspired by the Rupert family’s success – their erstwhile mining rivals in South Africa, which founded the Rembrandt Group in the 1940’s, building it up into a multibillion concern that was at one point second in size only to Anglo American. In 2000, after a process of disinvestment of many of its industrial and mining interests, the Rembrandt Group's activities were shifted to focus on luxury brands, establishing the Swiss-based Richemont concern, engaged not just in brand jewelry and watches, but also tobaccos and liquors.

Stepping into these footsteps, De Beers may well endeavor to get most of its future profits from retailers’ fees or royalties, from certificates, from selling marketing accessories, and from selling other luxury products, beyond jewelry. In diamonds, the company will be making money from the two most profitable parts of the value chain: mining and retailing. All those operating in between these parts, will likely see margins squeezed. They’ll become the industry suckers.

De Beers’ income from mining has been steadily reducing as ever greater shares of the company’s profits are going to its joint venture partners in Africa. In contrast, the revenues from the Forevermark brand licensing, the revenues from its own De Beers Diamond Jewellers stores and its income from other downstream activities will all accrue solely to the De Beers shareholders.

Conceivably, three years down the road, the mines will just become a division of Anglo American, with most of the marketing outsourced to the company’s African joint venture partners. The balance of the rough not sold through African local DTC companies will most likely be auctioned off on the internet.

De Beers itself will become the world’s largest diamond retailer, holding the most powerful diamond brand.

What does this mean to the diamond trader, the diamond manufacturer, the jewelry manufacturer or other rough and polished suppliers? We don’t really know – we’ll probably devote a good deal of time in the next few years to just finding out. The traditional De Beers umbrella will now shield selected retailers.

The lucky selected retailers seem undoubtedly the bigger winners – but they probably cannot even start to imagine how much they may have to pay for it. We will say again: we wonder what it will do to everyone else in the value chain.

Have a nice weekend.