RAPAPORT… Taking control of the De Beers Diamond Jewellers (DBDJ) retail operation from LVMH has completed De Beers transformation from a mining company into a diamond luxury group.
The acquisition means that not only is De Beers effectively spread across the entire diamond pipeline now, but it also has full control of its name, which the retail business was unable to leverage.
The partnership between De Beers and LVMH was, essentially, a failed one. DBDJ produced consistent losses; its most recently available report showed a net loss of $13.2 million in 2015 – largely due to high costs and operating expenses – even though sales rose 3 percent to $161.3 million that year.
Initially, at least, that reality will weigh on De Beers as the company takes responsibility for running the retail chain. Before, LVMH managed the operation, with De Beers taking a share of the profit – or, more accurately, incurring its losses.
In the new structure, from an accounting perspective, DBDJ will likely be treated the same way as other De Beers subsidiaries – Element Six, Forevermark and the International Institute for Diamond Grading (IIDGR).
In its financials, De Beers separates its rough diamond sales – its core business, which totaled $5.6 billion in 2016 – from “other sales,” which refers to the combined contribution of its subsidiaries. DBDJ would then give those other sales – which amounted to about $500 million last year – a $160 million-plus annual boost.
However, the decision to buy the retail business undoubtedly extended well beyond the financials.
The move further centralizes the company’s corporate identity and brand ownership – an exercise it initiated in 2012. Before then, De Beers was somewhat fragmented, with even its respective rough sales divisions – Diamond Trading Company (DTC) and Diamdel – carrying different logos. Today, these are De Beers Global Sightholder Sales and De Beers Auction Sales respectively, and they come under a single corporate “De Beers” emblem – complemented by the company’s “A Diamond Is Forever” tagline.
It was always rather puzzling that DBDJ did not utilize the iconic marketing campaign as De Beers shifted to brand-centric advertising. LVMH’s involvement clearly complicated things. The famous tagline, which only recently made a comeback in 2015, was saved for Forevermark and for underlining the general philosophy of the company. Today, De Beers messaging centers on “building forever,” whether it refers to supplying diamonds, its stakeholders, sustainability and governance issues, or the product’s impact on society.
We expect DBDJ will fit into that messaging and utilize the tools at its disposal now that it falls within the De Beers structure. How that will take shape, however, is a matter of speculation at this stage.
De Beers CEO Bruce Cleaver hinted at the company’s plans in this week’s press statement announcing the acquisition, when he said that “more fully integrating the De Beers Diamond Jewellers brand and store network will enable us to deliver an even more differentiated diamond offering, alongside our fast-growing diamond brand, Forevermark.”
If anything, the merger will likely change how DBDJ relates to Forevermark in the future. Perhaps DBDJ will carry Forevermark diamonds. Or better yet, perhaps De Beers will rebrand the stores under the Forevermark name.
But according to David Johnson, a De Beers spokesperson, the company doesn’t intend to do either of those things.
“DBDJ and Forevermark operate via different distribution models, and their respective consumer offerings are positioned differently,” Johnson explained. “De Beers believes it is able to unlock the potential of both brands, and this prospect was one of the drivers for acquiring full control of DBDJ.”
In that case, De Beers has its work cut out for it, given the retail operation’s performance history.
Restructuring the chain as part of Forevermark, meanwhile, would add value to the Forevermark brand and have a positive ripple effect on its retail partners. Although such a move might raise concerns that the company is competing with its customers, the model is quite common in retail. Nike, for example, distributes its shoes to other retail outlets, but also operates its own stores – strengthening its brand in the process.
Adopting such a strategy would not be a mass-market play for De Beers. In fact, it might require the company to scale down its retail operations and limit the stores to strategic locations that would prevent them from encroaching on Forevermark retailers. Downsizing would also help cut costs and elevate the exclusivity of the stores.
There are currently 32 De Beers stores in 17 key consumer markets around the world. Forevermark, meanwhile, opened its 2,000th retail door in February, and is now available in 25 markets. While Forevermark has steadily gained consumer recognition since its launch in 2008, integrating DBDJ stores would give the brand a massive boost.
It would also restore the De Beers logo to its intended role of defining the company’s corporate identity, which now touches on every aspect of the diamond distribution chain.
Alongside Forevermark and its retail operations, De Beers has mining and exploration projects, rough diamond sales, polished grading, synthetics detection equipment, synthetics research, diamond supply for industrial use, and a technology unit. It also has a number of side projects, including the development of a third-party polished trading platform, an education program, and a pilot project exploring ways to improve consumers’ experience when reselling diamonds.
That combination of entities is what differentiates De Beers from other diamond miners. While its rough sales provide its core revenue, the subsidiary businesses are what drive its value – particularly Forevermark. In contrast, the likes of ALROSA, Dominion, Rio Tinto, Petra Diamonds and others are only worth the volume of diamonds they produce.
De Beers stopped worrying some time ago about being the largest diamond producer in the world. Today, that mantle belongs to ALROSA. Instead, De Beers is concerned with building its brand equity to enhance the value of its production, which, we all recognize, will not last forever.
The company can only “build forever” by positioning itself in the luxury space rather than in the mining sector. Taking ownership of its store network completes the initial strategy to do just that. What it does with those stores will ultimately reveal where the strategy goes next.