De Beers homes in on diamond retail market

Diamond kingpin De Beers Consolidated Mines (DBRSY-Q) is teaming up with France’s LVMH Moet Hennessy Louis Vuitton to form an independently managed company that will develop and sell De Beers’ branded premium jewelry in the luxury goods retail sector.

In doing so, the South African major hopes to stimulate diamond demand by capitalizing on the De Beers brandname and catering to the luxury goods consumer market in the world’s wealthiest, most prestigious cities. Flagship stores are targeted for New York, London, Paris and Tokyo in the next 12-18 months.

The diamond jewelry retail sector accounts for total sales of something approaching US$56 billion a year, says Stephen Lussier, director of the consumer marketing division at De Beers’ Diamond Trading Company (DTC).

LVMH is a luxury goods marketing group, whose portfolio includes 30 of the world’s leading brands in the retail market, such as Louis Vuitton, Christian Dior and Moet & Chandon. Its five key divisions are wines and spirits, leather and fashion, fragrances, watches and jewelry, and specialty retailing. Watches and jewelry, the smallest of the divisions, was created in November 1999 following the acquisitions of complementary watch brands, comprising Tag Heuer, Ebel and Zenith, plus the Place Vendme jeweler Chaurnet.

LVMH generated US$7.5 billion in revenue in 1999, up 23% from the previous year. Gary Ralfe, managing director of the De Beers Group, says LVMH is the ideal partner, owing to its global retail marketing and brand management expertise — “skills that the De Beers group does not possess.”

The De Beers group will have no day-to-day operational involvement in the running of the new company. The joint venture will be independently managed by LVMH, with De Beers’ representatives sitting on the board in a non-executive role. Myron Ullman, group managing director of LVMH, will be appointed chairman of the new company.

The new entity will have the exclusive worldwide rights to the De Beers brand in the consumer markets. De Beers will also contribute a once-off transfer of technical diamond expertise, including the diamond branding technology that was used in De Beers’ “millennium diamond campaign.”

The new company will not buy rough diamonds or source polished stones directly from any company in the De Beers group; instead it will buy polished diamonds from the world’s leading independent suppliers at the exact standards demanded by the brand. As a result, Ralfe says, the new company will not bring De Beers in into competition with its sightholders. “This will create a new and, we believe, vigorous source of demand,” he adds.

With De Beers staying at arm’s length, the new joint venture should be able to operate in the U.S., which accounts for nearly half of global retail sales. De Beers cannot operate directly in the U.S., nor can its directors even visit the states, for fear of anti-trust laws aimed at alleged monopolistic practices in the diamond market.

De Beers and LVMH will contribute equal amounts of capital to establish the new company. The initial investment is expected to be about US$400 million, spread over the next 4-5 years. Profits will be shared 50-50 up to the time US$50 million has been earned; thereafter, the split will be 60-40 in favour of De Beers up to the point where US$300 million has been earned. Further profits will revert to a 50-50 split.

The core business of De Beers remains the mining and marketing of rough diamonds. For more than 100 years, the company has been the industry’s acknowledged leader. Today, it produces some 40% of the world’s gem diamonds by value from its own mines in South Africa, and in partnership with governments in Botswana, Namibia and Tanzania. De Beers operates a total of 20 diamond mines in these four countries, running the gamut of open-pit, underground, alluvial, coastal and marine operations. At the beginning of 2000, reserves and resources under the management of De Beers and its affiliates totalled 2.69 billion tonnes grading 42 carats per 100 tonnes, equivalent to 1.12 billion carats.

De Beers’ diamond production in 1999 was 32.3 million carats, representing, by weight, about 30% of the world total of 110 million carats. This production was valued at US$3 billion, or 44% of the estimated world total of US$6.8 billion.

Through the DTC, De Beers controls about two-thirds of the world’s US$8.4-billion trade in rough stones. Diamonds are sourced from its own South African mines and from mines owned jointly with the governments of Botswana, Namibia and Tanzania. De Beers also buy stones from Alrosa in Russia (which accounts for about half of that country’s total), and it has an agreement to buy 35% of production from the Ekati mine in the Northwest Territories.

De Beers has long taken the lead in the advertising and promotion of diamond jewelry. This year, De Beers will spend US$180 million in advertising worldwide, using the slogan “A diamond is forever.”

Over the past 10 years, growth trends in the diamond jewelry market have lagged behind the premium luxury goods sector — a situation De Beers blames on lack of brands and lack of marketing research. While advertising-to-sales ratios vary, Lussier says it is not unusual for luxury goods firms to spend between 6% and 10% of their sales on marketing, whereas the diamond jewelry sector is more likely to spend in the order of 1-2% of its sales.

Last July, De Beers unveiled a “supplier of choice” strategy, designed to position the company as the “preferred supplier,” instead of “the seller of last resort.” The objective is for De Beers to work with its leading clients to build market position and expand demand for diamond jewelry. The company now expects to have a much closer alliance with its sightholders, thereby ensuring an effective marketing and distribution channel for rough diamonds.

“We intend to grow demand for our product by developing industry marketing capability and also by differentiating our product from competing product,” says Ralfe.

Lussier says the DTC is commited to creating new brands, working with leading players throughout the industry, and supporting strong marketing initiatives.

“By creating a stronger marketing focus across the industry, we think we can put our industry in a position to compete head-to-head and toe-to-toe with the best in the luxury goods sector,” he adds.

The DTC sold a record US$5.67 billion worth of uncut stones in 2000, an 8% increase over 1999. Sales have been solidly underpinned by good demand for retail diamond jewelry, particularly in the U.S. Retail diamond jewelry sales, to the end of third quarter, were up by an estimated 7% worldwide, and demand in the U.S. alone was up 8%.

However, in the U.S., about 40% of all diamond jewelry is bought between Thanksgiving and Christmas. De Beers plans to release its year-end financial results in late February.

Internationally renowned jeweller Tiffany & Co. (TIF-N) reported that total company sales rose 2% to US$482 million between the Nov. 1-Dec. 31 periods of 1999 and 2000. Worldwide same-store sales also rose 2%.

U.S. retail sales alone were off a surprising 1% from the 1999 holiday season and well off the high-single-digit sales growth that was forecast. Same-store sales declined 3%, after increasing 27% in 1999’s stellar holiday season.

Tiffany expects that earnings in its fourth quarter, which ended Jan. 31, will fall short of market expectations but will be equal to the year-earlier figure of US56 per share. The company adds that earnings growth in 2001 is targeted at 10-15%.