DTC Strategies: The View from the Top
June 19, 03Last week’s memo reflected market sentiments linking the selection of DTC sightholders and its rough distribution decisions to De Beers’ corporate interests in its LVMH joint retail jewelry venture. It implied that De Beers may be “cornering” the market of the larger goods, strengthening a monopoly status on the upper end of the pipeline. The article evoked enormous public reactions and also caused quite an (unpleasant) tremor throughout the higher echelons of De Beers. The article, if true, might imply that De Beers may well be violating its specific undertakings to the European Commission’s competition authorities, as these regulators approved very exact rough diamond sightholder selection criteria – and non-adherence to such criteria would have distinct legal ramifications. As warranted by both journalistic ethics and commercial fairness, we presented, prior to publication, a draft of the article to De Beers inviting it to make comments or, if necessary, refute points of disagreements.
Instead of getting a detailed reaction, as we expected, we got a rather derisive blanket denial of everything we wrote in our article without any concrete substantive remarks. Therefore, last week’s piece was void of representations by “the other side.” No wonder, it “backfired” in some quarters of the industry. This week we publish a reaction right from the top of the DTC, from Gareth Penny, the sales and marketing director of the DTC and an executive director of De Beers. But, most importantly, Penny is the chief architect of the Supplier of Choice marketing strategy. No one speaks with greater authority on the issues at hand. He is a man of principles and high integrity, and that should add weight to his views.
“I have no hesitation in denying each and every aspect of the "memo" published last week that sought to link DTC's selection of sightholders and rough supply decisions under Supplier of Choice with De Beers' investment in De Beers LV, which, as we have explained from its formation, is separately managed and operated by LVMH and which sources its diamond supplies wholly independently,” reiterates Penny.
“As you know, we have taken great care to conduct all our dealings with the European Commission, whether relating to the formation of De Beers LV or about Supplier of Choice, in an absolutely straightforward manner. In short, we have conducted our dialogue with the Commission entirely in good faith. We have given undertakings to the Commission in relation to Supplier of Choice and we will stand by them. Not only is the theory wholly incorrect, but the overarching plan that you suggest would, if true, effectively subvert the integrity of Supplier of Choice in its entirety and negate the good faith of our discussions with the Commission,” stresses Penny.
“A further point I want to make is that the DTC has every reason to encourage success across all categories and segments and would never want to see De Beers LV as something which conflicted with our ability to drive the overall industry forward. If De Beers LV were totally successful it would have a market share of perhaps 1%, this against the 60% market share the DTC would have. We have absolutely no commercial interest in doing anything to undermine our relationships with retailers or other brands. We have spent enormous amounts of time, effort and resources supporting and building multiple competing brands and have an entire department devoted to this which has been working with many of the world's diamond brands,” concludes Gareth Penny.
For various (and obvious) reasons Penny was unwilling to comment on the issue of availability, intake, stocks etc., but it was obvious that the DTC was quite upset about our remark that there is no apparent reason to expect less availability of the better quality goods in the years ahead. Sources close to De Beers stress the overwhelming “weight” and validity of the lack-of-availability argument. We learned that De Beers has a genuine scarcity of the type of goods that, in particular,
It is well known, the New York industry can only cut +2 ct material competitively (in most instances only +5 ct materials) and therefore, unsurprisingly, it is in this area that DTC sight applications have been made by sightholders – thus forcing the DTC to reduce its New York client list. There were simply too many (good) people competing for too few goods. What is not always immediately apparent is that the DTC has struggled over the last few years to supply the current American sightholders and their allocations. In any event, these allocations account for a small percentage of most of these sightholders’ businesses.
So, despite scoring well on the whole across the DTC sightholder criteria, and particularly in marketing, the competition in this area, against scarce resources in the +2 ct area, has been extremely intense, particularly given that the DTC is looking out over a two year time period and want to adequately supply those that remain on the list.
When considering the rough availability argument, we were told, it must be kept in mind that De Beers is obligated by law to return to
The De Beers LV operates totally separately from the DTC. However, it can be argued that De Beers is not operating in a vacuum. It is reasonable to assume that De Beers closely watches the strategies of other producers. BHP-Billiton, which operates the Ekati mine, has publicly stressed and reiterated its desires to go downstream. At this moment, BHP-Billiton endeavors to sell 15% to 20% of its output as polished diamonds directly to retailers. The mining conglomerate, at this point, is involved in outsourcing the manufacturing (contract polishing) or manufacturing through joint ventures. In the future that 20% will grow – as BHP-Billiton makes more downstream revenues, depending on the rate of success. Other mining companies, noticeably Alrosa, follow – or plan to follow – similar routes.
It is, therefore, not unreasonable for the market to speculate. De Beers has operated a polished division for many years and De Beers is actively competing with its clients in the markets, even though many of its polished sales are to its present clients. Why would De Beers LV be different? What Gareth Penny clearly states is that it would be different because of the specific commitments made to the EC and because the DTC has nothing to do with the De Beers LV.
What we wrote last week is that it is not unfair for the market to be wary of the possibility that the strategies in one part of De Beers’ business may well be construed to affect or support other parts. The DTC denied this last week and today Gareth Penny is denying it again – and these denials cannot be readily ignored. Indeed, one reader argued that it would be quite stupid for the DTC to upset the EC – especially just in advance of the decision on the De Beers-Alrosa marketing contract.
What we stressed to the DTC is that fears or concerns by the industry – whether warranted or not – must be understood and should not be dismissed. During the merger approval process, the industry did express its fears to the European Commission that the De Beers-LVMH joint venture would lead to some manipulation of the rough diamond market as a result of this merger. By volume the market of the high-end goods is sufficiently small that De Beers, through its allocation policies (or through withholding rough from the market), could stimulate demand for slow-moving LVMH goods – because other jewelers simply would not be able, at least not without great difficulty, secure these goods. De Beers would be under pressure from its partner to perform. Therefore, it should not have come as a surprise to De Beers that the loss of sight privileges by so many of the
It is important that the DTC reacts to these concerns. The DTC must – and this is meant constructively – also accept that not everybody in the industry will accept all statements and undertakings of De Beers at face value. Especially today – when many soon to be ex-sightholders feel that there had been an implied promise that if certain criteria were met, their sight privileges would continue. They feel betrayed – even hurt. Such feelings certainly seem justified and natural.
In the present atmosphere the DTC must accept that its credibility may not be as high as it would have liked it to be. Statements by DTC spokesmen are being challenged, seen with a healthy degree of caution, and, in some instances, simply rejected or not believed. There is mistrust – and when there is mistrust there are suspicions; and suspicions may lead to perceptions and conclusion – some of which may be totally right or totally wrong. Last week’s memo must be seen in that context.
Gareth Penny deserves a lot of credit for recognizing that there may well be views that differ from those of the DTC – and for enunciating his position clearly and eloquently for our readers. From a journalistic perspective – we are only too happy that we can offer all these points and counterpoints. At the end of the day – every industry player will draw his or her own conclusion.