Buying Your Competitors’ Customers
May 19, 05A Belgian diamond trading organization complained to the European Commission against De Beers after one of its non-Sightholder members “was surprised and shocked to discover that a representative from DTC had visited two of his customers [the largest and third largest jewelers in Spain] and offered them 4% and 7% in advertising support if they bought respectively $1 million and $2 million yearly worth of diamonds.” To take advantage of this offer, says the Association of Traders Importers and Exporters of Polished Diamonds, “these jewelers would of course have to buy their merchandise directly from Sightholders. The DTC representative went on to show them a list of the recommended firms which included: Bornstein, Rosy Blue, Pluczenik, etc.”
This is a very interesting case for a number of reasons. First of all, “buying” a customer away from a competitor is not only common practice – to some it might even be “the name of the game”. We are personally aware of instances in which large U.S. jewelers were provided with an up-front signing on bonus of millions, just for the jewelry chain to enter into a long-term program. Worse, we even know about instances in which DTC Sightholders paid a lot to purchase a particular customer because he needed that party for his DTC Supplier of Choice profile. Having the client was worth losing some money.
So let’s not kid ourselves: buying one’s colleagues’ customers is in no way unusual. What makes this case different is that, being a dominant player, De Beers is still not able to operate in the same manner as non-dominant player. We saw that in a Belgian court when parties which lost Sight privileges at De Beers and at BHP Billiton went to court. De Beers was found to be guilty (“abuse of dominant power”), while BHP Billiton was acquitted, mostly because it was not a dominant player – to which different rules apply.
Andre Gumuchdjian, the president of the BVGD polished traders association, has now arrived at a similar conclusion. Says Gumchdjian: “I admit that we at the BVGD have been slow to react to the Supplier of Choice (SoC) strategy of De Beers. After all, we support fair and healthy competition and after 100 years of relationship with De Beers, it was hard to predict these changes. It is now clear that because of its size and dominant position, De Beers will never be a competitor like any other.”
Though great efforts are being made to highlight the “competitiveness” of the rough diamond market, we all know this is fiction. De Beers is the leader, it is the “price-setter”, and the others (BHP Billiton, Rio Tinto, Alrosa, etc.) nicely follow. Though De Beers proudly claims that it is leading the industry from supply-controlled to demand-driven, we all know that even on the demand side the business operates differently from any other industry. In normal demand theory there is a relationship between price and quantity. In diamonds there is a conspicuous consumption element that argues that the “high” price of diamonds is one of its attractions to the consumer. This is not the place to enter into a discussion on diamond prices; this is only mentioned to stress that the “competitiveness” and “competition” in the diamond industry are highly complex concepts.
One might argue that the dominant producer has used its dominancy (and nobody will say here “abusing”) to make diamonds intrinsically precious and desirable, having positioned the product as a visible embodiment of an illusion, love, sex and romance which supposedly lasts forever. The obsession of De Beers on the marketing messages is a direct outflow of its supreme need to maintain the “myth” on which the demand side is founded. I sometimes think it is losing its grip on the message, as polished prices (paid by the consumer) are stagnating – even under the Supplier of Choice regime.
None of this contradicts anything that Gumuchdjian is saying; to the contrary, it may strengthen his arguments. Says the industry leader: “The situation is clear now: De Beers is looking to eliminate independent diamond companies - sources of competition on the market - by actively enticing the jeweler-customers to source their diamonds directly from Sightholders. Furthermore DTC is starting an advertising campaign aiming at discrediting non-DTC diamonds with the consumer. In other words, it is being implied to the jewelers and the consumers that the non-Sightholder suppliers and diamond jewelry that do not have the tag “DTC” are simply not worthy of trust.” The latter conclusion was partly based on the diamond trader’s discovery “that De Beers’ publicity doesn’t simply advertise diamonds from DTC but suggests that diamonds not bought from DTC are simply not worthy of the consumer’s trust.”
Says Gumuchdjian: “After getting more information from other diamond traders, it appeared that DTC is launching similar programs [participating in jewelers marketing costs provided they buy from Sightholders] and actions in other markets. No doubt that with De Beers’ power of communication, such a campaign will be devastating for the industry.” Oddly enough, I tend to have sympathy for that argument - depending what you define as “industry”. To the association of traders in polished diamonds it may mean the end of their particular niche in the market. Yes, there is no doubt that Supplier of Choice is, eventually, devastating for that level of the pipeline.
As a truly professional organization, the BVGD must without remorse fight for the survival of its members. Their chances for success are slim and it is totally justifiable to fully exercise their right to use courts, public opinion, anti-trust authorities, etc. Gumuchdjian poses and then answers the question “what can be done”. Says the industry leader:” First of all, we have to send a clear message to De Beers as well as to the government, the European Commission, the HRD and our representatives. Normally the HRD should have taken this matter into its own hands, but the large presence of Sightholders (4) on the Board of Directors of HRD has become contradictory to the general principle of fairly defending our trade. In addition, as both the President and Vice President of HRD are Sightholders, the HRD is not in a position to defend the interests of the market. To top it all off, some Sightholders are proposing to give a seat on the Board of Directors of HRD to De Beers!”
He continues: “MM Roth and Pluczenik are both charming men and we respect them as people but they need to recognize that their status has become incompatible with the function they hold: that of defending the interests of all
This raises questions about the nature of the leadership of a representative body of the diamond trade and industry, and their tasks, functions and mission. To challenge the leadership of the industry in this context sounds like using your wife burning the toast as an excuse for getting a divorce. If the “toasts” are used as an excuse to get rid of the old lady, then there are probably another few hundred unnamed additional reasons. We don’t want to get into this except to say that in an industry in transition (as we are), in an industry in which we see a realignment of interests, powers, etc., it is imperative that the structures of the leadership adopt the new realities. In each cutting and trading center, not only Antwerp, a “strategic review” on its destiny and exploration of the tools available to reach that destiny (and the HRD is, at the end of the day, a tool to advance the Antwerp industry), can only be viewed as desirable and highly necessary.
Says Gumuchdjian: “We live in a democratic country where one man equals one vote. The HRD is not there to defend the interest of the 12 Sightholders of Antwerp but the 1,200 companies that are working here! We have to fight now to maintain legal competition in the diamond market which has to remain open to everyone. The issues are simply our incomes and our right and wish to continue our trade in order to support our families and the people for whom we are responsible. Of course, we can expect De Beers and the Sightholders to minimize the problem. They will sugarcoat their speeches with reassuring words aimed only at dropping our guard and making us hesitate to act. Let us not be fooled, it has become very clear that the actions of DTC and its “SoC” are aimed not only against the independent diamond traders, but against the market.”
The industry leader has published a “wish list” in which, among other things, he says that “we must obtain a ruling from the European Commission that it abolishes SoC and all the obligations imposed by De Beers, because it is an anti-competitive system that only serves De Beers’ interests, to the detriment of all others.” He also wants to “obtain a ruling from the European Commission that it prevents any alliance between De Beers and Alrosa or other independent producers. This will allow diamond manufacturers the greatest possible choice of suppliers, which is the best guarantee of choice for the consumer.”
I have learned not to predict what the EC will do and I don’t know whether these objectives are obtainable. It is doubtful that the Alrosa-De Beers trade agreement will be approved, but if it isn’t, I don’t think that the BVGD’s action will greatly influence the decision. I am writing about these charges against De Beers because the organization’s position and actions must be seen as a wake-up call. Each player in the diamond industry must take notice and decide for himself how it applies to his business and his future. The charge that the DTC contacted the non-Sightholder’s clients in Spain has been confirmed by De Beers. They try to belittle it as an approach “made by the local Spanish representative of the Diamond Information Office who was not authorized to make the offer. Subsequently, she was fired.”
That’s nice to hear; it isn’t necessarily true and it doesn’t explain the many reports of similar approaches made by the DTC or the Diamond Information Offices in other countries. On the other hand – the DTC didn’t do anything different from what other players do. The difference is that De Beers is dominant. That may not be a strong enough argument for the BVGD to stop it – but they ought to be encouraged to try. A professional organization must serve the interests of its members and – in this case – better late than never. But don’t hold your breath.
Have a nice weekend.