De Beers Case Write Up

1. This CSO’s unique position allowed it to perform multiple functions in the diamond industry.

1) Keeping balance between supply and demand in order to keep stable prices. De Beers could do so by purchasing most of diamonds produced in the world, setting a list price and controlling release of diamonds on the market. It prevented the market to be flooded with diamonds. 2) Marketing diamonds which was beneficial for the whole industry. SCO heavily

advertised for diamonds in order to maintain the notion that diamonds are a scarce commodity and keep demand high and stable. 3) Keeping demand and supply stable. CSO could project demand for diamonds and adjust its supply accordingly. It carefully monitored supply pipes and made sure that retailers and jewelers didn’t stockpile diamonds. CSO then would forecast demand and release appropriate supply amount. 4) Serving as a gateway between producers and the rest of the diamond pipeline. CSO enforced discipline in the whole market (Ex. antismuggling policy). 5) Controlling quality. Diamonds were sorted and valued in CSO. By being able to keep prices high, by creating an image of luxury product for customers and

generally sustaining discipline in the market De Beers was able to constantly expand economic pie of the

diamond industry. Table 1 for supply and Table 2 for demand show how economic pie of diamond

industry was expanding through history.

2. The strong monopolistic policy of CSO determined the division of economic pie among various players in diamond industry. The diamond pipeline depicted in Table 4 and Table 5 demonstrate all links of the

chain with De Beers being the main player between supply and demand. The process worked in the

following way: CSO is a channel of distribution for countries with mines (such as Zaire, South Africa,

Botswana, Soviet Union etc.).1 De Beers bough out most of diamonds from them (including illegal

diamonds) and stored them to release according to market’s demand. Neither mines nor sightholders had

power: they had to deal with what De Beers says. Gradually, some suppliers begun to realize that they have

enough capacity to reach to the rest of the chain without help from De Beers. In the 80s because

production capacity of various suppliers increased it became harder for DeBeers to control it. Besides,

1 Even though Siberia stopped contract due to political reasons they unofficial continued to market through CSO.

demand for diamonds changed. Table 6 looks into recent developments on supply and demand side which

had significant influence on De Beer’s monopolistic position.

3.

In late 70s and beginning of 80s De Beers face serious problems.2 Demand side: slow demand;

although enjoying increase in profits from price increase, De Beers foresaw disaster: up to that time

diamonds were forever and not to be resold, as soon as they were hold as investment the exact quantities

in the market at a given time would be beyond De Beer’s control. For example, if many people decide to

sell a lot at once, prices would drop thus hurting the image of diamonds as a rare product. Supply side:

swelling supply; key suppliers wanted to act independently3; although De Beers owned the richest mines in

South Africa, Namibia and Botswana but only accounted for 44 % of the total supply in 1982. The rest

came via contracts with independent suppliers which allowed CSO buy 100 % of mined diamonds on its

own price conditions which differed from country to country.

We suggest the following strategy: De Beers should abandon stockpiling strategy because the market is changing and the players should change too. Otherwise, they will not be able to survive.

2 Exhibit 9 shows De Beer’s balance sheet & income statement from 1978 to 1982. It’s cash decreased by 92% to $119 million, while its diamond inventory increased from $294 inventory to 5.8 times to $1,704 million dollars. During this period CSO’s profit also decreased by half, and its diamond operating profit fell by nearly 3/4.

3 De Beers had similar problems before. However, compared to 1933 when they simply bought all diamonds to keep the price it wasn’t possible this time because of problems with suppliers.

Here is what the company is suggested to do: 1) Given its current inventory of diamonds (as of 1982) and its limited cash flow, De Beers should be careful of which type of diamonds it purchases. It should focus investment on gems & near-gems, but not on industrial diamonds. 2) Switch from “the only one” to “one of the best” position on the diamond market, start competing for market share by means of advertisement in developing countries such as China and Southeast Asia to increase demand & thus price. 3) Continue with the intelligence group that helped predict demand for each particular category to adjust quantity to be released. 4) Implement smarter marketing strategy focusing on adding value and bring back consumers to the previous perception of diamonds as a luxury good focus on adding value--through marketing and branding initiatives--to the diamonds already under its dominion.

Appendix

Table 1

Table shows supply of natural diamonds from 1950 to 1982. Although it flattened in 70s, a steady growth from 1950 to 1970 is obvious.

Table 2 show that world’s diamond wholesale value as well as retail value was constantly increasing from 1971 to 1983

Table 3

De Beers’ position

Table 4

Table 5

Diamonds from mines

De Beers’s relationship with them were formed by means of exclusive contracts, formal purchasing contracts or unofficial agreements. Prices were dictated by De Beers. Most of those countries were dependent on diamond exports to get hard currency.

Different

countries

were

charged

different commissions.

Diamonds from open market

Purchased from buying offices

De Beers

Buying out, sorting, graded and marked, weighted, valued, stored and sold to sightholders. De Beers monitored inventories at each state of distribution.

Sightholders

They visited De Beers 10 times a year to buy diamonds without any right to complain about quality, quantity, or price. They were also subjected to inspections from CSO.

Independent Cutters

10 % mark up

Jewelry Manufacturers

50 % mark up

Retailers

100 % mark up

Table 6

Various players

Latest events

Supply

Zaire

Dissatisfied with the prices and having significant output Zaire wanted to try going to the open market independently.

Australia

Argyle mine’s owners were insisting on the right to market 25% of near-gem and industrial diamonds themselves.

Demand

Worldwide

Due to high inflation and resulted speculative demand for diamonds led to stockpiling them as a hedge against inflation. Price of polished diamonds jumped high up.