Surviving Supplier of Choice

By Russell Shor

When the De Beers Diamond Trading Company (DTC) finally announced the full Supplier of Choice (SOC) program to the trade last year, the news clanged like a steel bar on a cement floor. The most talked-about result was that 45 sightholders – many long-time clients and industry icons – would be dropped from the DTC client list in January. Ten new clients would be added, making a net loss of 35.

Now that the new list is in place, several Antwerp sightholders have filed complaints against the DTC with the European Union (EU). And, just at the close of last year, the New York Diamond Manufacturers and Importers of America sent a letter of complaint to Congress and U.S. regulatory agencies about DTC’s “policy of carving out the small and middle market (diamond) manufacturers.”  Thus it’s certain that EU courts, and possibly even the U.S., will be hearing challenges to SOC in coming months and years.

Despite the outcry, Gareth Penny, executive director of the DTC, remains quite blunt about his company’s initiatives, saying that SOC is about adapting to a rapidly changing business environment, not who’s on or off the DTC client list. The SOC, Penny insists, is the diamond version of realpolitik. It’s all about developing efficient inventory management practices, building strategic relationships with retailers and jewelry manufacturers, and creating marketing and branding initiatives so the diamantaires can compete.

First, Penny stressed in an interview at the end of last year, some of the big changes have occurred at the sources, out of De Beers’s control: The DTC’s market share of rough diamond sales has plummeted from 80 percent to 50 percent in the past decade. The DTC, he explained, last reviewed its client list in 1998, when it was taking in most of Russia’s diamond production, absorbing a third of Canada’s Ekati output, and buying large numbers of goods.

Today, Russia sells most of its production outside the DTC, the Canadian operators sell all of theirs to their own clients and the DTC has stopped nearly all buying from other producers. In short, he said, the DTC no longer has enough rough diamonds to distribute among 120 clients. The higher value of the sights is due mainly to price increases, not higher quantities of rough. This change has been evolving over several years, Penny insisted, so the drastic cuts in client rolls should not have surprised anyone.

In addition, he said, there are still large amounts of polished diamonds sitting in inventories that the trade should think about selling before it clamors for more rough. And it should put its energy into marketing initiatives, and efficient inventory management practices, to do just that.

“While everyone is talking about scarcity, there still is an excess of [polished] goods sitting in the pipeline,” Penny said. “This shows how inefficient the industry is. Huge inventories and ever-lengthening credit terms are not good business. The return on capital in this industry is not good at all. Improving this situation benefits everyone.”

Diamond dealers and manufacturers, however, insist they have legitimate complaints about the “new” DTC’s Supplier of Choice policies that cut so many from their primary source of rough. They say for years before the Supplier of Choice roll-out in July 2000, the DTC did its best to keep clients bound to its “single channel” marketing system, penalizing those who searched too diligently for alternate rough sources.

Diamond people also point out that, while the DTC has been pushing hard for clients to develop strategic partners with retailers and jewelry manufacturers downstream, its own actions have provided a hard lesson on the hazards of placing too much of one’s business into such partnerships.

“What would you call our relationship with the DTC over 30 years?” asked one now ex-DTC client. “Strategic partners, Nicky Oppenheimer called it that many times. But when they wanted to let us go, they just did it, leaving us to beg for rough.” 

So, which side is right here?

At the end of the day, it doesn’t really matter – at least in one major regard: The diamond industry and, by extension, the entire jewelry industry, is engulfed in a major competitive struggle with other luxury sellers, most of whom do a much better job of marketing their products.

The past Christmas season demonstrated that retail jewelers have discovered the rewards of advertising and have been moving to suppliers who can help them bring in customers. As I mystery shopped the malls this past December, it struck me how much display window and prime showcase space was being co-opted by luxury watch brands – which advertise like crazy. And, when you attend the upcoming trade shows, look at which companies draw the biggest crowds. Certainly, those offering the best advertising deals will be among the top draws. This is the market speaking, not the DTC.

In short, the SOC “requirement” that diamond manufacturers understand the downstream (retail) part of the market is just good business. The DTC can be questioned for its abrupt actions regarding some clients, but not for recognizing that the industry has to work harder at making sales than it does in getting rough supplies.