The De Beers Group: Case Study

Strategy for Managers

Dr. Dotan Persitz, Vered Kurtz David

15 May 2020

Submitted by (name and ID):

Amy Entin, 341065902

Gil Aizenshtadt, 307838862

Omri Derby, 034718304

Omer Koren, 052968682

Group number: 06

Class: Friday, 09:30 - 10:45

1. The gem-diamond industry value chain is typically divided into three segments:

upstream, midstream and downstream. In the upstream segment, diamond deposits are

found via an exploration process, and diamonds are excavated from the earth through mines.

The gem-quality rough diamonds are separated from the industrial-quality, and then sold to

wholesalers, who sort the rough diamonds based on 16,000 individual categories of cut, color,

clarity and carat. In the midstream segment, firms cut the rough diamonds and transform them

into polished diamonds that are sold to distributors. In the downstream segment, diamonds

are distributed to consumers through various channels.1 Finally, the reselling segment can be

thought of as the 4th segment, as diamonds are brought back to the market as people sell their

diamond jewelry to both wholesale and retail buyers.

2. External Analysis for De Beers:

Market Definition: Exploration, mining, distribution and trading of rough diamonds.

Competition - Existing Competitors: For decades, De Beers monopolized the upstream

market. It dominated the global diamond-mining industry, controlling most of the mines

(physical capital) and organizing the diamond trade worldwide (organisational capital). It was,

therefore, nearly impossible for new firms to enter the market. De Beers secured its monopoly

aggressively, convincing independent producers to join its single channel monopoly, flooding

the market of intractable producers with similar diamonds (causing local prices to drop), and

purchasing diamonds produced by other manufacturers, stockpiling them to control the prices.

In the 1980-90s, producers started falling outside of its grasp [1]. First, De Beers tried to keep

prices up by buying the excess supply. As the supply kept growing, De Beers couldn’t keep

up, and it shifted its strategy in the 2000s from controlling supply to driving demand. 2

1
Channels such as: (single-site jewelry stores, jewelry store chains, specialty retailers, and online retailers).
2
De Beers’ share of rough diamonds fell from 90% in the 1980s to 45% in 2000 to 35% in 2014[2].
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Today, constant rivalry among the major competitors is high; prices have stabilized and there

is no monopoly, despite the fact that the two largest companies, De Beers and Alrosa, hold

60% of market share (Figure 1, Appendix A) [3].

Competition - New Entry: With the breaking of De Beers’ monopoly, there has been a large

opening for new firms to rise in the industry. Recent discoveries of mines in Russia, Botswana

and Canada have made it possible for small and medium size enterprises to enter the market.

However, those new entrants are not currently threatening the combined market share of De

Beers and Alrosa, stable at 60% (see Figure 2, Appendix A) [6].

Bargaining Power - Suppliers: Prior to De Beers’ strategy-shift in the 2000s, the diamond

mines that were out of De Beers’ ownership demonstrated ever-intensifying bargaining power.

Its strategic decision to limit its sales to its own mined products [4] has turned the table - today,

De Beers acts as its own main supplier, via its own mines and its joint ventures.3 Having formal

relationships with governments allows De Beers to implement a long term supply strategy,

leaving other suppliers with little to no bargaining power.

Bargaining Power - Buyers: As a small number of suppliers still control the rough diamond

supply while the number of customers is high - customers are bargaining from a position of

weakness. This is true for both of the two main types of midstream segment customers -

cutting/polishing firms and jewelry manufacturers.

Substitutes - Synthetics: Synthetically produced diamonds pose a substitute threat. So far,

De Beers has had some successes in this battle.4 However, their popularity may rise due to

lower prices, control of the supply chain, and the clean image (no “blood diamond”

association). Being chemically and visually similar to natural diamonds at lower prices,

changes in the macroeconomic environment may boost their popularity. In addition, having a

3
For example its 50-50 joint ventures with the Botswana and Namibia governments.
4
Framing them as “synthetic” (rather than “lab-grown”), promoting natural diamonds with its “real is rare”
campaign and producing affordable diamond detection devices (DiamondSure and DiamondView) [8].
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solid customer base (industrial diamonds) strengthens the position of synthetic diamonds as

substitutes (their manufacturers can utilize this base for operational and financial benefits).

Substitutes - Recycled Diamonds: These have the potential to act as substitute products, and

are discussed further in Question 3.1.

Complementary Products: “Love gifting” constitutes a major share of the gem-diamonds

market: 72% of US brides receive a diamond ring, and more than 80% of gem-diamond sales

are “love related” [7]. Rings are therefore a classic complementary product to diamonds.

Changes in the ring market (fashion, gold/silver prices, etc.) can affect the diamond market.

Regulation: The upstream segment is sensitive to changes in regulations. De Beers has joint-

ventures with the governments of Namibia, Botswana and South Africa, leaving it exposed to

government regulations as it exploits the natural resources of those countries. In addition, this

concentrated segment is vulnerable to antitrust acts. Finally, involvement in “blood diamonds”

poses both PR and regulatory threats (e.g., Kimberley Process).

Macroeconomic Environment: As diamonds are more a luxury than a necessity, demand is

coupled to the consumers’ spending power. Recession and inflation can lower demand rapidly,

thus a slowing in macroeconomic growth poses a threat.

3.1. Recycled diamonds can be described as both a substitute and a complementary product

to new diamonds, in different market environments. Currently, recycled diamonds in a retail

environment are a substitute, since when the price of new diamonds will rise, people will seek

cheaper alternatives. In a buyback program environment like De Beers’, the prices will likely

be positively correlated (as new diamonds are worth more, the company can expect to make

more money on the turnaround and can thus offer a higher price to the sellers of the recycled

diamonds), so the recycled diamonds become a complementary product to new diamonds. In

addition, if the market for recycled diamonds is improved for the private buyer, allowing for

easy reselling of used diamonds, the complementary relationship is strengthened as a new type
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of buyer - one that looks at diamonds not only as an expense but also as an investment - will

enter. A rise in the price of recycled diamonds would lead such a buyer to invest in more new

diamonds, creating a culture of buying more similar to that of gold than that of other gemstones.

3.2. De Beers was exploring an entrance into the market of second-hand diamonds, defined by

the purchase of pre-owned diamonds from private individuals to be resold to wholesalers and

retailers. Based on this market definition, follows an External Analysis:

Competition/Potential Entries - While other firms are active in the market, they are unable

to unlock its full potential. They lack the technology to authenticate the diamonds as non-

synthetic and may offend customers with low offers. Private citizens don’t pose a threat as

competitors in a C2C market, either - their inability to authenticate the diamond, the logistics

of sending large amounts of cash to a stranger, and not knowing correct current prices stand in

the way. Most entries would suffer from the same pitfalls plaguing the current competitors;

firms that could make a difference are those similar to De Beers, with a large reach and

experience in the diamond industry. In addition, shopping platforms that enjoy consumer trust,

virtual-physical presence and the ability to absorb new tech, such as Amazon, can leverage

their advantages to enter this market as well.

Customers - Intending to resell the diamonds to wholesalers, De Beers has a ready customer

base with whom it has long-standing relations. Lack of obligation to disclose the diamonds as

pre-owned means that the diamonds can be integrated seamlessly into the midstream market.

Suppliers - The supply of second hand diamonds comes from consumers looking to part with

their diamonds. The most common reasons for doing so (finances, divorce, death, and

disinterest) are facts of civilization; as long as there are diamonds being bought, there will

always be a supply of diamonds being resold as well. In addition, intense dissatisfaction in

today’s reselling options makes the market ripe for a new competitor for them to work with.

As this market is yet to stabilize, if De Beers pushes its advantages (financial depth, customer
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base, authentication technology), it can monopolize this market, minimizing the bargaining

power of suppliers.

Substitutes and Complements – This is discussed in detail in the substitute/complement

section of Question 3.1.

Regulation - The main potential pitfalls in regulation for this market would be a new

requirement to disclose diamonds as recycled and specific price requirements for diamond buy-

back programs.

Macroeconomic Environment - A recession can increase the supply of recycled diamonds as

people in financial hardship look to sell, allowing firms to offer bid lower prices while raising

demand for cheaper, second-hand diamonds. This poses an opportunity for financially stable

firms such as De Beers to cheaply acquire inventory for the market rebound.

3.3 De Beers’ research showed that the diamond reselling industry was worth $1-2 billion, and

the strategic analysis showed that if they entered the market, they would likely succeed where

others were failing and occupy a large portion of the market. In parallel, taking control of the

reselling industry and improving the seller experience would bolster a major tenant of their

marketing strategy, the idea that a diamond is a worthy investment.

4. We would vote to approve the launch of a standalone business unit. The reasoning for

the market entry is sound, and we believe that there is value in backing up the diamond as a

worthy investment for continued success in marketing new diamonds. Studies estimated that

recycled diamonds would represent third of the supply by 2025 at the upper bound. We see the

market as a risk management strategy; becoming a major player in the second-hand diamond

industry returns the control over the supply to De Beers, which has always been a major part

of its strategy. While these benefits are at the forefront of the decision to enter the market, the

financial aspect is no less important; we agree with the assessment that scaling the operation

will yield a modestly profitable business eventually. We would advise the De Beers to use the
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ramp-up time to work on relationships with wholesalers that could potentially be angered by

De Beers’ entry as a competitor.

Additionally, in the extreme case of the mines running out of natural diamonds (or another

supply crisis), De Beers will have already established a foothold in the recycled market.

5. While the existence of a platform on which De Beers sells diamonds is unsurprising, it is not

immediately obvious why they would offer to let their competitors use that platform too. The

answer, however, lies in De Beers’ early strategy of controlling the supply. While De Beers

can no longer prevent its competitors from putting diamonds on the market, they are aiming

for control through other means. De Beers understood that one way or another, their

competitors would be selling diamonds. By offering their own platform, De Beers took a

market inevitable and turned it to their advantage with three distinct benefits:

Customer Traffic - While separate platforms would require customers to choose ahead of time

where they would buy their diamonds, a unified platform brings all the potential customers to

one place. By designing the platform to present their own product in its most flattering light,

they have the opportunity to subtly elevate their product in a comparison; undecided customers

that come to compare can then be swayed to purchase from De Beers.

Data - Controlling the platform on which their competitors sell delivers a wealth of market

data into their hands - information on customers that are purchasing from their competitors,

what items the customers viewed before making a decision, categories in which their

competitors outperform them (and vice-versa) - data that can help De Beers forming a

successful strategy.

Profit - Operating under the assumption that De Beers charges their competitors to use their

platform, it is also a source of revenue. De Beers took the inevitable (that their competitors

would sell on some kind of digital platform) and turned into a profit by expanding something

they already had (an existing and scalable software).

Bibliography
[1] Phyllis Berman and Lea Goldman, "Cracked DeBeers", Forbes.com, September 15, 2003.

[2] "De Beers' market share to rebound, thanks to Gahcho Kue", Mining Markets, 10 July

2014. Retrieved 14 July 2016.

[3] "De Beers Analyst and Investor Seminar 2014" (PDF). angloamerican.com. Anglo

American.

[4] Zimnisky, Paul (6 June 2013). "A Diamond Market No Longer Controlled By De Beers".

Kitco Commentary. Kitco.

[5] Bain & Co. (2017). The Global Diamond Industry 2017: The Enduring Story in a

Changing World. [online] Moscow: Bain and Company.

[6] “Diamond mine production of the leading companies worldwide from 2013 to 2018”,

Statista.

[7] “The diamond insight report 2019”, De Beers Group, p. 14.

[8] “Undisclosed Synthetics - What you need to know”, De Beers Group, p. 4.

Appendix A: Figures

Figure 1: 2013 rough diamond production by company and country. Source: [3]

Figure 2: Top producers’ global shares, 2016. Source: [5]