The July sight may be an indicator of the future of De Beers. According to an article on Damonds.net, more than 65% of the total value of rough was rejected by sightholders. Stating a lack of profitability, the buyers are pushing back at the antiquated and unrealistic expectations imposed by De Beers; who seems to be oblivious of the real market conditions at the wholesale and retail levels. Their only response was to keep prices stable while decreasing the size of the sight. They “generously” allowed sightholders to defer an additional 25% or their allotment.
To put the De Beers business model in perspective, let’s take a look at how this concept would work with a manufacturer of finished jewellery.
XYZ, Inc. is a fictional large manufacturer of a full line of jewellery products. They produce everything from cheap costume jewellery to fine collection goods. They select a limited amount of wholesalers to market their output. These wholesalers must travel to XYZ’s facilities several times a year to purchase goods. XYZ imposes strict rules on the buyers:
- XYZ will provide a group of goods selected for each buyer.
- The buyer may not negotiate the prices.
- The buyer must purchase the offered group, although they can select a small amount of goods to be deferred until the next buying session.
- The buyer does have the right to reject a product category, but only once or twice a year.
- If the buyer continually rejects products they will no longer be allowed to purchase goods.
XYZ Inc. claims to understand each buyers needs but they have needs of their own. If a wholesaler specializes in high-end 18K and Platinum goods with large centre stones, XYZ will provide a fair amount of these goods but the buyer must also take any other goods that are in the package. That may include large group of 10K bracelets and hundreds of sterling silver and CZ toe-rings; whatever XYZ has in excess inventory. If the buyer does not have a strong market for these goods they must accept them anyhow. XYZ does not really care about market trends or metals prices. They determine the price they want and the buyer must accept that price. If the buyer cannot make a profit… too bad. Maybe they can make it up on the next buying session.
In reality, XYZ, Inc. would be laughed out of the jewellery industry. This concept can only work if the supplier has a total monopoly. De Beers had a monopoly for decades however their overriding control of rough diamonds is continually slipping away. Yet they persist in this outmoded method and sightholders still march to their drumbeat. But this system is beginning to fall apart. Sightholders are rejecting more goods with each sight and finding other sources of rough.
Eventually, the diamond industry must follow the lead of the coloured stone industry. Rough needs to be traded on an open market with prices determined by supply and demand. Fine rare goods will rise in price while common, low-grade rough will lose much of their value until they are in line with industrial goods. The market will be realistic instead of falsely inflated. De Beers and the sightholders may lose out but consumers will benefit and the jewellery industry will have a chance to prosper.