Followup on Box 8.1
De Beers Centenary AG has announced (July 12, 2000) that it will stop controlling the market for diamonds as it has done for the past seventy years or so. The company, through its Central Selling Organization, has effectively controlled the price of diamonds by hoarding vast amounts of gems; as recently as last year, its stockpile has been valued at $5.2 billion. In this way, De Beers has managed to steadily increase the price of diamonds and keep control of one of the tightest cartels in the world.
As new mines were discovered in North America, Russia and Australia, De Beers has found it harder and more expensive to maintain control of the cartel. In particular, holding vast stocks of diamonds from the market (and producing no yield) has been costly: although diamond sales keep soaring, De Beers's profitability has been quite low.
Bowing to shareholder pressure, and following the advise of Boston-based Bain & Co., De Beers announced that its new strategy is to be the ``supplier of choice" rather than the dominant supplier. The company plans to reduce its diamond pile to $2.5 billion. With the proceeds of this sale, De Beers plans to expand its spending on diamond advertising, while insisting that its partners do the same.
In addition to poor financial performance, De Beers's strategy shift was also prompted by the problem of ``blood'' diamonds, gems obtained from war-torn areas of Africa. The company feared that by maintaining its iron grip over the distribution of diamonds it might induce a public backlash and even a consumer boycott similar to the one that hit the fur industry. Moreover, the association of ``conflict diamonds'' may destroy the image of diamonds as symbols of ``love, beauty and purity;'' and image is central to the business of selling diamonds.
Sources: The New York Times, July 13, 2000; The Wall Street Journal, July 13, 2000.