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WFDB & DTC - 2005
London meeting between the World Federation of Diamond Bourses (WFDB,) and the Diamond Trading Company (DTC) - July 15, 2005.
The agreements reached by DTC and WFDB represent an ongoing dialogue between the two groups.
- The DTC recognised the tremendous contribution made by WFDB members in driving consumer demand for diamond jewelry, and suggested that there would be benefit to members who aligned their marketing campaigns alongside the generic DTC run campaigns. (The WFDB agreed to facilitate presentations from the DTC to members of their bourses about the Christmas marketing campaigns and consumer confidence updates).
- The DTC acknowledged the leading role played by the WFDB in supporting the diamond industry and agreed to work together with the organization on appropriate industry initiatives
- The DTC committed itself to provide delegates to participate in a joint committee for the development and implementation of the WFDB Mark.
- Another point of discussion was the fact that the DTC carries out a majority of the marketing for the industry as a whole.
- The Diamond Trading Company (DTC) intends to increase sales to Diamdel up to $550 million, according to a De Beers company statement.
After the meetings between the DTC with the heads of the diamond industry, a joint press release was sent out with details about the meeting.
- Shmuel Schnitzer, president of WFDB said, "The WFDB represents 15,000 members from all over the world at all levels of the diamond industry, and we have aims in common with the DTC in driving the success of this industry for the benefit of all. Furthermore, we recognise that DTC, through its marketing and consumer confidence activities, provides real value to this industry, unmatched by other participants."
- Varda Shine, Sales Director for DTC said, "The unity of purpose shown by all parties in the meeting lead to frank, wide ranging and forward looking discussions. We are pleased to be working with the WFDB to help address many of their concerns. We believe that the actions agreed today will be of benefit to the entire diamond industry.”
Diamond Group's Sales Tiller
Emma Muller wrote that Gareth Penny took the "diamond group's sales tiller" and "it will be up to him to navigate trading policy through Brussels' regulatory reefs". She wrote, "On July 1, Mr Penny, architect of Supplier of Choice, the policy that should transform De Beers from market custodian and buyer of last resort to marketing led supplier, succeeded Nigel Wisden as sales director." (July 25, 2001, in the Financial Times
Upstream to Downstream
The name De Beers has been synonymous with diamonds for more than a
century.
De Beers leads the world in diamond exploration, mining,
recovery, sorting, valuation, and marketing.
De Beers exploration program extends across 6 continents.
The mining operations include every category of diamond mining:
- open pit
- underground
- alluvial
- coastal
- under sea
De Beers marketing and sales of rough diamonds is via the Diamond Trading Company (DTC) based in London. www.debeersgroup.com
De Beers was always thought to have been more concerned with "upstream" - mining, exploration, recovery; but its new program insists that sightholders get more involved with "downstream" - marketing and advertising.
However, Muller noted that already, "Most sightholders that went downstream bought their goods at high prices and channelled the diamonds into manufacturing without the proper experience, which has resulted in higher costs and bigger inventories. They are now accumulating debt that is mainly financed from within the trade."
A rising tide raises all ships.
When the WFDB raised other concerns with reference to non-sightholders and
how the new program would effect the small and medium sized manufacturers,
the DTC responded in this inimitable way, "A rising tide raises all
ships". (www.worldfed.com)
Supplier of Choice...not a 'big bang' event.....rather an evolutionary
development ......a concerted effort......to benefit everyone.... an
appropriate cliché: "A rising tide raises all ships".... effective SMUs
should benefit.
With all these water and shipping references - our question is:
"Where are the lifeboats when you need them"?
Special Report - July 2001 - Presentation DTC - Introduction - Summary
The Presidents of the World Federation of Diamond Bourses, at their recent meeting in Idar-Oberstein, Germany, expressed concern about the future of the small and medium sized rough and polished diamond trading, exporting, wholesaling, dealing, and polished manufacturing units in the context of the DTC's Supplier of Choice marketing strategy.
It was felt that the potential contribution of these companies, numerically representing the majority of the diamond industry, might not have been fully appreciated by the architects of Supplier of Choice. It was also felt that the policy might unwittingly lead to the exit of large segments of the diamond community from the industry which would have an irreversible effect on the industry.
Ad Hoc Committee
An Ad-Hoc Committee was appointed to
investigate the ramifications of the SoC strategy on the small and medium size manufacturing and trading units (hereinafter SMU's).
Mr. Avraham Fischler - WFDB president
Mr. Schmuel Schnitzer - WFDB vice-president
Mr. Ernie Blom WFDB - WFDB executive committee member
Bourses and Cutting Centers - SMU's
The diamond business, worldwide, is dominated by small and medium size manufacturing and trading units (SMU).
Distribution and trading SMU's dominate.
In Belgium, out of some 1400 companies active in the diamond sector, some 1000 units fall in the SMU category, each typically being managed by a single principal, assisted by a few employees.
New diamond producers have consciously selected Antwerp for the "entry" of their rough diamonds into the pipeline, even though they are aware that the rough will most likely be processed elsewhere.
In New York, a survey of diamond and jewelry firms in Manhattan shows, as quoted next:
- 99% of the firms employed fewer than 100 employees.
- About 70% of the firms had ten or fewer employees.
- Only 5% had fifty or more employees
In Israel, 80% of the diamond exporters (733 out of a total of 927 exporters) are SMU's.
On all Levels:
SMU's represent by far the majority of the 10,000 members of the 24 worldwide diamond bourses.
In the United States among the many thousands of polished dealers, some 2,000 traders are members of the WFDB.
In Belgium there are over 400 companies that trade in rough diamonds and 700 companies that trade in polished.
In Israel, there are some 1,500 polished dealers and exporters, and some 350 rough traders in the memberships of the bourse.
In South Africa, for example, there are some 250 polished dealers who are invaluable in servicing and supporting the domestic jewelry wholesale and retail sectors. It also has some 80 rough dealers.
Distribution, Marketing, and Sales Decisions
The DTC itself markets some 60% of its sales through Antwerp (including sales to sightholders who may live and operate in other centers).
It is the right of the DTC to decide to whom it wants to sell its rough
diamonds.
It is the right of the DTC to consider the clients' downstream
affiliations as a factor in that decision making.
Though one might dismiss the concerns of the SMU's of "marginal interest" to the DTC, the WFDB believes that the DTC has always shown genuine concern and consideration for the total market.
It is imperative that the distribution system continues to facilitate a flourishing segment of SMU's, and that they will continue to enjoy access to the DTC's (or its subsidiaries) direct supplies and that sightholders are encouraged to develop and strengthen their business ties with these units.
Distribution System - Pipeline - Competition
Bain & Co. may have found the distribution system complex. It probably is. But the issue should be whether it is efficient.
When making comparisons to other economic sectors, the distribution margins - definied as the difference between the ex-factory price of a
product and the price to consumers - may make up between 10% and 50%
of the price of a consumer goods. The distribution costs (excluding marketing and promotion costs) in the diamond pipeline are exceedingly small, both in absolute terms as well as in comparison with other products.
The distribution system plays a vital role in giving consumers/buyers (on each pipeline level) a wide choice of goods and associated services. In principle, an efficient and competitive distribution mechanism can help to enhance consumer welcare - and thus stimulate demand.
The DTC wants to make the entire pipeline, including the rough supply level, more competitive which is a laudable and welcome policy.
To bring about a far smaller number of players in the pipeline will reach the opposite objective: it will narrow the choice of supplier on each level.
WFDB Perspective
It is our view that De Beers should avoid risking alienating a major
segment of the industry. Rightly or wrongly, the SoC initiative is viewed as "unfriendly"' to many small and medium sized companies, to those large companies that are active horizontally and are not geared toward vertical integration.
It is seen as "non-supportive" to companies which fail to have the volume, financial strength, marketing skills, which are defined by De Beers as meeting the minimum criteria for SoC. It must
be stressed that there are scores of excellent companies in the
diamond business - comapnies earning a high return on capital invested, companies which have sound profit margins, but somehow, it is feared, they don't meet the desired DTC client profile.
It is in the best self-interest of the DTC - and of the diamond business as a whole - for the DTC to consciously maintain a bridge to the smaller and medium sized companies.
Response from the DTC - www.worldfed.com
The following is the response that the WFDB received from the
DTC with respect to its concerns about the Supplier of Choice program.
July 2001 Supplier of Choice - The DTC Responds to the WFDB
On the 11th July, a WFDB delegation consisting of Bram Fischler, Shmuel Schnitzer, Ernie Blom and Freddy Hager visited our offices in London.
They gave us a very clear, detailed and professional presentation on 'The contribution of the small and medium sized players to the continued growth and prosperity of diamond jewellery consumption worldwide'. This reflected the concerns voiced at the WFDB/IDMA Presidents' Meeting in Idar-Oberstein that the DTC 'Supplier of Choice' initiatives would drive SMUs (small and medium size manufacturing and trading units) out of the diamond business.
At the DTC we are aware of the belief in some quarters that our intention with Supplier of Choice is to create a vertical pipeline directly from Sightholders to retailers, cutting out the middlemen and forcing industry consolidation. This is simply not the case. We had hoped that the many briefings and interviews that we have given over recent months on this topic would have allayed such fears, but obviously there is a need for greater clarity and so I am grateful to the WFDB for this opportunity to put the record straight.
First of all, we have to face the fact that on a global basis the diamond industry is losing market share and has been throughout the past decade. The growth in sales of diamond jewellery at retail has been pedestrian when compared with other luxury goods sectors, such as perfume or watches, which have been growing by 10% per annum. Even in the Millennium Year of 2000, diamond jewellery grew by just 4%, below the 5% GDP growth in the main consumer countries that we must at least match. In Japan last year, even given the economic downturn, the sales of luxury - and especially branded - goods grew by 12%, whereas diamond jewellery sales fell by 7%. Why is this? Diamonds, as the ultimate luxury, should be leading the field, not lagging woefully behind.
Something has to be done if we are to halt and reverse this downward trend. At the DTC we believe that we - all of us - need to boost our marketing and distribution skills to create a competitive, demand driven industry, match the growth rates enjoyed by the leading companies in the luxury goods sector and outperform GDP. As one example of the need for change: the diamond industry spends on average 1% of sales revenue on marketing and promoting diamond jewellery (and that includes the $180 million a year that the DTC devotes to the generic advertising of diamonds). Compare that with the 6% to 10% typically spent by the luxury goods sector!
So yes, we do need to streamline the distribution chain, to encourage
strategic alliances within the pipeline from manufacturer to retailer, to work together with our suppliers and customers to create efficiencies and economies of scale, but that does not mean the demise of the SMUs. Most smaller and medium sized firms add value to our business, provide flexibility and make an important capital contribution. Indeed, it is from their ranks that the large companies of tomorrow will spring. However, as the WFDB itself points out in its presentation, it is market forces that will ultimately determine the viability of individual SMUs, not any particular policy or initiative by the DTC.
We cannot ignore, however, that there is a trend towards consolidation in all industries and that this trend is likely to increase in an uncertain economic climate. This is precisely why we believe that individual companies - large, medium and small - need now to adapt and to seize the opportunity to put their business on a new footing to meet the challenges that the changing world presents.
Supplier of Choice is a concept, a process, which we believe will
establish the DTC's commercial relationship with its Sightholders on a new basis that will demonstrate the benefits of more efficient distribution and more effective marketing.
This will take time, however.
Supplier of Choice is not a 'big bang' event, but rather an evolutionary development, reflecting the realities of the marketplace. We believe, also, that if we can be successful in driving demand for diamonds up to and beyond GDP levels - and that will take a concerted effort from us all - the effect will be to benefit everyone in the industry.
To use an appropriate cliché
: "A rising tide raises all ships".
Efficient and effective SMUs should benefit from a more dynamic pipeline.
Of course, the DTC's primary focus will be on our own customers who, with their strategic partners downstream, will have the scale and margins to run promotional campaigns and be the major drivers of demand. But, far from being in any sense indifferent to the prospects for the SMUs, the DTC recognises that the so-called 'secondary market' also has an important role to play. Many smaller firms will be more adept than the larger players in dealing with niche markets, producing speciality cuts or devising particular marketing plans, and these need to be encouraged. It is part of our strategy to continue to supply manufacturers in the secondary market, through Diamdel and the other dealers.
At Idar-Oberstein it was felt by some that the DTC was discouraging sightholders from selling to polished wholesalers. Here, again, this is a misunderstanding. In fact, polished wholesalers often have the best downstream contacts in the consumer markets and we certainly do not want them to disappear. What we would hope is that they will transform their businesses to drive demand through their customers by creating added value concepts and joint marketing initiatives.
A key aim of Supplier of Choice is to encourage closer commercial relationships between the cutting centres and the consumer markets so that effective, demand-building initiatives can be devised by buyer and seller working together. We must move away from price-cutting as a way to sell diamonds! If SMUs can create these pipeline relationships they will be successful - we wish them to be so and would certainly encourage DTC Sightholders to work with such companies.
I trust this goes some way to explain that although the Supplier of Choice concept does present the industry with some very real challenges, it certainly poses no threat to those companies - regardless of their size - ready to grasp the opportunity to transform and revitalise the industry.
For further information, please visit our website on www.debeersgroup.com
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