Business model – mining, polishing and selling diamonds as luxury products
De Beers is the largest subsidiary by assets and second largest profit center of Anglo American, headquartered in London and listed on the London stock exchange . The De Beers mining consortium extracts, polishes and sells diamonds and other precious stones to major gemstone traders and jewelry houses worldwide. Its profit streams include margins generated above and beyond mining operating costs and sales of rough gemstones to traders (upstream), as well as markups generated in direct-to-consumer sales of finished jewelry (downstream).
The business model resides on the premise that diamonds, despite little intrinsic value, are desirable due to their scarcity. This model, in effect since the last 19th century, had benefited from De Beers acting as the de facto supplier of diamonds on the global market. By the 1990s, however, De Beers only controlled about 50% of the global supply of diamonds , following the exploitation of kimberlite (or diamond ore) mines outside of Africa. This led to the company needing to adapt its operating model in order to remain a market leader on the global stage.
Operating model – shift from ‘managing supply’ to ‘driving demand’
In summary, by the 1990s De Beers’ traditional operating model no longer effectively supported its business model, due to the loss of its global monopoly status in the diamonds industry. The company made changes to its operational strategy to protect market share and increase brand image.
Pre-1990s – De Beers’ operations prior to the 1990s could be summarized as “the De Beers way or the highway”. In effect, the company’s marketing arm (or “Central Selling Office”) handpicked customers (or “sightholders” ) to bid for its chosen level of supply of diamonds at non-negotiable prices. If needed, De Beers would stockpile gemstones in its coffers to maintain high prices. Interestingly, supply levels were informed by internal research on the number of marriages worldwide . Such monopolistic behavior was partially enabled by high barriers to entry, given the large capital investments involved in ore mining. This operational strategy was accompanied a long-standing marketing campaign entitled “a diamond is forever”, effectively pushing the “De Beers” as brand ambassador for diamonds. Margin captured by De Beers resided primarily in the upstream portion of the value chain (near rough gemstone extraction).
1990s – Two major disruptions called for a shift in De Beers’ operating model. First, following the rise of several upstream competitors, including Alrosa, BHP Billiton and Rio Tinto, De Beers no longer controlled the lion’s share of market supply . Stockpiling diamonds (analogous to the Kingdom of Saudi Arabia’s Aramco stockpiling barrels of oil) no longer served its purpose as well, given competitors could balance the demand at market prices. This led to declining revenues and profits, and eventually dwindling cash reserves . Second, consumers increasingly associated De Beers diamonds with armed conflict and child labor, leading the long-marketed “emblem of love” to become “blood diamond”.
Its new operational strategy, instigated and implemented by its then-Director Gareth Penny , consisted of fixing its brand image, sharing the profit pie upstream, and driving retail to stimulate demand. First, De Beers ratified the “Kimberly Process Certification Scheme”, which aimed to guarantee legal funding and working conditions used in diamond mining. This spearheaded an industry changeover that eventually spanned 75 countries and 99.8% of global rough diamond production , helping to increase brand equity for De Beers. Second, it adapted its upstream supply chain by splitting distribution with local mining country governments, and diminishing its reliance on stockpiling (effectively benefiting other players in the supply chain) . It also relentlessly pursued cost efficiency in all operations, given increasing competitive price pressure . Third, De Beers formed retail JVs with luxury brands, such as LVMH, in order to stimulate overall demand for gemstones and decrease its reliance on its own brand (first stage). That way, De Beers effectively compensated its declining margin levels upstream of the value chain by complementing it with margin downstream (near jewelry points of sale). Its brand name today benefits from more positive awareness, as evidenced by the recent marketing efforts of its internal “DeBeers Diamond Jeweler” line.
Post-1990s – De Beers’ operating model effectively evolved from supply chain control to vertical integration. Financial performance in the 2000s was strong as a result, with sales turnover growing at 4% CAGR from 2001 to 2011 . To this day, the company (and other subsidiaries of Anglo American) face pressure to change business practices (e.g., selection process for “sightholders”, compliance with “Black empowerment” in South Africa). However, is has successfully (re-)positioned operations to continue to play an important role on the global diamond stage.
 Anglo American 2014 Annual Report, http://www.angloamerican.com/~/media/Files/A/Anglo-American-PLC-V2/report-builder-2014/annual-report/aa-ar14-interactive-final.pdf
 SlideShare presentations, “De Beers Strategy”, http://www.slideshare.net/ravindra.choudhary10/de-beers-strategy-over-the-years
 De Beers company website, www.debeersgroup.com/globalsightholdersales/en/index.html
 Bain & Company industry report, http://www.bain.com/Images/PR_BAIN_REPORT_The_global_diamond_industry.pdf
 Bloomberg Business article, “The Issue: De Beers’ Multifaceted Strategy Shift”, http://www.bloomberg.com/bw/stories/2009-01-06/the-issue-de-beers-multifaceted-strategy-shiftbusinessweek-business-news-stock-market-and-financial-advice
 Official Kimberley Process Website, http://www.kimberleyprocess.com/web/kimberley-process/kp-basics
 Capital IQ, De Beers company statistics
 Pictures and video: De Beers company website and YouTube channel, Daily Mail website