Looking at other industries, there appears to be various ways to address the challenges of excess fragmentation in parts of the diamond sector as highlighted previously.
One option our sector can consider, especially given the slow trend in consolidation between players, is to make more use of strategic alliances.
Alliances seem popular in many industries because they allow companies to pursue common objectives whilst remaining independent and whilst continuing to compete in the market.
Alliances also provide flexibility, from acting as traditional trade associations to performing more extensive forms of cooperation in chosen areas such as branding, cost reduction in procurement and manufacturing.
The Financial Times estimates that “every one of the world’s 24 biggest carmakers by sales operates some form of alliance or joint venture with another large carmaker. Some work with as many as 10 of their rivals.”
How can alliances be helpful to downstream retailers and midstream companies, and what insights can we draw from other industries?
Branding alliances between diamond retailers
We discussed how in a fragmented market, diamond retailers are less incentivised to make significant investments to sustain consumer demand when revenues are spread over so many players.
In the absence of mergers and acquisitions, diamond retailers could consider branding alliances to jointly invest in promoting diamonds as a brand.
‘Destination’ alliances are common in the tourism industry where hotels, restaurants and attractions come together, often by setting up trade associations, to jointly promote and brand their destination.
Or consider industry-wide promotion campaigns. In its list of the most enduring USA slogans, The Atlantic magazine rates “Got Milk?” as perhaps the most recognisable commodity slogan in history.
Launched by the California Milk Processor Board and co-funded by dairy processors to promote cow’s milk consumption, this slogan has been credited with greatly increasing milk sales in California.
The Atlantic’s shortlist also includes of course “A Diamond is Forever” which De Beers singlehandedly launched in 1947 and which the magazine regards as perhaps “the best slogan of the 20th Century?”.
But despite its past successes, this diamond campaign is now fading and our industry can hardly rely on it alone to reach out the new generation of buyers.
Is it time for a new alliance or trade association of jewellery retailers to promote the next memorable diamond slogan? Could existing diamond exchanges and other diamond trade organisations play a role in stimulating this process?
Trading alliances between midstream companies
As a result of being fragmented, the midstream market is currently exposed to various challenges, including a difficulty to put in place sustainable trading strategies.
Could some of these challenges be addressed through alliances and trading associations formed by various players (including smaller niche companies such as those specialising in particular stones) to help improve their position, including vis-à-vis rough sellers and polished buyers, thereby also stabilising the sector as a whole?
In the airline industry, Star Alliance (26 members) is one of many trading alliances in the sector to purchase fuel and other items jointly in order to generate savings.
Similarly, car companies cooperate on their procurement, including the 15+ year-old alliance between Renault and Nissan which is said to have saved the combined groups over €10bn.
Starting gradually with about a third of purchases conducted together in 2001, there is now a formal entity handling all their purchasing activities.
The diamonds industry should explore the feasibility of similar alliances.
Isn’t a midstream company with $1m capital likely to be better off working as part of an alliance of 10 companies with $10m in combined capital when dealing with trade suppliers and customers, when seeking debt and when considering whether or not to adopt accounting standards such as IFRS that are increasingly expected by lenders and by major rough suppliers but which also add further costs?
Using illustrative figures and publicly available margin estimates, a single company with $1m could for example raise another $1m of bank loans and achieve a trading profit of say 5% on the $2m goods traded, i.e. $100,000 gross profit. But as an alliance, and if applying standards such as IFRS, the combined $10m capital is likely to secure a higher loan proportion, say even $15m, and hence each company will be able to achieve higher trading margins of say 6% on its share of the $25m total goods traded, i.e. $1.5m gross profit for all members of the alliance or $150.000 per company.
Can such alliances help reinforce the midstream market by helping them secure a larger part of the value-add between the $15bn p.a. rough production and $22bn p.a. wholesale polished output and without harming healthy competition between its members? Could such associations somehow also provide better markets signals when rough and polished prices are not aligned, thereby help prevent situations as today where midstream players find it difficult to buy rough diamonds?
Such initiative may appear too far out for the diamond sector, but it is worth noting that a group of Indian and Israeli diamond traders recently coordinated action to list their inventories at full asking prices without the common discounts as protest against the lack of transparency of one of the price lists.
Whilst alliances should not be formed in a way that harm end consumers or distort efficient competition, do such events suggest that stronger trading alliances between midstream diamond players may not be out of reach, especially if we involve the younger generation of professionals?
Designing the alliance right is key
Establishing successful alliances requires close and ongoing legal guidance to ensure compliance with competition laws and may also require obtaining certain regulatory approvals. Longstanding alliances also require careful design, especially as not all alliances have proven to be successful. According to the Boston Consulting Group for example, successful purchasing alliances require effective management structure, communication with suppliers and setting up the right form of corporate structure.
But in spite of the challenges of setting up alliances “the rewards of getting it right are too great to ignore” concludes the Financial Times.
The views expressed here are solely those of the author in his private capacity. No one should act upon any opinion or information in this website without consulting a professional qualified adviser and legal counsel.
 Quoted in http://en.wikipedia.org/wiki/Got_Milk%3F
 Based for example on indicative operating margins from Bain & Co analysis http://www.bain.com/publications/articles/global-diamond-report-2014.aspx (figure 1.1.5)