According to Antwerp Facets, up until recent years, everyone knew their place in the diamond and jewellery industry. Dealers dealt in diamonds and sold them to manufacturers, who cut and polished them. They, in turn, sold them to wholesalers and jewellery manufacturers, who then sold them to retailers. With the purchase of jewellery by the end consumer, the cycle was complete.
But then things changed, the portal says. Possibly as a result of the introduction of Supplier of Choice by De Beers more than a decade ago, or perhaps because of plain business sense and financial expedience, the neat order of the distribution was blurred and, in some cases, eliminated completely.
Initially Supplier of Choice called on sightholders to move downstream, ostensibly to help increase demand for diamond jewellery, and thus for diamonds. That call met with limited success, although it is fair to state that today a major percentage of diamond manufacturers are also involved in jewellery production.
But, at the same time that De Beers introduced SoC in 2000, it also announced that would be using its own name to launch a high-end jewellery retail venture, and so it did just one year later. And it was not the only major player to get involved at both ends of the pipeline. During the years that followed luxury jewellery retailer Tiffany & Co. moved into the financing of diamond mines, while Harry Winston, the owner of the the iconic chain of jewellery stores, was bought by the Aber Diamond Corporation, which owned a 40 percent share in the Diavik diamond mine in Canada's North West Territories, and thereafter operated as the Harry Winston Diamond Corporation.
It makes good sense financially. The most profitable parts of the diamond business are mining and jewellery retailing, while the manufacturing section of the pipeline is where all the financial headaches most frequently are located. There, profit margins frequently run in the single digits, and often below that, while in the mining and retail ends double and triple digit profits margins are not out of the question.
As so often has been the case in the diamond business, De Beers was first off the mark. Together with luxury retailer LVMH Moët Hennessy Louis Vuitton, it established De Beers Diamond Jewellers in 2001. In the years that followed, it has opened 40 stores in Europe, the United States, Asia and the Middle East.
This week it expanded its chain by opening a branch in Bahrain, following the opening of a store in Almaty, the capital of Kazakhstan, on July 2. The opening followed moves by other luxury retailers to take advantage of the enormous wealth that has been created in the oil-rich central Asian state.
As for the Harry Winston Diamond Corp., it supplies rough diamonds to the global market from its 40-percent stake in the Diavik diamond mine, while its diamond jewellery and luxury timepieces are sold in salons in key locations including New York, Paris, London, Beijing, Tokyo, Hong Kong and Beverly Hills.
Its unique business model gives it important competitive advantages, with its sales of rough and polished diamond operations giving it market intelligence that further boosts its overall performance. Furthermore, as a leading rough diamond supplier, it is able to leverage its client relationships to secure the highest-quality polished diamonds for its luxury brand division. By linking the production and retailing of diamonds, Harry Winston Diamond Corporation benefits from the market synergy created by being a rough diamond producer, polished diamond buyer and retailer of fine diamond jewellery.
The Diavik mine has proven resources and ore bodies that are among the highest grade and value in the world. It has more than 50 million carats of diamond reserves in the current kimberlite pipes being mined, and the average price of diamond reserves is approximately $195 per carat. The current mine plan is expected to take the mine’s production to at least 2022. The company says it has additional indicated and inferred resources of nearly 22 million carats awaiting reclassification to reserves status.
In addition, it has more sources of rough diamond supply, with over 2,400 square kilometers on the remaining joint venture holdings. It has also staked 915 square kilometers southwest of the existing mine site.
And this year, the company took its rough diamond mining and supply capacities a step further when it signed an exclusive arrangement with Diamond Asset Advisors, Zurich. The independently managed fund will see Harry Winston source polished diamonds for the fund to purchase. In the portfolio, 75 percent are diamonds of 0.50 to 5.99 carats, and 25 percent are fancy colors or larger stones. The diamonds will be consigned to Harry Winston which will act as custodian and use the diamonds in its products. When Harry Winston sells jewellery it will pay the fund the current wholesale replacement price.
The move also makes a new source of diamond inventory available to an expanding salon network without making additional demands on working capital, as well as supporting an expanding bridal business where clients prefer to review a wide range of diamonds at each salon. In addition, it reduces inventory financing costs and improves returns on capital.
In a bid to boost its luxury goods sales to $1 billion over the next seven to nine years, it will increase the number of its directly operated salons to 26 in 2013 from 19 this year and to 35 by 2016. It will start operating licensed salons and aims to have six such operations open by 2013, and 15 salons by 2016. Its luxury sales for the first six months of this year were $215 million.
The trend is clear, to expand in Asia to take advantage of growing wealth and brand recognition. The firm operates eight salons in North America currently, along with two in Europe, four in Asia and five in Japan. However, by fiscal year 2016, it aims to have an extra salon in North America, four more in Europe, and two more in Japan, but nine extra in Asia.
Meanwhile, Tiffany & Co, best known for its luxury jewellery items, particularly at its Manhattan flagship store, is also involved at both ends of the diamond jewellery pipeline. The retailer said in August that it was aiming to be more engaged in financing diamond mines around the world in return for privileged access to supplies due to the high price of rough goods.
Tiffany CEO Michael Kowalski said the company was ready to repeat an unusual deal struck this year to lend $50 million to a mine in Sierra Leone in exchange for the right to buy its rough stones. "We have recognized that it may be necessary to commit capital to assure diamond supply,” he told the Financial Times. “We’re not going to bet the company on the mining business. What we would do is ... look for selective opportunities.”
Tiffany’s aim is to find a way around high diamond prices and forecasts that supplies will fall short of future demand due to rising demand from wealthy consumers and a lack of large, new mines. “We are absolutely facing an environment of shortage, and the shortages are greater at the higher quality levels, so we are in constant search of new supply sources,” said Kowalski.
Tiffany’s loan to Sierra Leone’s Koidu mine is the latest move in a 15-year effort to integrate and internalize its supply chain. The company has already moved from buying a majority of polished diamonds to buying rough stones, which are now cut and polished overseas, notably in Antwerp in Belgium, then crafted into jewellery at factories in the United States.
Kowalski said it was a “powerful business model” that enabled Tiffany to gain a clearer view of diamond price moves, build up inventories, and raise profit margins. Kowalski said Tiffany had done extensive due diligence on Koidu and direct access to mines helped it to assure customers that diamonds had been mined responsibly.
