Analysis of Debeers
Analysis of Debeers
Analysis of Debeers
Declining revenues, liquidity problems and a bloated diamond stockpile are leading to decreased profits, diminished return on equity and a dwindling cash reserve
Today
Today
Saturated marketplace Problems with public relations Rumors of De Beerss demise Contract negotiations with key suppliers Emerging suppliers from developed countries
"The first effect of discovering kimberlites was that it converted diamonds from a rare gem to an industrial product like copper or any other product that you can mine."
Today
Today
1880 - founded by Cecil Rhodes 1888 - controls 95% of the worlds diamonds 1893 - signs exclusive deal with the precursor to the Central Selling Organization 1933 - survives great depression and buys out the CSO 1967 - discovers large deposits in Botswana and forms Debswana 1977 - speculation begins 1982 - the bubble bursts
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Ring courtesy of James D Julia
Today
Procurement
Cartel Controls distribution via lots and provides $ value grading service Stock piles diamonds
CSO
Sets infrequent inventory offering dates Limited offering locations
Market Maker Builds personal value to manage financial value Strong advertising
Primary Activities
Inbound Logistics
Operations
Outbound Logistics
Today
Cost markup percent from prior value contributor Percent consumer price allocated to value contributor
Mine
10% Polished
50% Polished
100% Polished
24%
3.6%
2.8%
3.0%
16.7%
50%
[1] Rough diamonds loose approximately 52% of weight during cutting and polishing
Today
Today
Primary challenge: diamonds are not a store of value and have little intrinsic value
De Beers Hangover
Context Analysis Plan Except for those few stones that have been permanently lost, every diamond that has been found and cut into a gem since the beginning of time still exists today. This historic inventory, which overhangs the market, is literally in the public's hands. Some hundred million women wear diamonds on their person, while millions of others keep them in safe deposit boxes or strong boxes as family heirlooms. It is conservatively estimated that the public holds more than five hundred million carats of gem diamonds in this above-the ground inventory, which is more than fifty times the number of gem diamonds produced by the diamond cartel in any given year.
Today
Analysis Plan
Today
Botswana Tanzania
De Beers owns or controls all output from South Africa, Namibia, and Botswana
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Today
Marriage rates declining Divorce rates rising Economy unstable Recession in primary jewelry markets Civil unrest plaguing Africa Middle East in conflict
Analysis
De Beers Customers
Context Analysis Plan Sightholders 80% cut their own stones before selling 20% mark-up on polished stones 20% sold to independent cutters Dealers 10% mark-up Jewelry Manufacturers 50% mark-up Retailers 100% mark-up Consumers Industrial buyers
Today
Creation
Mines
Firms Activities
CSO Buyers
Today
Cost Appropriation Mine Value Firms Activities CSO Buy Pay
Today
Threat of Substitutes: Attractive + No substitutes for diamonds + Cultural history + Social issues/status + High cost of entry
Bargaining Power of Suppliers: Very Attractive + Controls output + Owns distribution channel + Alliances + Relationships with foreign governments + Cash on delivery
Today
Bargaining Power of Suppliers: Unattractive + Controls output + Owns distribution channel + Alliances + Relationships with foreign governments - Cash is dwindling - Zaire does not renew contract (1980) - Argyle insists on right to market 25% of near-gem & industrial - Sightholders decrease from over 250 to 150 - Bankrupt sightholders liquidate inventory
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Today
CSO Sales
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Op Profit
Inventory
Figures from Ghemawat Case Study
2000 1800 1600 1400 1200 1000 800 600 400 200 0 1978 1979 1980 1981 Investments Cash
Figures from Ghemawat Case Study
Plan
Today
1982
Diamond Inventory
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Today
Diamonds owned by consumers Zaire: selling diamonds on the open market Argyle mine
Plan
De Beers Alternatives
Context Analysis Plan Today
1) Establish secondary market for diamonds as investments 2) Liquidate smaller, lower-quality diamonds, use proceeds to purchase and hold higher quality stones 3) Find new sources of capital, continue to buy surplus inventory 4) Decrease production 5) Increase demand
Pros Creates new demand Cons No universal grading system Increases speculation Takes time to establish market
Pros Creates much needed liquidity Provides Consumers an affordable choice Maximizes profit on larger, higher quality stones Cons Must sell diamonds below market Creates imbalance in inventory
Pros De Beers can continue purchasing excess inventory No change in strategy necessary Cons Long term debt increase Cost of interest
Pros Decrease inventory coming into the market De Beers has control over 40% of production Cons Others may increase production Adverse impact to relationship with diamond-producing countries
Pros Maintain pricing Benefits others in supply chain Cons Relatively slow process Advertising can be costly
Acquire additional financing to fund the purchase of excess inventory through the CSO Reduce output of De Beers-controlled mines Employ aggressive advertising strategy aimed at increasing demand
Address the cash shortage - secure additional financing Decide on operational strategy to ramp production down in company-controlled mines Evaluate or hire advertising agency to begin working on ways to pull product through the channel more effectively
Today
Turnover increase in De Beers group over 2003 of 5% - US $6.2B Decrease in operating cash flow from US $1.58B to $985M DTC sales reach US $5.2B Suffering from weak US Dollar Mining delivers 47M Carats
De Beers is cleaning house and tightening its circle of trusted partners De Beers restricts Sightholders to best performers and brand maintainers that are not susceptible to lowering prices Sightholders go from 120 to 80 by 2004 DTC sales actually go up from US $5.5 to $5.7 B while restricting Sightholders
De Beers Marketing
Context Analysis Plan Today
De Beers continues its masterful marketing by creating demand; however, the campaigns are increasing in frequency and beginning to overlap compared to the clarity of their A Diamond is Forever campaign The company is creating demand in its international markets with significant gains in China and India (the largest markets)
De Beers Diversification
Context Analysis Plan Today
De Beers continues to shuffle its corporate holdings, corporate brands, alliances, names and partners Global trade zones are catching up with De Beerss international strategy De Beers faces increasing pressures to change business practices
De Beers settles US Department of Justice case for Industrial Diamond price fixing issues - resolves long running US disputes, likely opens market further for DeBeers in the US Belgian diamond cutting company files suit in the EU courts against DeBeers for its Supplier of Choice program De Beers is working toward compliance in the African programs for Black Economic Empowerment (BEE) Conflict (Blood) diamonds
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Questions