Further Franchising the Name “De Beers” and Changing the De Beers LV Business Model

It all started when De Beers, which for legal reasons couldn’t go downstream and operate its own jewelry retail stores, entered into a 50 percent – 50 percent joint venture with LVMH, to whom it granted the exclusive use of the De Beers brand name for retail purposes. Now, a few years later, it is apparent that the original business model has been dramatically changed. De Beers LV, in turn, is now franchising the name further, probably quite differently from what it initially declared that it set out to do through the public disclosures made at the time it sought the European Commission’s Competition Authorities approval of the joint venture (a merger between LVMH and De Beers).

            The change was done in a transparent manner, but I wonder whether the industry players have contemplated all its ramifications; whether DTC Sightholders – and especially those developing jewelry brands – ought to rethink some of their own business strategies.

            Recently I visited the latest attraction at Dubai’s Mall of the Emirates: a new De Beers retail store, more or less next to Tiffany’s, Damas and Dhamani, at a well-positioned corner in the world’s most exclusive (and exotic) mall. As “De Beers” is the only name on the store, one might assume that this is the latest endeavor of the LVMH-De Beers joint venture. It is – and, in a way, it also is not.

             The Dubai store represents a partnership with Qatar-based Salam International with whom De Beers LV is teaming up to open jewelry stores around the region. Salam International was granted the exclusive rights and franchise to operate a De Beers franchise in a broad geographic area that includes local and duty free markets in Qatar, the UAE, Saudi Arabia, Kuwait, Bahrain, Oman, Lebanon, Syria, Iraq, Jordan, Yemen, Iran, Turkey, and Cyprus. Salam International will have the right, pending agreement, to own and manage exhibitions and license sub-franchisees to operate a De Beers franchise operation in the countries mentioned above.

            It is this “sub-sub-sub franchising” of the De Beers name that especially caught my attention. Such a downstream franchising process has not been followed so far, at least as far as we know, at the stores which were opened in New York, Beverly Hills, Paris, London, and Japan. They are all proper LVMH-De Beers joint venture stores. It is our understanding that by the end of 2006, there will be three stores in London, the number of stores in Japan will double from four to eight and by the end of this year, De Beers LV will have about 17 stores worldwide.

            But are they “their stores”? The definition of what constitutes a De Beers retail store is changing. Through the franchising process, a De Beers store might also sell a range of other brands – some of which may be brands in which DTC Sightholders have invested (so retailers selling these brands may find themselves competing with De Beers stores selling the same jewelry – possibly at different prices) while others may just be any brand. Not necessarily “high-end” or any end…. Indeed, the De Beers stores may actually end up selling very little jewelry designed and marketed by the original LVMH-De Beers partnership (called “Rapids World” at the time).

            This may well be a response to the “slow start”, the failure by De Beers LV to get its “act in order”, to find the right line of jewelry, etc. Anyone watching the personnel turnover knows there have been problems. That’s quite okay – and so is the changing of a business model. The question is: how does it impact the diamond business and the current strategies followed by the individual industry participants?

            Guy Leymarie, De Beers LV's CEO, has gone on record looking for retail partnerships. Interviewed by a trade paper he has clearly and frankly indicated that, "We will favor a partnership if we have mutual understanding. If we can build a serious partnership, we would consider it. Never forget, the most influential factor in the purchase is the family jeweler." In the deal with Salam International, the joint venture has gone much further. It has out-franchised its name.

It has been clear for a long time that De Beers (the mining people, not the joint venture with LVMH) had been unhappy about the joint venture’s performance. As recently as February 2006, Gary Ralfe frankly noted that, "De Beers LV has so far been disappointing. It has not recorded the sort of instant results that we, with our confidence, liked to have seen. It clearly takes rather more that the name of De Beers simply for the diamond jewelry to fall off the shelves…”

            Of course, De Beers LV is a non-managed business from the mining company’s perspective, though it has representation at its board (and De Beers director Stephen Lussier is watching that non-managed business on behalf of De Beers). De Beers LV is developing - or has already established - so-called “store within a store” concepts in general merchandisers such at Harrods in London, Le Printemps in Paris, or, maybe, Neiman Marcus in the United States.

            In their joint application to the EC’s merger authorities, De Beers and LVMH stated specifically – and this is also what was noted in the positive merger decision – “the new joint venture will source polished diamonds and other raw materials from third parties. It will control jewelry design in house, will outsource manufacturing activities and will distribute its products through its own distribution system to outlets, including Rapids World owned shops, to enable Rapids World to conduct these activities; both parents have committed significant resources to it at start-up in terms of finance, staff and assets.”

            The industry has always assumed that the De Beers stores would sell diamond jewelry designed by De Beers LV using diamonds sourced by De Beers LV, and mostly bought from DTC Sightholders. And that the term “distribution system” applied to the (now) some 1,700 LVMH retail outlets around the globe.

            The sub-sub-sub franchising, and turning De Beers LV into some kind of Tupperware or “Herbalife” pyramid, where those at the top collect only royalties on the accumulative downstream activities, may have been the intention from day one – we don’t know – but it was certainly not perceived that way by the market players, nor by the EC. In the De Beers LV joint venture, De Beers in entitled to 50 percent of the profits (and, technically, at a certain level even 60 percent). The franchising of the name may well provide a guaranteed cash-flow for generations to come – even though the joint venture may well lose control over the “exclusivity” that is associated with the prestigious high end environments.

            Does it matter? I truly don’t know. The process of distancing the De Beers mining operations from the De Beers retail brand will probably accelerate. De Beers will become mostly a “store brand” with name recognition such as Tiffany, Debenhams, Winston or Harrods – and sell many different brands within these stores. To me it isn’t clear where they are going. In Dubai, it undoubtedly aims at being the highest-end of the jewelry line. It will probably become one of the most successful De Beers stores.

             Quite a few diamantaires have lamented that it is so difficult to get a foot into the door at De Beers LV’s diamond buying operations – though they seemed eager (at least in London, I was told) to display your goods on consignment.

            Maybe the day will come that it may not be necessary to buy any diamonds from the market, or design jewelry lines. Its future may be well be in selling franchises. This reminds me of a comment that Harry Oppenheimer made a few decades ago, at an Antwerp conference, that probably the best way to make money in diamonds is “to buy shares in De Beers.” Maybe in the present century the answer to that same proposition would be “to own a De Beers franchise.”

            Who needs mines when you can own the franchise?