The "Diamond" and the Cartel that invented it, and still drives it, is by commercial reckoning now 120 years old. The DeBeers organization (founded 1888) has far exceeded the average life of any other cartel. Diamonds have been integral to the American consuming public for nearly 100 years (who hasn't heard "A diamond is Forever"?) and yet, remains one of the most intriguing, and narrowly understood phenomenon in the annals of modern business.
There is no shortage of information on the subject, and modern diamond industry is more public and vital than ever. DeBeers has had its portion of public exposure: scathing media reports of "the South African monopoly", rumors of involvement in sectarian violence in several African countries, strong accusations over "blood" or "conflict" diamonds, ad-nauseum. Yet, the questions I am most frequently asked are "What is the real value of diamonds?; if they aren't rare, why are they so expensive?; what is the truth about the cartel?, why do they cost so much, but are worth nothing when I want to sell them?".
Meanwhile, the distribution and retail segments of the diamond business are so engaged in a contest (or maybe more like a rabid dog fight) to be more recognizable than the other, the average consumer is now awash in a virtual ocean of sales hype, name branding, technology and confusion. Yikes!
My goal is to present the diamond industry from a different perspective (my perspective); the perspective of a professional appraiser, market observer; not a professional seller. I plan to cover all pertinent topics from the beginning, to present day; in a series of installments, and do it in some loose dispensational order. QE
A Brief History
To better understand current events in the diamond business, a quick "throw-down" history seems in order. In recent years, an array of articles and made-for-TV documentaries, have provided the American public with at least, a basic knowledge of the "invention" and growth of the diamond dynasty. Without doubt, DeBeers is by far, the most efficient and durable cartel ever to exist on Planet Earth (more on cartels below). From its beginning, the diamond industry has been driven by two primary engines.
1. Natural diamonds of significant size and quality to be cut and polished as gemstones, represent a comparatively small percentage to what is mined (most diamond material is suitable only for industrial applications). And though diamonds are found in fairly few locations on the planet; among those locations, they have shown to exist in sufficient profusion to continually exceed planetary demand. So in the construct of supply, there are plenty of diamonds.
2. The diamond industry operates inversely to most classic commodity-market fundamentals. Basically, diamonds were a "product" that, beyond a long trail of myth and lore, had no real, or conceived value to a mass market. The common perception in 19th - early 20th Century cultures was that diamonds were reserved as toys for aristocracy, not "ordinary" people. Indeed, DeBeers owed much of its early progression to favorable associations with the powerful British-Dutch stewards of South Africa.
The Diamond Invention: coup de maître of the DeBeers / Ayer partnership
Thus, already holding a virtual monopoly on rough diamonds (supply), DeBeers realized that value and desirability (demand) would have to be invented. And to ensure the growth and profitability of the consortium, both supply and demand would be well-controlled. This sounds like "Marketing - 101" now; but in the 1930's, what DeBeers, and its advertising firm, N.W.Ayer, did for diamonds, not only set, but also permanently shifted the paradigm of modern mass marketing.
The original market targets for this endeavor were of course, British subjects, as well as their next-door European neighbors. However, in the late 1920's, because of a fairly wide economic depression in free Europe, concerns over the looming spectre of war and the general disinterest among European society, the concept of public ownership of diamonds never really caught on.
So, DeBeers and Ayer re-tuned its efforts to the only remaining market, The United States. The American consumer was regarded by most Europeans as having more money than sense; so it seemed the perfect alternative. In 1938, Harry Oppenheimer, son of the founder of DeBeers, set forth to New York, and a meeting with N.W. Ayer, an aggressive, forward thinking advertising agency in the US.
Ayer proposed applying to the diamond market, a recent groundbreaking theory that the American consumer was motivated to purchase not by utility but by "conspicuous consumption", an idea postulated by economist Thor. Veblen in 1899. By combining the persuasive power of Hollywood icons, motion pictures and American socialites, with compelling advertising and Verblin's theories; Ayer subtly and completely succeeded in altering the American psyche. By 1940, Ayer had achieved an unprecedented goal. Diamond sales in the US were up over 50%. By the early 1950's, the idea of the necessity of the diamond engagement ring had been permanently inured to the American consumer. Fully 75% of all DeBeers diamonds sold, were sold in the US market.
Thenceforth, diamonds have been marketed ingeniously and aggressively to the consuming public of every free society; an effort so effective, that today the giving, receiving and ownership of diamonds is endemic to the expression of betrothal and of enduring love; as well as the most universally recognized symbol of wealth and power in modern western culture.
As For The Cartel
A cartel is generally held to be a coalition of independent producers, whose goal it is to control a product or commodity,
fix or set prices and restrict competition (unlike a monopoly, which is held by a single entity). There are some basic principles that apply to all cartels; and given subtle variations, that also describe the DeBeers organization precisely.
1. The amount of product or commodity is usually ample and available through more than one source
2. The producers, distributors and investors realize that by merging their interests, they become far more powerful
3. Demand is created, maintained and controlled through effective marketing
4. Product price is controlled by limiting supply and distribution (created shortage or availability to demand)
Most countries wield antitrust laws prohibiting cartels; yet they continue to exist. Price-fixing is widely prohibited, but practiced internationally. In a few cases, price control agreements are sanctioned by a government, or protected by a multilateral treaty. DeBeers has successfully controlled supply and prices since its inception in 1888; and for the greater portion of the 20th Century, either owned, or controlled all of the diamond production in southern Africa. Today, DeBeers exists in many forms, and in many countries; and significant diamond producers (not in the DeBeers fold) now exist on two other continents. Yet, beyond what it still directly owns, DeBeers continues to influence (to great degree) both supply and price of "the diamond".
Notes
*Diamond: ORIGIN Middle English : from Old French diamant, from medieval Latin diamas, diamant
*Well worth a read: Thorstein Veblen's work "Theory of the Leisure Class", 1899
Thanks for reading. More to come...
