Diamonds are a Girl’s Economist’s Best Friend

The Business of De Beers, a South African - British company specialising in diamonds.

De Beers has been the company synonymous with diamonds for over a century. However, the diamond industry is experiencing significant shifts, with De Beers at the center of these changes.

Founded in 1888, De Beers once had considerable monopoly power within the diamond industry. When you think of diamonds, what comes to mind? If you immediately turn towards ideas of love and commitment, you’ve been influenced by De Beers! The company was instrumental in establishing diamonds as symbols of affection through its famous "Diamonds Are Forever" campaign launched in 1947. This slogan not only bolstered sales for decades, but also caused considerable cultural and social shifts in the way that diamonds are perceived, ingraining the stone into the social fabric of engagements and weddings.

De Beers maintained its monopoly power over the diamond market by tightly controlling the supply through its Central Selling Organisation (CSO). The company would stockpile diamonds, releasing them in controlled amounts to ensure scarcity and keep prices high. De Beers also established exclusive agreements with major diamond producers and distributors to secure its dominant position.

De Beers' monopoly began to unravel in the late 20th and early 21st centuries due to several factors. Legal challenges, such as antitrust lawsuits in the United States and Europe, forced the company to change its business practices. The emergence of new diamond producers, particularly in Russia, Canada, and Australia, increased market competition. Additionally, advancements in lab-grown diamonds provided cheaper alternatives to natural diamonds. In response, De Beers shifted its strategy from controlling supply to focusing on branding and retail, launching its own lab-grown diamond line and investing in consumer marketing. These changes, coupled with increased regulatory scrutiny and market diversification, have significantly eroded De Beers' monopoly power in the diamond industry.

Selling De Beers

Recently, Anglo American, a British mining conglomerate, announced plans to divest its 85% stake in De Beers. This decision comes as Anglo American faces a takeover bid from BHP Group, the world's largest mining company. By focusing on its core businesses like copper, premium iron ore, and crop nutrients, Anglo American hopes to increase its value and fend off the takeover.

Selling De Beers marks a significant change in the business strategy of the company. For years, Anglo American has promoted De Beers as one of its most valuable and influential companies, but the changing dynamics of the diamond industry, including the rise of lab-grown diamonds, have pressured this traditional market leader. Arguably, the firm simply isn’t changing with the times.

Challenges and Competition

The diamond market is not what it used to be. In 2023, De Beers' revenue plummeted by 35% from the previous year, with rough diamond sales falling from $6 billion in 2022 to $3.6 billion in 2023. This decline is partly due to weak consumer demand in major markets like China and the U.S., which together account for about half of the global diamond jewellery market.

Adding to De Beers' woes is the competition from lab-grown diamonds (LGDs). These stones, virtually identical to natural diamonds but much cheaper, are gaining popularity. In fact, LGDs now account for a significant portion of diamond jewellery sales, especially in the U.S., where nearly half of the diamond engagement rings sold include lab-grown stones. For many people, the appeal of a diamond lies only in what it looks like, rather than in where it has come from.

De Beers' Strategic Response

To counter these challenges, De Beers has been proactive. In 2018, it launched the Lightbox brand to market LGDs, positioning them initially as fashion items rather than direct competitors to natural diamonds. However, the economic reality of the rising popularity of LGDs, whose prices continue to fall, has forced De Beers to rethink this strategy. Recently, it considerably cut the prices of Lightbox diamonds to make them more competitive.

The Future of De Beers

As Anglo American prepares to divest De Beers, several potential buyers are putting themselves forward. Sovereign wealth funds from the Middle East and luxury goods conglomerates like LVMH are seen as likely candidates. These potential buyers have the financial strength and industry knowledge to take on the De Beers brand and adopt new, more innovative business models.

As well as these private firms, the government of Botswana, which owns a minority stake in De Beers, could play a more significant role. Botswana’s government holds a 15% stake in the company and partners with De Beers through joint ventures like Debswana, which operates some of the richest diamond mines in the world. This partnership has made Botswana one of the largest diamond producers globally and significantly boosted its economy.

The diamond industry's current dynamics illustrate important economic concepts. The balance of supply and demand is a fundamental principle at play. Traditionally, De Beers controlled the supply to maintain high prices. However, with the development of LGDs, the supply has effectively increased, pushing prices down and challenging the traditional market structure.

The distinction between natural and lab-grown diamonds highlights the challenges facing firms in terms of product differentiation both within the diamond industry and more broadly. De Beers must convince consumers that natural diamonds, despite their higher price, offer a unique value that lab-grown diamonds cannot match. This involves not just the intrinsic qualities of the stones but also the emotional and symbolic value attached to natural diamonds. To achieve this, De Beers may need to dig out some of the advertising campaigns of its past.

De Beers is at the forefront of the changes evolving within the Diamond industry, facing significant challenges from changing market demands and increasing competition from lab-grown diamonds. The company's ability to profitably navigate these challenges, and others as they arise, will depend on its business strategy and how the company changes under potential new ownership. For over a century, De Beers has been a symbol of luxury and enduring love. Whether it can maintain this status in a rapidly evolving market remains to be seen.

From the Team

Has the UK Sidestepped Out of Recession?

A dive into the current state of the UK economy leading up to the 2024 General Election and a discussion of whether recession is really behind us.

Has the UK finally come out of recession?

Short answer yes, it thankfully has! Previously the British Chambers of Commerce (BCC) had reported that the UK had entered a mild state of recession that lasted for the second half of 2023. However, according to the Office for National Statistics (ONS) services output grew by 0.5% in March 2024 and that was the biggest factor that led to an increase in GDP.

Economics or ‘Swiftonomics’?

Taylor Swift is an American singer-songwriter with record breaking albums and a dedicated international following. There is an estimate of about 1 million fans to be attending the 152 different concerts spanning 54 cities and 5 continents. According to an article by BBC News, Taylor Swift’s Eras Tour is estimated to inject £1 Billion into the UK’s economy.

Outside of ticket costs fans have also put money towards things such as costs of travel and accommodation. On social media fans have also been seen purchasing various items for outfits to wear to the concerts. According to Barclays Bank spending by an attendee of the Eras Tour concerts is about 12 times more the average cost of a night out in the UK (an estimate of £67.)

Has the UK Really Broken up with Retail Therapy?

That seems to be the case due to a significant decrease in UK spending. According to the Office of National Statistics (ONS) retail sale volumes (quantity bought) decreased by approximately 2.3% in April 2024. These statistics are ranging from various sectors such as apparel, furniture and toy stores. Although, recent bad weather has been taken into account for the reduction in footfall on the high streets.Although there was a 0.7% rise in the three months lead up to April 2024 when compared with the last quarter of 202

Sunak vs Starmer

On May 22nd British Prime Minister and Leader of the Conservative Party Rishi Sunak announced to the public that there was to be a general election held on the 4th of July 2024.

Since then on the 27th Sunak pledged to cut taxes for pensioners and he also plans on increasing their tax free allowance either by at least 2.5% or close to the highest of average earnings. This move was done in efforts to win over public opinion ahead of July's Election.

According to an article by The Guardian the average of polls spanning over a 10-day period show that 44.7% of voters are in favour of Labour Leader Keir Starmer winning the election.

Keir Starmer has put forward Labour's six commitments which include bringing economic stability to the UK. This could be the reason for his popularity amongst the British public after the first quarter of 2024 only saw a 0.6% growth rate and the last quarter of 2023 had a 0.3% decline in the economy according to the Office for National Statistics (ONS.)

Thanks for reading! See you in the next issue - Erin McGurk