The De Beers Group made headlines last month when it announced the end of its joint venture with LVMH with the aquisition of their 50% share in De Beers Diamond Jewellers (DBDJ), a move that Chaim Even-Zohar characterizes as, "brilliant and long overdue." He writes, "With De Beers at the helm, the venture will get a realistic chance to succeed. But above all, having full ownership of De Beers Diamond Jewellers means a 'homecoming' of the name De Beers, allowing the company to apply the name to a wider range of downstream possibilities." In his latest Diamond Intelligence Briefing (subscription), "De Beers Diamond Jewellers: A Commercial Disaster Getting a Second Chance", Even-Zohar looks at 14 of the 16-year history (2001-2015) of the failed partnership between the two luxury giants: "they should have divorced many years ago", writes Even-Zohar, particularly after LVMH's $6.01 billion acquisition of Bvlgari made DBDJ "totally irrelevant" to their business model.
In early days, the marriage seemed nothing less than obvious: each partner invested $200 million to create what they thought could be a world-beating team ('world-beating' = 10 years to achieve 1.4% of global diamond jewelry market, eventually becoming the world's leading diamond jewelry brand) combining LVMH's brand management and retail skills with De Beers' name, diamond expertise, heritage and domination of rough diamond production. These hopes were soon dashed, and the "failure was solely LVMH's", as they made all the management decisions. It also complicated the market for De Beers while serving LVMH's interest: the latter got rid of of a potential competitor, while the former still wanted their 'own' brand - Forevermark - to which they could not attach their own name, having given it to LVMH. "Whether the $100 million or so that De Beers spent every year on promoting the Forevermark could have been avoided, I wouldn't know," writes Even-Zohar. "But allowing it to use the De Beers name ... would have eased its market recognition." It took 16 years before Bruce Cleaver got it back.
In the first 14 years following the merger, DBDJ sold $1,454 million worth of diamond jewelry at an operating loss of $532 million. To make this more starkly clear: "On sales of almost $1.5 billion, the joint venture lost $0.5 billion." They first passed it off as acceptable losses incurred while developing a new brand, but the 1.4% of the global market target ended up being just 0.2% by 2015, "an unmitigated disaster." As Even-Zohar sees it, De Beers severely overestimated the capacity - and even willingness - of LVMH to develop a luxury brand, while undervaluing their own name. Over the years, the partners had to inject more capital into the project, while DBDJ often failed to meet its contractual agreements with its own suppliers, paying DTC sightholders late and, "grossly violating the DTC Best Practice Principles", established by De Beers of course.
Now that the divorce has been finalized they can go their own ways. "De Beers will not be missed by LVMH", as even after losing De Beers' 32 stores and 17 franchises, LVMH still has, "some 70 more brands sold through 3,940 stores. DBDJ represents the equivalent of 0.4% of LVMH's gross revenues, and 0.8% of its stores." Losing DBDJ will have no impact; losing De Beers name just might. It is not clear how much DB paid for LVMH's share, but it will be significantly less than what it would have taken to acquire a company originally valued at $1 billion, and more in line with an investment now estimated at $68.2 million, "based on the expected (future) break-even point." Going forward, however, "It can only get better", writes Even-Zohar. "Indisputably, De Beers CEO Bruce Cleaver made an excellent move by getting its 'name' back - and also grabbing an opportunity to integrate the retailer in DB's overall downstream activities. With mining production on an unmistakable downward curve, the company needs to grow its downstream income streams." It is also not clear where DBDJ's strategy will go from here, but, "it has gained a new lease on life."