Possible Solution for Fragmentation – Alliances

As another possible way to solve the problem of fragmentation in the diamond sector beyond consolidation, Ehud encouraged the industry to explore strategic alliances.

"Looking at other industries, there appears to be various ways to address the challenges of excess fragmentation in parts of the diamond sector. One option our sector can consider, especially given the slow trend in consolidation between players, is to make more use of strategic alliances."

 "Alliances," Ehud stated, "provide flexibility, from acting as traditional trade associations to performing more extensive forms of cooperation in chosen areas such as branding, cost reduction in procurement and manufacturing."

Ehud often called for increased investment in marketing and therefore felt branding alliances for promotion purposes were a good idea, encouraging the industry to adopt this approach. "In the absence of mergers and acquisitions, diamond retailers could consider branding alliances to jointly invest in promoting diamonds as a brand."

Picking up on how branding alliances exist in other sectors, "'Destination alliances are common in the tourism industry, where hotels, restaurants and attractions come together, often by setting up trade associations, to jointly promote and brand their destination."

Branding alliances have, in part, been adopted by some diamond industry players. A group of six diamond miners formed the Diamond Promotion Association (DPA). It is tasked with promoting diamonds in general, much like De Beers' "a diamond is forever."

Trading alliances between midstream companies was another form of alliance Ehud recommended to consider:

"As a result of being fragmented, the midstream market is currently exposed to various challenges, including a difficulty to put in place sustainable trading strategies. Could some of these challenges be addressed through alliances and trading associations formed by various players (including smaller niche companies such as those specializing in particular stones) to help improve their position, including vis-à-vis rough sellers and polished buyers, thereby also stabilizing the sector as a whole?"

Ehud showed how airlines and car companies did so successfully and encouraged the diamond industry's midstream to find a model that would work well and prove beneficial.

Ehud also shared a concrete example of how trading alliances could apply in the diamond midstream. "A single company with $1m could, for example, raise another $1m of bank loans and achieve a trading profit of say 5% on the $2m goods traded, i.e. $100,000 gross profit. But as an alliance […], the combined $10m capital is likely to secure a higher loan proportion, say even $15m, and hence each company will be able to achieve higher trading margins of say 6% on its share of the $25m total goods traded, i.e. $1.5m gross profit for all members of the alliance or $150,000 per company."

In exploring examples from how other industries addressed problems of fragmentation, whether through consolidation, vertical integration or alliances covered in the last few posts, Ehud always sought to encourage the diamond sector to be creative and dare to consider more structural and industry-wide solutions to challenges felt by individual players.

Related links:

Excess Fragmentation in the Diamond Market and Lessons from Other Industries

(Slide share version) 

Together We Are Stronger - Branding Alliances

Priorities for the New Diamond Producer Association