Since the 1930s when Sir Ernest Oppenheimer established the Central Selling Organisation, De Beers Consolidated Mines have controlled the selling and marketing of approximately 80% of the worlds rough diamond production (Capon, 1998). However, in 1996, Australian company, Argyle, stunned the world by announcing that they would no longer market diamonds through De Beers C. S. O. Many economists predicted that Argyle wouldnt be able to compete against the mammoth De Beers. Yet in the year to December 31, Argyle recorded a profit of $142. 5 million, an increase of 76% (Treadgold, 1999).
De Beers is currently looking like losing the monopoly it has had on the diamond industry for almost seventy years. A monopoly is an industry in which there is only one organisation that supplies a particular good, service or resource which has no other similar alternatives. Monopolies are created by barriers which restrict the entry of new organisations (McTaggart et al, 1999). In a perfect monopoly, the seller has total control over the quantity of goods or services available for sale and the price at which the items are sold (Butterworths Business .. Dictionary, 1997).
De Beers Consolidated Mines Central Selling Organisation has had a monopoly on the selling of rough diamonds since the 1930s. A monopoly industry is characterised by having no close substitutes. Although there are substitutes for diamonds such as rubies, emeralds and cubic zirconias, many believe that there are no other gems that exhibit the same beauty of the diamond. Perhaps this belief was created out of De Beers advertising campaign, A Diamond is Forever (Capon, 1998, pg 6) which began in 1947. Whatever the reason that consumers want diamonds, and diamonds only, doesnt matter.
Consumers demand the real thing and will pay for the luxury. The second factor which creates a monopoly market are barriers to enter the market. Common barriers to entry include licenses, patents, entry lags, economics of scale and control of inputs (Browning & Browning, 1989). Control of inputs is the factor that constricts entry into the diamond industry. De Beers Consolidated Mines of South Africa, through its ownership of mines and its central sales organisation, controls 85 percent of the worlds diamond output (Browning & Browning, 1989, pg 330).
De Beers enormous clasp on the marketing of rough diamonds has made it almost impossible for other producers to enter the diamond market. The combination of lack of close substitutes and control of inputs created the De Beers monopoly. Argyle has rewritten the books on the marketing of diamonds and in turn has caused De Beers grip on the industry to loosen. Argyles entry into the market has changed the way in which customers are supplied and is one of the chief reasons behind its successful entry into the diamond marketing industry.
The dictatorial style of marketing used by De Beers where packets of diamonds are shown at sights and the customer must take what is offered with no possible negotiation is being threatened by Argyles approach to marketing (Treadgold, 1999). According to the managing director of Argyle, Gordon Gilchrist, their marketing method has aligned the customer and the supplier (Treadgold, 1999). The other reason that has enabled Argyle to move in on the diamond market is their slight product differentiation. Argyles diamonds are of lessor quality compared to De Beers.
World diamond prices have fallen over past years. In 1990 an average diamond sold for $US780 per carat in Japan. Today, the current price is $US410 per carat (Treadgold, 1999). Customer preferences have shifted to a higher demand for cheaper, lessor quality diamonds, the type that Argyle is supplying. Argyles shift away from De Beers has resulted in a demise of the diamond industry monopoly with a shift to an oligopoly market type. An oligopoly market structure is characterised by a small number of organisations supplying a certain good, service or resource.
Examples of oligopoly style markets include the petroleum industry, airplane manufacture and computer software (McTaggart et al, 1999). The firms in oligopoly markets may provide identical products or differentiated products such as in the case of Argyle and De Beers. The demand curve in a monopoly market is inelastic. In a oligopoly market, demand is much more elastic, due to the substitutes available. The opinion from the De Beers camp is that Argyles presence in the diamond market will have little effect on their monopoly.
Tim Capon (1998), De Beers Executive Director, believes that De Beers diamonds are far superior to anything that Argyle markets. Under a microscope, De Beers diamonds are a premium product, however, for value for money, consumers are flocking to Argyle diamonds. Publicity from De Beers Consolidated Mines only hints at the companys concern in losing part of its market share to Argyle. A new marketing strategy which places the De Beers name onto some of its gems – is a classic marketing technique aimed at “segmenting” the diamond market between high value gems, bearing the De Beers name, and lower value stones (Newland, 1998).
This is an example that perhaps De Beers is not 100% confident with the new market situation. The bottom line doesnt lie. In the year ended December 1998, Argyles profit rose 76% on the 97 figures. In comparison, De Beers profit dropped by 39%. With the entry of Argyle and the significance of its independent success onto the diamond market, other organisations may soon too cut their ties with De Beers. Current rumours indicate that BHP and Diamet are both considering their position (Capon, 1998).
Rio Tinto (60% owner of Argyle) and Aber may also be considering the move to independence. It is almost definite that De Beers has lost its monopoly on the diamond market. Argyle has without a doubt made an impact on the international diamond market and will be a permanent player. It is likely that the industry will undergo many more changes, perhaps even more significant than Argyles entry. Only time will tell if consumers will gain by the diamond market becoming more competitive.
