In 1848, on the eve of the fall of Louis-Philippe’s regime, two representatives from Tiffany & Co. arrived in Paris for their annual buying trip. The mini-revolution was reaching its peak, and members of the royal court, mindful of what happened to their predecessors in the revolution of 1789, were preparing to flee the country. In need of ready cash, they were desperate to liquidate their jewelry, which included plenty of diamonds. But, as the story goes, there were few takers, and the price of diamonds fell 50 percent overnight.
The Tiffany buyers immediately came to the aid of the distressed gentry, capitalizing on the opportunity by spending their entire budget on diamonds. At the risk of being executed as royalist conspirators, the buyers surreptitiously managed to acquire a substantial portion of the French nobility’s jewelry. Their buying frenzy caused quite a stir. Indeed, a Paris newspaper erroneously reported that they had acquired some of the French crown jewels, which were rumored (falsely as it turned out) to have been stolen from the Tuileries amid the chaos. The buyers fled the country just ahead of the firing squad. By the time they returned to New York, the rumor had spread, and the New York press crowned Charles Tiffany “The King of Diamonds.” Tiffany basked in the media attention, capitalizing on the story for its considerable publicity value. (Ironically, in 1887, the jeweler did acquire a portion of the French crown jewels—albeit by a far less sensational, legitimate auction.) Despite the scandalous hype, the Paris buying trip did go down as a legendary triumph of sourcing.
Today, diamonds of exceptional quality remain difficult to come by, even for a company with Tiffany’s purchasing clout. Although its buyers are no longer required to risk their lives or procure goods on the black market, they can be hard-pressed to acquire a steady stream of the best sparklers. There is no assembly line churning out VVS1s (stones graded as high clarity). Diamonds have to be dug out of the ground. Of the 6,395 kimberlite pipes (diamond’s host rock formation) found in the world to date, only 14 percent have been classified as diamond-bearing. Of those, only 4 percent yield more than three carats per ton, which is the threshold for an economically viable mine. And only .07 percent of those pipes have been mined, with a mere 1 percent of the diamonds that are mined annually qualifying as “Tiffany-type goods” (as they are known in the trade): I-color and VS-quality or better. Furthermore, distribution is tightly controlled and widely dispersed.
The diamond market was cornered early in the 20th century by De Beers, the South African dynasty whose mines produce 45 percent of the world’s gems and whose marketing arm, the Diamond Trading Co. (DTC), is contracted to buy and sell most of the rest. As a cartel, De Beers had a stranglehold for more than a century on the supply and price of diamonds, issuing “sight boxes” to a select group of what is now fewer than 100 handpicked dealers and manufacturers (cutters and polishers) every fifth Monday throughout the year. The boxes contain a variety of stones that range in size and quality, as determined by De Beers, with certain considerations for each sightholder. The boxes’ contents and prices are confidential and nonnegotiable. De Beers endeavored to control the distribution of most of the world’s supply of diamonds by either purchasing a controlling interest in the mines as they came into production or, in the case of independent producers, securing contracts to market the gems.
Then came Canada. The 1998 opening of the Ekati Diamond Mine in the Northwest Territories marked the first time that a Western country had ever produced diamonds. And they were not merely run-of-the-mill diamonds, but some of the cleanest, high-color diamonds in the world. In fact, only De Beers’ Botswana mine yields a finer gem diamond.
The deposit was discovered by Canadian geologists whose small exploration company, DiaMet, had recently sold its share to senior partner BHP Billiton. A second mine, Diavik, has been in production since November 2002. Its majority owner is Rio Tinto, whose minority partner, Toronto’s Aber Diamond, discovered the gems. As two of the world’s largest multinational mining conglomerates, Rio Tinto and BHP own extensive mining operations throughout the world. Rio Tinto mines the majority of Australia’s massive diamond deposits, which were originally contracted to De Beers. A few years into the contract, disagreements arose over everything from pricing and production quotas to the way that De Beers marketed the gems. In the mid-1990s, the Australian producers split from the De Beers cartel and began marketing their diamonds directly to dealers in India, where small stones, such as those mined in Australia, are typically cut and polished.
With Rio Tinto and BHP Billiton at the helm of the Canadian sources, it was almost a given that Canada’s diamonds would not pass through the De Beers cartel. Although BHP initially contracted to sell a small portion of its diamonds to the DTC, virtually all are now sold independently, mainly to clients in Antwerp, a leading market center for top-quality stones.
Once word spread through the diamond world that Canadian producers were marketing outside the cartel, there was no shortage of takers. But Aber was looking for more than a customer; it wanted something to take to the bank. The company needed to raise more than $380 million to cover its share of Diavik’s start-up costs, and part of that would have to come from a large bank loan.
“We needed to provide the banks with a security package on the marketing aspect of the diamonds,” says Aber Vice President of Marketing Matthew Manson. “Normally when a bank finances a mine, it’s for something that has a spot price [a value determined by the commodities market], like gold or copper. If the mine goes belly-up, the bank can always sell the commodity on the market. With diamonds, you can’t do that. The convention in the diamond industry is person-to-person sales, and each sale is negotiated.”
With a pledge from a client of Tiffany’s caliber, Aber knew it could secure a loan, allowing it to avoid contracting with De Beers and to retain marketing rights for the diamonds. Policies such as nonnegotiable pricing and market-control measures that involved the imposition of quotas—forcing producers to stockpile diamonds—had made Aber shy away from the cartel. It was not that Aber wanted to flood the market, it just wanted to control its own prices.
For Tiffany, Aber came along at a time when the company was drastically tightening its supply chain and becoming more vertically integrated. (It now produces more than half of its own jewelry.) “We wanted to ensure an adequate supply,” says James Fernandez, Tiffany’s executive vice president and chief financial officer. “Our vendors were great, but they weren’t growing at the same pace as Tiffany’s.” Tiffany’s net sales have increased an average of 11 percent each year for the past six years, peaking in 2002 at $1.7 billion. Jewelry accounts for 80 percent of sales, and 36 percent of that jewelry incorporates diamonds, translating to about $500 million a year in sales of diamond jewelry.
From the beginning, an Aber/Tiffany partnership seemed to be a perfect match. “We had diamonds, and Tiffany sold diamonds,” says Aber President Bob Gannicott. “It seemed like a good place to start. And, as Canadians, that’s what we do, isn’t it? We dig it out of the ground and flog it to the Americans.”
The courtship between Aber and Tiffany began in 1993 with a telephone call between Gannicott and Fernandez. Then Gannicott flew to New York with charts, maps, and stone samples that projected the quantity and quality of diamonds that would come out of Diavik. He kept Fernandez in the loop throughout Diavik’s feasibility and environmental approval stage, and in 1999, the two companies exchanged their vows. In a $71 million deal, Tiffany acquired 14.7 percent of Aber, including a contract to purchase $50 million worth of the mine’s top quality diamonds annually over the next 10 years. Tiffany also announced that it would establish a cutting and polishing center not in the traditional centers of Antwerp or Tel Aviv, but in a factory in Yellowknife near the mine.
The deal sent shock waves through the diamond world by eliminating three to seven middlemen—from De Beers and its sightholders to brokers and polishers. It also created a ripple of fear about diamond price stability. Some said the Canadians were acting irresponsibly by not going through the cartel. There were rumors that they would soon be dumping diamonds on the market, just as the Russians had done in the politically volatile 1990s, when the government needed cash. The Aber/Tiffany deal was remarkable in that it was the first time that any entity other than a mining company, a government, or De Beers had secured a piece of a diamond mine, and it was a retailer, no less, who would have the opportunity to cherry-pick the best gems.
What’s more, the deal represented a sea change in the diamond pipeline. Traditionally, diamonds follow a trail from either Africa or Siberia through the DTC’s London office to a trading/cutting center in Belgium, Israel, or India, and then to America. With the Tiffany deal, for the first time, diamonds would be entirely sourced and processed by a single entity in North America, which seems fitting considering that Americans spend $27.4 billion a year on diamond jewelry, representing almost half the annual world sales of $58 billion.
The implications of this truncated distribution pipeline served another important function for Tiffany. The Canadian diamonds came along just as a diamond’s provenance was becoming politically charged. Four years ago, nongovernmental organizations (NGOs), such as Amnesty International and Global Witness, reported that diamonds were being illegally sold to fund rebels in warring African countries, primarily Sierra Leone. These so-called conflict or blood diamonds were blamed for financing atrocities against civilians, and the NGOs were calling for a boycott.
Although conflict diamonds represent less than 5 percent of world diamond production, the diamond industry, fearing a backlash, implemented a system that requires verification of the origin of rough diamonds. Legislation to support the system, known as the Kimberley Process, has been passed in several countries, including Canada and the United States. While the legislation is an important development for the industry, it is still impossible to verify scientifically the geographical source of a diamond. But, although the Kimberley Process appears to be little more than a paper trail, it is widely viewed as the best solution, because those who do not comply risk their reputations. Given the current media hype surrounding the issue of conflict diamonds, anyone caught dealing in such stones would be ostracized by the industry itself.
Ethical sourcing has become an issue of industry-wide concern. For a company such as Tiffany, whose name is synonymous with quality diamonds in America, buying clean diamonds is crucial to protecting its valued brand equity. Aber Diamond represents not just a source for Tiffany, but a clean, ethical source. However, unlike many retailers, the company will not distinguish its Canadian stones from the others—a Tiffany diamond is always a “Tiffany” diamond and no further qualifier is needed. But for those who care about the distinction, the first Canadian diamonds debuted in Tiffany jewelry this fall, and once Diavik’s production is running at full capacity, Tiffany expects that Canada will be the source of at least 25 percent of its annual diamond supply.
The Canadian mines’ decision to work outside the cartel has not, as predicted, collapsed the price of diamonds. The producers of Canadian diamonds are not in desperate need of ready cash, so it is not necessary to dump diamonds on the market, and doing so would require a stockpile of stones. Because they are not contracted to De Beers, there are no restrictions that would force the Canadians to hold back diamonds and create a stockpile in the first place. Diamonds from Diavik and Ekati are sold at market prices to Tiffany as well as to a small group of core dealers and manufacturers, many of whom are also De Beers sightholders and are more interested in sourcing as many rough diamonds as possible than they are in bargain hunting.
Because high-quality rough diamonds are truly rare, bargains are hard to come by. There is no shortage of buyers who will line up and agree to almost any criteria to get their hands on such stones, which are like meat to a pack of hungry wolves. In this milieu, for a retailer like Tiffany to set aside the prime cuts for itself is indeed a sourcing coup of some proportion—almost the equivalent of pilfering the French crown jewels.
