Think Beyond Business

Welcome to my Newsletter #7

Know Your Customer: Lessons from Sam Walton

Dear Readers,

In this newsletter, I want to share a powerful lesson from retail legend Sam Walton, which holds true not only in the world of business but also in our daily lives. As Walton once said, "There is only one boss. The customer. And he can fire everybody in the company from the chairman on down, simply by spending his money somewhere else."

Recently, I had a conversation with a client who struggled to define who their customer truly was. It was a crucial question that had never crossed their mind before. This lack of clarity can be perilous, as not knowing your customer means you might be running a business that's already lost its way, all while thinking everything is in order.

I understand why many find it challenging to pinpoint their key customer. However, I can't stress enough how important it is to do so. With a little guidance, anyone can find the answer to this fundamental question. I'm here to help you not only discover your primary customer but also unravel other overlooked yet essential aspects of your business.

If you believe these answers are crucial to your success, don't hesitate to schedule a meeting with me using this link: Schedule a Meeting or send me a direct message.

Warm regards,

Isaac

Continuing the Diamond Saga: De Beers and the Neglected Customer

In this edition of the newsletter, we delve deeper into the diamond industry's fascinating history and explore how De Beers disregarded the wisdom of Sam Walton.

De Beers, once the dominant force in the diamond market, failed to pay attention to its customers and their evolving needs. As their marketing campaigns progressed, they were built on misconceptions, like the belief that people needed to reaffirm their love through diamond jewelry at significant life moments. Instead of comprehending the customer's motivations, De Beers attempted to "educate" them and alter their behavior, not realizing that such behavior is deeply ingrained in the subconscious.

The campaign to promote jewelry as a form of reaffirmation stemmed from De Beers' need to offload its surplus of smaller diamonds, which they had previously deemed as "junk."

By August 1980, the diamond market faced a catastrophic collapse, triggered by De Beers' fear of losing its grip on the industry. The diamond bubble, built on misconceptions and misconstrued customer behavior, had burst.

Stay tuned for more insights and revelations in our next newsletter.

De Beers: The seeds of a looming disaster were sown

The Prelude to Disaster

The seeds of a looming disaster were sown in the late 1970s. During this period, De Beers held a near-monopoly on both the supply and demand sides of the diamond industry. On the supply side, most of the world's diamond production came from De Beers mines or was contracted through the Diamond Trading Company (DTC). De Beers even contemplated extending its influence into the polished diamond market, following the model of Russian diamond control. On the demand side, N.W. Ayer effectively marketed diamonds to align with De Beers' objectives, emphasizing their emotional significance and insulating the market from economic fluctuations. N.W. Ayer also demonstrated its ability to shape demand according to De Beers' directives.

At this point, De Beers had not yet fully embraced its role as the guardian of the diamond industry. It primarily viewed itself as a diamond mining company seeking to protect and control its market. Investing in the marketing of diamonds aligned with its strategic vision. Transforming diamonds into symbols of love and cherished purchases was vital to De Beers, ensuring that diamonds remained in demand as long as people continued to get married, valuing them for their emotional worth rather than their monetary value. Furthermore, diamonds sold as cherished purchases were less likely to re-enter the retail market, enabling De Beers to consistently supply fresh diamonds. To reinforce this message, N.W. Ayer advised against introducing any specific brands, as they aimed to sell an idea rather than a product.

However, despite its control over both ends of the diamond pipeline, De Beers faced challenges to its dominance, particularly in areas it did not oversee. Unfortunately, when these challenges emerged, De Beers was ill-prepared, and by the time the damage was done, it was too late to reverse the situation.

The Role of Indians Transforming Diamonds

Enter the Indians: Historically, only a small percentage of diamond output, around 15-20%, met gem-quality standards, while the rest was considered industrial and discarded. When synthetic diamonds made natural industrial diamonds nearly worthless, De Beers sought a solution and invited Indian diamond professionals into the industry. In the 1960s, Indian Gujaratis, particularly the Palanpuri Jains from Palanpur in Gujarat, began arriving in Antwerp. These Gujarati Jains specialized in smaller, lower-value diamonds and utilized the affordable labor and exceptional skills of Surat's diamond cutters and polishers to transform diamonds that were otherwise difficult to process. De Beers introduced a "near-gem" category, essentially rebranded industrial diamonds that were polished in India, sparking the growth of the Indian diamond industry in the 1970s. Over time, these "near-gems" became known as "Indian goods."

For the first time since 1938, De Beers allowed polished diamonds to enter the market without a well-defined marketing concept. Indian goods became commodities seeking customers, a practice De Beers was aware of but could not prevent. As Indians accumulated these goods, they required increased banking support to finance their growing stockpile.

The Emergence of the Diamond Certificate

One of the pillars of De Beers' marketing strategy was to remove tangible value from diamonds, emphasizing their eternal emotional value. However, in the late 1970s, things began to change. In 1931, Robert M. Shipley founded The Gemmological Institute of America (GIA) to enhance the professionalism of the jewelry industry through gemological education. In 1953, Richard T. Liddicoat introduced the International Diamond Grading System, which became a universal standard based on Shipley's 4Cs (Color, Clarity, Cut, and Carat). The GIA issued its first grading reports or "certificates" in 1955, based on the 4Cs system.

Antwerp followed suit, establishing the High Council for Diamonds (HRD) in 1973, which issued grading reports using the 4Cs system, albeit with minor differences from the GIA standards. Other gem laboratories were subsequently established in Antwerp, Paris, and Los Angeles, as the concept of the diamond certificate gained popularity.

The diamond certificate introduced the idea that it was possible to buy diamonds based on objective standards, making them investable assets. This led to a significant and rapid increase in diamond prices, especially for higher-quality diamonds. The slightly varying standards used by different gem laboratories further boosted prices, as diamonds could be re-graded to command higher prices. This created a speculative bubble, with diamonds being sold to financial institutions and pension funds, among other investors. Investment diamonds accounted for one-third of the market.

De Beers' Unexpected Foray

De Beers also joined this trend, introducing its "diamond fellowship" plan in March 1978. For a fee of $2,000, any jeweler could access tools for selling investment-grade diamonds to affluent individuals aged 55 and over. While De Beers officially opposed the sale of "investment" diamonds due to their lack of emotional attachment, they too got involved.

As long as diamond prices continued to rise, the speculative bubble could be sustained. However, unlike other investments, diamonds couldn't be resold at a profit. Allowing this speculative bubble to occur, and even participating in it, led De Beers to commit three cardinal sins against its own successful marketing strategy. Firstly, selling "investment" diamonds stripped away the emotional value of diamonds, turning them into tangible commodities and exposing them to price fluctuations in severe economic conditions. Second, it violated the formula stating that the number of diamonds sold annually should equal the number of annual engagements. Finally, investments are meant to be sold over time, and so were these "investment" diamonds. De Beers committed the third cardinal sin by allowing diamonds to re-enter the market.

The Israeli Rough Speculation

In the 1970s, Israeli diamond dealers increasingly purchased rough diamonds not for further processing but for speculative purposes. Since diamond prices were rising rapidly while the Israeli currency was depreciating, it became more profitable to hold onto diamonds than to cut and sell them for paper money. Israeli dealers could borrow money against their diamonds at relatively low-interest rates. As more diamonds were removed from circulation in Tel Aviv, a shortage emerged in New York, driving prices higher. By 1979, Israeli stockpiles began to threaten De Beers' market control, accounting for $1 billion or 20% of De Beers' annual output.

One reason for building this stockpile was the fierce competition between Israel and Antwerp. With the devaluation of the Israeli Lira and cost-effective labor, Israel managed to produce about 85% of Melee goods, smaller diamonds of medium quality. While the Israeli industry thrived, with banking and government support, one out of every four Antwerp diamond cutters was left unemployed. In 1977, De Beers attempted to curtail this competition by announcing a 20% reduction in supply for the following year.

However, this warning had an unintended effect, prompting the Israeli diamond industry to build up its stockpile. Dealers paid a 100% premium on unopened De Beers diamond boxes initially allocated to American and Belgian customers. Israelis even traveled to Africa to buy diamonds directly from smugglers, and Israeli banks offered financing at low-interest rates. By 1978, banks had extended $850 million in credit to diamond dealers, equivalent to 15% of Israel's entire gross national product. The only collateral for these loans was uncut diamonds.

The Burst of the Investment Diamond Bubble and Market Collapse

By 1977, the stockpile had reached 6 million carats, with half a million carats added monthly, according to De Beers' estimates. At this rate, it was only a matter of time before the Israeli stockpile equaled that of De Beers, jeopardizing its ability to set prices and supply. The situation in Israel spiraled out of control as long as banks continued to finance diamond purchases. De Beers announced a 40% "surcharge" on all sales, which could be revoked at any moment. Banks couldn't take the risk of financing diamonds at potentially inflated rates. Within weeks, interest rates on diamond loans reached 50%, and banks demanded that diamond dealers match the loans with their own funds.

To exacerbate the situation, De Beers cut ties with forty sight-holders, customers known for selling large diamond parcels to Israel. This move served as a warning to De Beers' remaining 250 clients. Israeli diamond dealers were forced to sell off their accumulated stockpile, leading to falling prices at the wholesale level. Panic spread throughout the market, leading dealers to liquidate their stocks. The panic didn't remain confined to Tel Aviv. Subsequently, the "investment" diamond bubble burst, and the entire diamond market collapsed.

On July 24th, 1980, the Antwerp diamond exchange closed for the summer vacation, leaving diamonds at their peak prices. Upon their return from vacation, diamond dealers were met with significantly reduced asset values."

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