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Case Study "The De Beers Group - Exploring the Diamond Reselling Opportunity"
The De Beers Group is exploring the reselling opportunity in the diamond market amid declining performance and lost market share, despite a forecasted increase in demand for gem-quality diamonds. The document outlines a pilot project aiming to address issues related to customer experience in selling diamonds and enhancing trust in their value. Recommendations include leveraging blockchain technology to build trust and improve the resale experience while considering risk management and potential revenue streams.
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Case Study "The De Beers Group - Exploring the Diamond Reselling Opportunity"
- 1. November 30, 2017 TheDe Beers Group Exploring the Diamond Reselling Opportunity Constança Freire de Andrade | Stefania Bonetti | Clemens Jungmair | Lukas Richter Final Exam Harvard Business School Case Study (9-717-430)
- 2. 2 Problem Definition1 Scenario BusinessUnit3 Further Recommendations4 Update: Pilot Project2 Agenda
- 3. 3 Falling business performance,despite growing demand Company Performance. Industry – Diamonds § De Beers lost market share from 90% (1980) to 36% (2015) § Issues included antitrust issues and increasing competition 10 15 20 25 30 2008 2018F Base production Low demand Base demand Production increase 2014F High demand 2012 Stable production 2016F 2023F2020F2010 § Demand for gem-quality diamonds will increase by 3% per year § Demand is forecasted to exceed supply by 2019, indefinitely Growing diamond industry offers market opportunities for De Beers Regain trust in diamond value Diversify revenue streams Offer reselling opportunities Sustain and regain market share Demand of gem-quality vs. supply of rough diamonds, in $ millions 20 30 40 50 60 70 80 90 100 200119951992 19981989 -2,94% 20152013201020072004 Projection % of De Beers market share in value 1 2 3 4 1. Problem Definition
- 4. 4 Next option toproceed? IIDV Development 321 Previous research Pre-pilot: “Project Magellan” Launch of IIDV § $1-2 billion annual market volume (fragmented market) § Counter-cyclical business, sales to wholesale and retail buyers § Existing disparities between value and sales price Initial market testing phase § Qualitative understanding how recycling works § Surveys, focus groups and in- depth interviews § Financial distress, divorce, death, and disinterest § Customers dislike selling experience § Loss in perceived perpetual value Formal pilot program § Reach customers via website and build local retailer network § Offer highest price possible and sell through wholesale channels § “In store” vs. “send in” option § Customers pleased with better selling experience § Average expected gross margin of 16% for De Beers Engagement in the recycled diamond trading 2. Update: Pilot Project
- 5. 5 § Focus oncore business and abandon project § Red light: 1. Major risk for the core business 2. Unused opportunity Drop It1 Extend the Pilot § Potential: improve selling experience § Unknowns and key factors hinder the pilot program 2 § Real growth, full profitability, and maximum learning § Capitalize with up to $20 m § Increase scale and expand internationally Create Business Unit3 Recommendation to Proceed: Low Medium High Consider § Generating uncertainty prevents partnering with retailers § Capital constraints § Lack full economic cycle performance Stop § Customers may not buy in the future § Loss in trust in diamond value § Negative impact on core business § Ramp up business over next years § Gross margins sufficient to cover operating costs § Flexibility through autonomy § Brand value and reputation – build customer trust Proceed Options to proceed 2. Update: Pilot Project
- 6. 6 Problems addressed: § Thevalue of diamonds is lost in the recycling market § Poor customer experience in reselling § Loss of faith makes customers less likely to buy diamonds in the future § New source of supply (1/3 of total by 2015) § Solution for diminishing supply in the future The benefits of entering the recycled diamond market Positive prospects 3. Scenario Business Unit Supply 1 § Additional source of revenue stream § Opportunity for international expansion Revenues 2 § Win back market share § Increase supply channels Market Share 3 § Brand trust § Buyer: certify the origin of the diamond § Seller: seamless customer experience Brand 4 § Brand reinforcement § Diamond perpetual value Value5
- 7. 7 Loss in diamondvalue Maintain high level reputation High quality of inventory/purchases Subjective valuation of diamonds Capital constrains Price below expected for sellers Agreements with retailers Financial crisis 2-sided trust Rough diamonds sales cannibalization Price fluctuations Overgrading by retailers Fake diamonds Price transparency Disagreement with wholesalers Shift in regulatory laws LikelyUnlikely Likelihood Impact Negligible Severe III IV I II Estimated Risk Level low medium high External Project Management Technical Organizational Risk matrix 3. Scenario Business Unit Risk Categories Risk Management Risk planning Identify risk Impact analysis Response plan Control
- 8. 8 Risk Matrix Likely Likelihood II Severe Impact Capital constrains Agreementswith retailers Financial crisis 2-sided trust Maintain high level reputation Subjective valuation of diamonds Price below expected for sellers Risk matrix 3. Scenario Business Unit External Project Management Technical Organizational § Recycling business anti-cyclic as customers cash-in diamonds in recessions Financial crisis1 MitigateMonitor TransferAvoidAccept Credit lines and inter-corporate loans to purchase and store Price below expected for sellers2 Increase satisfaction by send-in option and higher prices § Sellers may not be the buyers § Clients will never receive full, but second-hand value MitigateMonitor TransferAvoidAccept Risk Management Risk planning Identify risk Impact analysis Response plan Control
- 9. 9 Risk Matrix Capital constrains Agreementswith retailers Financial crisis 2-sided trust Price below expected for sellers Maintain high level reputation Subjective valuation of diamonds Likely Likelihood II Severe Impact Risk matrix 3. Scenario Business Unit External Project Management Technical Organizational § Development of network is crucial, as it is the basis of the recycling business model Agreements with retailers1 MitigateMonitor TransferAvoidAccept Creation of Business Unit will enforce trust 2-sided trust & asymmetric information2 Provide machines needed to determine value § Determine fair value for the customer § Uncertainty regarding the origin (synthetic or blood) MitigateMonitor TransferAvoidAccept Risk Management Risk planning Identify risk Impact analysis Response plan Control
- 10. 10 Risk Matrix Likely Likelihood II Severe Impact Capital constrains Agreementswith retailers Financial crisis 2-sided trust Price below expected for sellers Maintain high level reputation Subjective valuation of diamonds Risk matrix 3. Scenario Business Unit External Project Management Technical Organizational § Decrease of price down to 50% of wholesale price Subjective valuation with in-store option1 Promote send-in option MitigateMonitor TransferAvoidAccept Risk Management Risk planning Identify risk Impact analysis Response plan Control
- 11. 11 Risk Matrix Likely Likelihood II Severe Impact Capital constrains Agreementswith retailers Financial crisis 2-sided trust Price below expected for sellers Maintain high level reputation Subjective valuation of diamonds Risk matrix 3. Scenario Business Unit External Project Management Technical Organizational § Failure may affect reputation of De Beers Group Maintain high level reputation1 MitigateMonitor TransferAvoidAccept Promote trust and reliability Capital constraints2 See next slide § Financial needs for set-up, recycling, inventory, etc. MitigateMonitor TransferAvoidAccept Risk Management Risk planning Identify risk Impact analysis Response plan Control
- 12. 12 Assumptions 1 Market Size& Market Share 1.75% 2 Gradual Gross Margin Growth 25% 3 Corporate Investment USD 10 million 4 Discount Rate 8% 5 Annual Revenue Growth 20-25% NPVProject USD 2.51 m. In 1,000 USD BE 8% Discount Rate Financial needs 3. Scenario Business Unit Base Scenario1 10.000 5.000 0 -5.000 -10.000 7.057 4.746 2.581 -192 202020192017 2.309 2015 2016 -5.192 -5.000 2018 -5.000 Unlevered FCF Accumulated NPV (Investments) NPVProject USD 1.65 m. In 1,000 USD BE 8% Discount Rate Neg. Scenario2 10.000 5.000 0 -5.000 -10.000 6.179 4.387 2.581 -192 202020192017 2.309 2015 2016 -5.192 -5.000 2018 -5.000 Unlevered FCF Accumulated NPV (Investments) -5% -5% 20% 15-20%
- 13. 13 A new approachto customers A diamond is forever A diamond is a perpetual value A customer is forever Buy a De Beers diamond as a symbol of love Make business with De Beers forever Current Belief Consumer Proposition Desired Belief Desired DoCurrent Do 5-Box (Re-)Positioning Statement Positioning Statement Re-positioning of the brand 4. Further Recommendations “To customers in the upper class, our firm is target audience because the best guarantee of perpetual value and trust functional, symbolic or experiential benefit of its lifetime relationship with customers through IIDV.” support/reason to believe
- 14. 14 Blockchain: building brandtrust and lifetime customers Underlying Issues § Two sided trust issues § Dispersed information due to paper-based certification § Once a certificate is lost there is no way to assess the value § Once a diamond is lost, there is no way to trace it Blockchain Technology § Build trust through record- keeping § Create a digital twin of the diamond § Digital records include dozens of attributes § Aggregate dataset, a shared visible record to secure diamond value Storing diamond record forever Next steps: the future with blockchain 4. Further Recommendations
- 15. 15 Q&A Constança Freire deAndrade | Stefania Bonetti | Clemens Jungmair | Lukas Richter
- 16. 16 Assumptions Appendix Assumptions 2016 2017 20182019 2020 Revenue growth rate 0% 20% 20% 25% 25% Additional diamond upgrade revenue 2% 2% 2% 2% 2% Percentage of Sales: In Store (%) 20% 20% 20% 20% 20% Sent in (%) 80% 80% 80% 80% 80% COS as %-age of sales 84% 81% 78% 75% 75% Gross Margin 16% 19% 22% 25% 25% OpEx growth rate 0% 1% 2% 3% 4% D&A (4% PPE) 120 115 111 106 102 Tax 35% 35% 35% 35% 35% NWC Change 0 313 435 822 612 Capex (0,5% PPE) 15 14 14 13 13
- 17. 17 Profit and LossAccount Appendix Income Statement 2016 2017 2018 2019 2020 Revenue: In Store 6,003 7,203 8,644 10,805 13,506 Sent in 24,010 28,812 34,574 43,218 54,023 Diamond upgrades 613 735 882 1,103 1,378 Total Revenues 30,625 36,750 44,100 55,125 68,906 Cost of Sales: In Store 5,145 5,954 6,880 8,269 10,336 Sent in 20,580 23,814 27,518 33,075 41,344 Total Cost of Sales 25,725 29,768 34,398 41,344 51,680 Gross Margin 4,900 6,983 9,702 13,781 17,227 Operating expenses 5,000 5,000 5,100 5,253 5,463 EBITDA -100 1,983 4,602 8,528 11,763 D&A 120 115 111 106 102 EBIT (Operating Profit) -220 1,867 4,491 8,422 11,662 Interest 275 220 165 110 55 Tax 0 654 1,572 2,948 4,082 Net Income -495 994 2,754 5,364 7,525 Projection Period
- 18. 18 Balance Sheet Appendix Balance Sheet Capitalization 20152016 2017 2018 2019 2020 Current Assets: Cash & Cash Equivalents 5,000 3,505 3,801 4,243 5,141 5,796 Accounts Receivable 0 2,621 2,842 3,173 3,844 4,334 Inventory 0 6,867 7,447 8,312 10,072 11,355 Non-current Assets: PPE 0 3,000 2,880 2,765 2,654 2,548 Total Assets 5,000 15,993 16,971 18,492 21,711 24,033 Current Liabilites: Accounts Payable 0 1,488 1,977 2,737 4,347 5,508 Non-currrent Liabilites: Loans 0 5,000 4,000 3,000 2,000 1,000 Shareholders' Equity: Common Stock 5,000 10,000 10,000 10,000 10,000 10,000 Retained Earnings 0 -495 994 2,754 5,364 7,525 Total L+SE 5,000 15,993 16,971 18,491 21,711 24,033 Projection Period
- 19. 19 Net Present ValueCalculation Appendix Net Present Value 2015 2016 2017 2018 2019 2020 EBIT -220 1,867 4,491 8,422 11,662 Less: Tax -77 654 1,572 2,948 4,082 NOPAT -297 2,521 2,919 5,474 7,580 Plus: D&A 120 115 111 106 102 Less: NWC Change 0 313 435 822 612 Less: Capex 15 14 14 13 13 Unlevered FCF -192 2,309 2,581 4,746 7,057 CF (Investment financing) -5,000 -5,000 Cash Flows -5,000 -5,192 2,309 2,581 4,746 7,057 Discount Factor 0.93 0.86 0.79 0.74 0.68 PV (Cash Flows) -5,000 -4,807 1,980 2,049 3,488 4,803