2003/79/EC: Commission Decision of 25 July 2001 declaring a concentration to be compatible with the common market and the EEA Agreement (Case No COMP/M.2333 — De Beers/LVMH) (Text with EEA relevance) (notified under document number C(2001) 2365)
Date: 2001-07-25
Institutions: European Commission
Subjects: European Economic Area, dominant position, economic concentration, luxury products industry, merger control, precious stones, retail selling, sale

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COMMISSION

COMMISSION DECISION

of 25 July 2001

declaring a concentration to be compatible with the common market and the EEA Agreement

(Case No COMP/M.2333 — De Beers/LVMH)

(notified under document number C(2001) 2365)

(Only the English text is authentic)

(Text with EEA relevance)

(2003/79/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

joint control of a newly-formed company, Rapids World
Limited (Rapids World), by way of purchase of shares
(constituting a joint venture) (*).

Having regard to the Treaty establishing the European
Community,

Having regard to the Agreement on the European Economic
Area, and in particular Article 57(2)(a) thereof,

(2)

On 18 April 2001, the Commission decided, in accor-
dance with Article 6(1)(c) of the Merger Regulation and
Article 57 of the EEA Agreement, to initiate proceedings
in this case.

Having regard to Council Regulation (EEC) No 4064/89 of 21
December 1989 on the control of concentrations between
undertakings (1), as last amended by Regulation (EC) No 1310/
97 (2), and in particular Article 8(2) thereof,

(3)

The Advisory Committee discussed the draft of this Deci-
sion on 16 July 2001.

Having regard to the Commission Decision of 18 April 2001
to initiate proceedings in this case,

I. THE PARTIES

Having regard to the opinion of the Advisory Committee on
Concentrations (3),

(4)

Whereas:

De Beers has extensive operations throughout the world.
Its principal activities are in the upstream markets of the
diamonds pipeline, in particular, the exploration, mining,
recovery, valuation and marketing of rough diamonds. It
has relatively small activities in relation to polished
diamonds and is not active in the market for the retail of
jewellery.

(1)

On 9 March 2001, the Commission received a notifica-
tion of a proposed concentration pursuant to Article 4
of Regulation (EEC) No 4064/89 (the Merger Regulation)
by which the undertaking Riverbank Investments
Limited (Riverbank), controlled by the De Beers Group
(De Beers), and Sofidiv UK Limited (Sofidiv), controlled
by LVMH Moët Henessy Louis Vuitton (LVMH) acquire

(5)

LVMH is principally engaged in the production and sale
of luxury goods and owns various famous brands intern-
ally organised in the following sectors: wines and spirits,
fragrances and cosmetics,
fashion and leather goods,
watches and jewellery, selective distribution, media, art
and auctions.

(1) OJ L 395, 30.12.1989, p. 1 (Corrigenda: OJ L 257, 21.9.1990, p.

13).

(2) OJ L 180, 9.7.1997, p. 1.
(3) OJ C 27, 5.2.2003, p. 8.

(*) Parts of this text have been edited to ensure that confidential infor-
mation is not disclosed; those parts are enclosed in square brackets
and marked with an asterisk.

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(6)

Rapids World's principal activity will be in the retail of
diamond jewellery. The primary focus of Rapids World
will be retail of diamond jewellery with possible exten-
sion of its activities to the retail of associated luxury
products.

V. RELEVANT MARKETS

A. Relevant product market

II. THE OPERATION

(13)

The economic sector concerned is the diamond industry.
The diamond pipeline consists of several
stages of
production as follows:

(7)

On 16 January 2001, Riverbank and Sofidiv entered into
a Shareholders Agreement relating to the creation of a
newly-formed company, Rapids World.

1. exploration and prospecting;

2. mining and recovery of rough diamonds;

III. CONCENTRATION

3. sorting, valuation and supply of rough diamonds;

The proposed operation involves the establishment of a
newly created company, Rapids World.

4. dealing;

(8)

(9)

(10)

De Beers and LVMH will be the parent companies of
Rapids World, with [description of voting rights](*) and
the ability to exercise veto rights over matters which
affect Rapids World's commercial policy, [description of
commercial policy](*). Therefore, De Beers and LVMH
will have joint control.

The new joint venture will source polished diamonds
and other raw materials from third parties. It will control
jewellery design in house, will outsource manufacturing
activities and will distribute its products through its own
distribution system to outlets including Rapids World-
owned shops. To enable Rapids World to conduct these
activities, both parents have
committed significant
resources to it at start-up in terms of finance, staff and
assets.

(11)

The proposed joint venture will perform, on a lasting
basis, all
the functions of an autonomous economic
entity. The proposed operation is therefore a concentra-
tion within the meaning of Article 3(1)(b) of the Merger
Regulation.

IV. COMMUNITY DIMENSION

(12)

The undertakings concerned have a combined aggregate
worldwide turnover of more than EUR 5 billion (4) (De
Beers EUR 5 171 million; LVMH EUR 8 547 million).
They each have a Community-wide turnover in excess of
EUR 250 million, (De Beers EUR […](*) million; LVMH
EUR 2 960,9 million) but
they do not both achieve
more than two-thirds of their aggregate Community-
wide turnover within one and the same Member State.
The notified operation therefore has a Community
dimension within the meaning of Article 1(2) of the
Merger Regulation.

(4) Turnover calculated in accordance with Article 5(1) of the Merger
Regulation and the Commission Notice on the calculation of turn-
over (OJ C 66, 2.3.1998, p. 25). To the extent that figures include
turnover for the period before 1 January 1999, they are calculated
on the basis of average ECU exchange rates and translated into EUR
on a one-for-one basis.

5. manufacturing (i.e. cutting and polishing);

6.

jewellery manufacturing;

7.

jewellery wholesaling; and

8.

jewellery retailing.

(14)

This pipeline can be split into three broad levels: (a) the
exploration, mining and supply of rough diamonds; (b)
the production and sale of polished diamonds and (c)
the production and sale of diamond jewellery. Each of
these levels require entirely different expertise and core
investment
competencies, as well as totally different
requirements.

The exploration, mining and supply of rough diamonds

(15) Diamond is the hardest substance occurring in natural
form. Diamonds are sometimes found in kimberlite (the
rock in South Africa) and
dominant primary host
lamproites (the main host rock in Australia). Kimberlite
is intruded into the earth's crust as ‘pipes’ (diatremes) or
in fissures and sills. There are thousands of kimberlite
pipes around the world but few contain diamonds and
fewer than one in 200 kimberlite deposits will become a
major mine. Of the 6 500 kimberlites which have been
found around the world so far, only 50 have become
sustainable diamond mines. Some diamonds, eroded
from kimberlite pipes, have been transported by rivers
concentrated in alluvial deposits. Alluvial
and are
diamond-bearing gravels commonly yield diamonds that
are of a predominantly high gem quality. The mining of
alluvial gravel deposits initially involves the mechanised
removal of overburden (usually sand and boulders) to
expose the layer of diamond-bearing gravel, which is
then excavated for processing. Diamonds are recovered
from the sea bed by means of specially modified sea
vessels or ‘floating mines’. World production of natural
diamonds has grown to about 120 million carats
annually.

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(16)

Following extraction, rough diamonds can be brought to
the market in a number of ways. The majority of rough
diamonds that are produced are fed through De Beers'
single channel operated by De Beers' wholly owned
the Diamond Trading Company (DTC) (5).
subsidiary,
The DTC markets rough diamonds produced from De
Beers' wholly-owned mines, those produced from those
mines in which De Beers is a joint venture partner as
well as diamonds that are sold to De Beers under
contract by other producers (notably Alrosa and BHP).
Until recently De Beers also purchased rough diamonds
on the open market which were subsequently fed
through the DTC channel (6). Producers other than De
Beers can market their rough diamonds through other
means. For example, rough diamonds can be sold to
dealers who specialise in rough diamonds, or they can
be sold directly to players downstream in the diamond
pipeline, whether they be manufacturers of polished
diamonds or even retailers (7).
In the last decade, an
the world's production of
increasing proportion of
rough diamonds has been sold through alternative
supply channels. Despite this reduction, the DTC still
sells nearly two-thirds of the world's supply of rough
diamonds. The Commission does not take a position on
the question whether a market exists for the exploration
and production of
separate and
upstream to that for the supply of rough diamonds, as it
is not necessary to do so for the purposes of this Deci-
sion.

rough diamonds,

(17) As the demand for diamonds at the polishing level is
derived from consumers' demand for jewellery it is also
necessary to examine the competitive conditions at the
retail level before reaching conclusions about the rele-
vant market upstream. As is shown in recitals 25 to 32,
the retail markets are at their widest for the retailing of
diamond jewellery. This confirms a preliminary conclu-
sion that the relevant upstream market is no wider than
a market for the supply of rough diamonds. It comprises
the mining and marketing of rough diamonds.

(18)

The Commission has also explored whether there is a
single relevant market for rough diamonds, or whether
there are narrower relevant markets within this. In their
notification the parties argued that as a result of the
highly differentiated nature of the product, there is a
continuum from the lowest quality to the highest quality
stones, that it is not possible to break the continuum at
any point and therefore that it is not possible to define
separate relevant markets. In the market investigation,

(5) Formerly known as the Central Selling Organisation.
(6) De Beers has since stopped making these open market purchases in
order to minimise the risk that the diamonds it sells are sourced
from so-called ‘conflict regions’.

(7) For example, the diamond jewellery retailer Tiffany has recently
established a joint venture with a mining company the terms of
which allow Tiffany to be supplied directly a proportion of the
mine's output of rough diamonds. Tiffany will contract in diamond
polishers to process the rough diamonds.

support for this position has not been universal. Respon-
dents to the Commissions questionnaires, both competi-
tors and customers, have indicated that rough diamonds
can be divided into a number of different sub-groups.

(19)

In general, the criteria upon which rough diamonds can
be categorised relate to the quality of polished diamonds
rough
the rough can produce. For example,
that
diamonds can be divided into those used in jewellery
and those used for industrial purposes. A respondent
also indicated that there are standard industry references
based on the following categories:
rough that
produces polished diamonds of 0,50 carats and above,
white, slightly included and designated as gem material;
(ii)
rough that produces diamonds of between 10
points (8) and 50 points that are in the top end of colour
and quality; (iii) rough that produces diamonds of less
than 10 points that are in the top end of colour and
quality; and (iv) rough that produces what is referred to
as near gem because of the high level of labour required
to remove waste material.

(i)

(20) While these may represent standard industry references,
the Commission does not have sufficient evidence to
conclude that these represent separate relevant markets.
Moreover, for the purposes of this analysis,
it is not
necessary to decide whether
exist narrower
markets since the conclusion that De Beers is dominant
remains valid, regardless of how the rough diamond
market is classified.

there

(21)

In the light of the above arguments, it is concluded that
the relevant upstream market is the supply of rough
diamonds.

The production and sale of polished diamonds

(22)

into

being

jewellery,

incorporated

Before
rough
diamonds are transformed into polished diamonds by
manufacturers of polished diamonds. Due to the nature
of diamonds and in particular their hardness, there are a
number of highly specific skills and facilities required in
order
to polish the rough diamonds. For example,
diamond polishers must be able to critically appraise
rough diamonds before deciding how to maximise the
value of the resulting polished diamonds that they can
produce. It is extremely unlikely that companies which
have invested in the highly specific requirements of
diamond processing and polishing will switch their
production facilities to polishing other gem stones.

(8) 1 point = 0,01 carats.

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(23) Most of the world's largest diamond polishers are also
De Beers' customers, the so-called ‘sightholders’ and they
are mostly based in the traditional cutting centres of
Antwerp, New York, Tel Aviv and Mumbai. This stage of
the diamond pipeline remains highly fragmented, with
De Beers' sales, which account for nearly two-thirds of
the world's
sold to around 120
sightholders. De Beers also operates at this stage of the
diamond pipeline through its Diamdel companies and
The Polished Division (9).

supply, being

(24)

(25)

(26)

(27)

For the purposes of this Decision it is not necessary to
determine whether or not diamond polishing represents
a separate relevant market as this activity is not directly
affected by the operation and the assessment of the
operation would remain the same,
irrespective of the
definition chosen.

Retail of diamond jewellery

In their notification, the parties argued that the relevant
product market is the retail of luxury goods, including
the retail of diamond jewellery and of other jewellery.
Among the arguments presented by the parties in this
regard are the following (10). Creativity and imagination
are the hallmarks of luxury products and designers and
stylists play a fundamental role in creating distinctive
products. Luxury products are highly appreciated both
as product and art. Luxury products possess both
tangible characteristics, such as design, quality and high
price, and intangible characteristics, such as their aura of
exclusivity and prestige. Luxury goods are desirable for
their own sake rather than for any function they may
have.

Furthermore, the parties argue that the purchasing deci-
sions of luxury goods consumers are not primarily based
on price but on other factors, and that ‘the Commission's
approach to demand side substitutability insofar as it
assesses
inap-
therefore,
functionality and price is,
propriate in defining the luxury goods market (11)’.

The market tests carried out by the Commission in both
the initial phase of investigation and in the subsequent
stage have in general shown that the degree of heteroge-
neity in luxury products means that it would be inap-
propriate to consider diamond jewellery as part of a
wider market for luxury products.

(28) Moreover, during the market investigation, a minority of
respondents have stated that the precise market defini-
tion could be a market for ‘fine jewellery’ which would
include jewels with precious gem set (diamond, ruby,
emerald, sapphire in platinum or gold setting) differ
from semi-precious jewels (such as amethyst, aqua-
marine, tourmaline in gold or silver setting) and costume
jewellery (imitation stones in base metals, gold-plated
settings). The difference is in the distribution and sales
channels since fine jewellery or diamond jewellery is
most exclusively sold through high-end independent
sellers or exclusive jewellery chain stores.

(9) Rapids World will be expressly forbidden from purchasing polished

diamonds from any De Beers owned company.

(10) Form CO, Section 6.B.1.
(11) Form CO, Section 6.E.3.1.

(29)

(30)

The purchase of diamond jewellery is not a frequent
event. For a large part due to the marketing efforts
undertaken over the years by De Beers, a very significant
proportion of demand for diamond jewellery relates to
specific occasions in people's lives,
in particular the
diamond engagement ring. De Beers marketing — in
particular
the ‘A Diamond is Forever’ campaign —
increased the emotional imagery that is now attached to
diamonds. Due to this emotional imagery of diamonds,
jewellery centred on other gem-stones would be an
imperfect substitute for diamond jewellery.

Furthermore, as Rapids World will focus on diamond
jewellery manufactured using polished diamonds of
higher quality, and in particular
the best
colours, it has been necessary to consider whether jewel-
lery comprising such diamonds represents a separate
relevant market within a wider market
for diamond
jewellery. However, the Commission does not have suffi-
cient evidence to be able to conclude that these repre-
sent separate relevant markets.

those of

there exists a separate relevant market

(31) Again due to the focus of the new joint venture on
branded products, it has also been necessary to consider
whether
for
branded diamond jewellery. Evidence provided by the
parties in relation to pilot sales of branded jewellery
showed that these pilots had succeeded in driving incre-
mental demand for diamond jewellery. This provides
indirect support for the existence of a separate market
for branded diamond jewellery since the branded sales
were additional to — and did not substitute for — sales
of unbranded jewellery. By itself, this is not sufficient to
conclude that there exists a separate market for branded
diamond jewellery, although it is an indication that such
a market may exist. The Commission has also received
evidence that the geographical scope of competition for
branded diamond jewellery is wider
for
unbranded jewellery (see recitals 35 to 39 ). Neverthe-
less, for the purposes of this case, it is not necessary to
reach a decision on this point since the competition
assessment would remain the same irrespective of the
definition chosen.

than that

(32)

In conclusion, the relevant product market is the retail
of diamond jewellery.

B. Relevant geographic markets

The supply of rough diamonds

(33)

Rough diamonds are presently mined in some 25 coun-
tries around the world from underground, open-cast and
offshore sites. They are processed in manufacturing
operations in as many as 30 countries. The market test
has shown that because of the limited number of sellers
of rough diamonds, the products high value-to-weight
ratio and the fungibility of rough diamonds expected to
cut to a particular polished grade, rough diamonds trade
on a worldwide basis.

(34)

(35)

(36)

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The production and sale of polished diamonds

Concerning
the production and sale of polished
diamonds, there are thought to be diamond manufac-
turing facilities in 26 countries with four traditional
diamond polishing centres (India, Israel, Belgium and the
United States of America). The individual cutting centres
have become increasingly specialised in terms of the
types of goods that they will process. Nevertheless there
is no need for the purpose of the present Decision to
decide if the geographic market is worldwide or regional
since the competitive assessment would remain identical
irrespective of the definition chosen.

adjust to changes in relative prices as a result of, for
example, changes in the exchange rates between two
countries.

(39) While the argument that the relevant geographic market
for the retail of diamond jewellery is global can be
rejected,
it is not
for the purposes of this Decision,
necessary to decide whether the relevant retail markets
are European (that is, EEA-wide), national or local
in
scope. It is therefore concluded that the geographic retail
market for diamond jewellery is, at the most, EEA-wide
while it appears that for the narrower product segment
of the retail of branded diamond jewellery the market
could be global.

Retail of diamond jewellery

The parties submit that the geographic market for the
retail of jewellery is global. They consider that the preva-
lence of
international travel and tourism means that
tourists represent a target for jewellers and that the exis-
tence of relatively inexpensive and easy travel may spur
consumers into ‘shopping sprees’
in fashionable cities.
They also consider that a number of retailers, such as
Cartier, Tiffany & Co (Tiffany), Bulgari and Van Cleef &
Arpels, tend to operate or have outlets in a broad spread
of countries and carry out marketing on an international
basis, with little or no tailoring to national characteris-
tics. They add that the health of the world economy, the
performance of the financial markets and exchange-rate
fluctuations have a significant impact on the jewellery
market and that transportation costs are relatively low in
comparison to the high price of jewellery.

In relation to the narrow market segment of branded
diamond jewellery,
the parties' arguments have been
supported by respondents to the Commission's question-
naires. Branded diamond jewellery is sold with the same
territories
contents and quality in diamonds for all
around the world. The consumer is sold a specific
product made by a designer with immediate brand
recognition because of its design and its look. Branded
jewellery sales occur on a global basis because the brand
is sold the same way in the Community as in the United
States of America or Japan.

(37) However, other than for branded diamond jewellery, the
Commissions investigation has not supported a conclu-
sion that the relevant geographic market for the retail of
diamond jewellery is global. Competition amongst sellers
of diamond jewellery occurs primarily on a local basis
and secondly on a national basis. The purchase of a
diamond requires trust in the seller and proximity to the
customer is important. Therefore, even small established
local jewellers have the means to compete successfully if
they have the merchandise to sell.

(38)

Price differences also exist between regional markets. For
example, prices in Japan are generally higher than those
in the United States of America and the Community.
Due to the importance of price points in consumers'
purchases, prices are set on a national basis and do not

(40)

(41)

VI. COMPATIBILITY WITH THE COMMON MARKET

THE DIAMOND PIPELINE — DE BEERS' NEW STRATEGY

The current operation is part of De Beers' new strategy
in which it is seeking to replace its traditional monopo-
listic approach based on the control of supply with a
strategy based on demand driven actions and the crea-
tion of a multi-brand environment. De Beers now
focuses on adding value — through both marketing and
branding initiatives and a strengthening of the control of
the supply chain — to the diamonds it supplies.

For most of the 20th century, De Beers sold 85 % to
90 % of
the diamonds mined worldwide. With this
leverage, it could artificially keep diamond prices stable
by matching its supply to world demand. De Beers is
not abandoning its hegemony, but it is reacting to two
main difficulties it has been facing for some time. The
sudden emergence of several diamond producers in the
1990s meant that De Beers, in an effort to keep prices
high, was forced both to hold back a large portion of its
diamonds and to purchase much of the excess supply of
its new competitors — often at
inflated prices. The
company's market share fell from [80 to 85] %(*) to [60
to 65] %(*) and its stockpile soared from USD 2,5
billion to USD 5 billion — tying up cash reserves and
upsetting investors, with the result that its stock price
fell significantly.

(42) De Beers is no longer seeking to buy every diamond in
the world. Instead, it is planning to add value to the [60
to 65] %(*) of the supply which it does control and to
increase consumer demand for diamonds. To achieve
this goal, De Beers has developed a dual-branded
strategy. The new company formed with LVMH is aimed
at developing a retail strategy for the De Beers brand
based on the De Beers name which has a very strong
consumer awareness and credibility. The DTC, the sales
and marketing arm of De Beers, will [use the Forever-
mark icon and ‘A Diamond is Forever’
in its generic
advertising campaign](*). The Forevermark is a proprie-
tary [device identifying selected diamonds originating
from the DTC in a way which indicates their conflict
free origins](*).

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(43) As it seeks to leverage those brands, De Beers is taking more interest in managing its diamond pipe-
line — the network of sightholders, wholesalers and retailers that disseminates its diamonds. The
‘Supplier of Choice’ programme, announced by De Beers in July 2000, is designed to encourage De
Beers' sightholders to work more closely with downstream partners to stimulate demand through
the creation of a multi-brand environment. De Beers intends to make sure that the diamonds it sells
are put into the strongest, most effective hands. In return, the parties argue that the sightholders will
get [improved](*) supply and they will be entitled to use De Beers' Forevermark — together with
[additional benefits associated with it](*).

(44) Until recently, De Beers let everyone in the industry benefit from its advertising campaigns but from
now on all that marketing will be just for De Beers' customers. In order to allow the De Beers brand
to be used exclusively by the joint venture, the company is changing its [generic advertising
campaign to incorporate the Forevermark icon to signify](*) its fully owned selling and marketing
subsidiary DTC.

(45)

In summary, faced with the increasingly intractable logistical and financial realities of controlling the
fate of every diamond, De Beers has set in motion a demand-based strategy which is intended to
drive demand for DTC.

1. Dominant position of De Beers in the market for the production and sale of rough diamonds

1.1. De Beers has a market share of 60 to 65 % whilst the rest of the market is fragmented

(46) De Beers is the self-confessed ‘custodian’ of the diamond industry. For much of the 20th century, De
Beers has controlled 85 to 90 % of the supply of rough diamonds. This share has recently been
reduced by the decision taken by some competitors, namely Argyle (AESO) to leave De Beers' single
channel, and because the new entrant, BHP Diamonds Inc (BHP), also decided to bring at least some
its diamonds to market independently. It should be noted that BHP supplies 35 % of its output via
De Beers' sales channel. Regardless of these recent reductions in share of supply (see Table 1), De
Beers remains the largest supplier of rough diamonds, with only two other suppliers having achieved
market shares of over 10 % between 1995 and 2000. Such disparity in market share provides in
itself a clear indication that De Beers is dominant in the supply of rough diamonds.

TABLE 1

Estimated shares of rough Diamond supply by value, 1995 to 2000

1995

1996

1997

1998

1999

2000
est'd

De Beers

75-80 %

65-70 %

60-65 %

55-60 %

60-65 %

60-65 %

Alrosa

Angola

AESO
(Argyle)

Congo

BHP

Miba

SDM

Otros

Total
(USD million)

[1-5] % *

[10-15] % *

[10-15] % *

[10-15] % *

[10-15] % *

[5-10] % *

[1-5] % *

[5-10] % *

[5-10] % *

[5-10] % *

[1-5] % *

[5-10] % *

[1-5] % *

[1-5] % *

[1-5] % *

[5-10] % *

[1-5] % *

[1-5] % *

[1-5] % *

[1-5] % *

[1-5] % *

[1-5] % *

[1-5] % *

[1-5] % *

[1-5] % *

[1-5] % *

[1-5] % *

[< 1] % *

[< 1] % *

[1-5] % *

[1-5] % *

[1-5] % *

[5-10] % *

[5-10] % *

[1-5] % *

[5-10] % *

[5-10] % *

[5-10] % *

> 5 000

> 7 000

> 7 000

> 5 000

> 8 000

> 8 000

(47)

Furthermore, De Beers is able to control the rate of production of rough diamonds from those mines
that it controls by means of production quotas in order to ensure that the market is not over-
supplied and that downward pressures on price are limited. This explains that De Beers responds to
improvements downstream by raising its prices of rough diamonds, and that it responds to a
worsening situation downstream by means of a combination of production quotas and price reduc-
tions.

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1.2. De Beers operates the most efficient mines and has a leading position in the exploitation of

future mines

(48)

Table 2 shows the mines which are wholly owned by De Beers.

TABLE 2

Mines

Average value (EUR)/carat in 2000

Expected mine life

Finsch

Kimberly

Kaffiefontain

Namaqualand

Venetia

The Oaks

> 50

> 50

> 200

> 100

> 50

> 100

(49)

Table 3 shows De Beers' joint venture mines.

TABLE 3

2028

2018

2013

2010

2018

2009

Joint venture

Partner

Stake of De Beers

Average value
(EUR)/carat in
2000

Expected mine life

Marsfontein

Debswana

Namdeb Diamond
Corporation

Williamson

Local partners (29,4 %),
Southern Era (40 %)

31 %

Botswana
(50 %)

Namibian
(50 %)

Tanzania
(25 %)

Government

50 %

Government

50 %

State Mining

75 %

> 50

> 50

> 300

> 100

2002

2030

2021

2006

(50) De Beers'

largest source of rough diamonds is from the Debswana mines. Debswana is a joint
venture between the De Beers Group and the Botswana government. Under the terms of this joint
venture De Beers operates the Botswanan Orapa, Letlhakane and Jwaneng mines.

(51) According to information provided to the Commission by De Beers (12), the Jwaneng is the most
productive diamond mine in the world in terms of the volume of carats produced. In addition, it is
also De Beers most profitable mine and this is determined by the value per tonne of ore mined and
the efficiency of production. On an annual basis, between 1995 and 2000 this mine by itself
accounted for no less than 18 % of the world's total production. According to profit/revenue data
produced by De Beers for 2000, 55 % of the worlds diamond mining revenue is from eight mines
where it costs less than USD 0,25 to generate USD 1,00 of revenue. Of this 55 %, the majority
(approximately 37 %) is generated by mines controlled by De Beers, and the remaining 18 % is
generated by three mines controlled by other producers (13). Even in the unlikely scenario that all of
this remaining production to be marketed independently of the DTC's single channel, De Beers
would still be better placed than any other producer to withstand a price war were one to take
place.

(52)

The commercial advantages provided by control over these highly profitable Botswanan mines will
continue for the foreseeable future. Indeed, the expected mine life of the two largest Botswanan
mines (Jwaneng and Orapa) is 2030.

(12) Form CO, Annex 7.3/1, Table 4 — Estimated Share of Production by Mine, 1995 to 2000.
(13) The data did not identify which the non-De Beers mines were.

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(53)

of

rough

increased

diamonds

Furthermore, De Beers has kept pace with increases in
the level of global diamond production. The level of
production
from
USD 5 894 million in 1995 to USD 7 519 million in
2000. De Beers' share of this production has remained
between 41 % and 47 % throughout that period. Indeed,
given the breadth of experience in diamond exploration,
and the wealth of data it has collected in relation to its
exploration activities, De Beers should be able to predict
with greater accuracy the likelihood that a sampled site
will
lead to a productive mine. This virtuous circle
should enable De Beers to retain its strong position in
relation to the production of rough diamonds.

1.3. In addition to its own production, De Beers holds
significant levels of stocks from which it can release
rough diamonds onto the market whenever
it
decides appropriate

(61)

(54) De Beers has maintained a level of stocks significantly
over its working level. That the levels of stock have been
considerably above those needed for De Beers to operate
is recognised in the Form CO. The notification states
that a strategic decision has been taken by De Beers as a
result of which it will reduce its stockpile to no more
than a working level.

(55)

The control of stockpiles has been done not only to
enable De Beers to ensure that the market has not been
oversupplied, but also to ensure that De Beers has, at
any time, been able to release diamonds of any type and
quality onto the market and potentially to (temporarily)
flood the market.

(62)

(56) Although De Beers has stated that for strategic reasons it
has decided to reduce its levels of stocks, this is not an
irreversible strategy and there is no reason to believe that
De Beers would be unable to rebuild its stocks as quickly
as it has reduced them.

1.4. De Beers maintains close economic links with many

of its competitors

(57) DTC is the marketing and selling arm of De Beers,
formerly known as the Central Selling Organisation
(CSO). A number of De Beers' competitors also sell a
significant proportion of their output via DTC channel
under contract to the DTC.

(58)

(59)

For example, Russia accounts
for 20 % of world
diamond production, approximately EUR 1,5 billion).
But the Russian producer Alrosa only supplies half of
this output on its own account (see recital 46). The other
half is sold under a sales contract via De Beers and the
DTC channel.

BHP is a new entrant in the diamond producing sector,
making its first sales in 1998. BHP also decided to
operate to a certain extent outside of the DTC channel.
In 1999 it had a market share of [1 to 5] %(*), largely
produced from the Ekati mine in Canada. Yet BHP also
supplies a very significant proportion of its production
(35 %) via the DTC channel.

(60)

These sales agreements significantly reduce incentives for
these companies to compete actively with De Beers. This
is because active competition would not only lead to
lower prices for the goods that they sell directly, but
would also lower the value of the sales they make to the
DTC. This creates incentives for these companies to
behave as price followers, with De Beers as the price
leader.

1.5. De Beers customers depend on the supply by De
Beers and can only switch to a very limited extent
to other suppliers.

Some mines yield a higher percentage of larger and/or
higher quality stones; other mines yield a higher percen-
tage of smaller, coloured, and/or otherwise lower quality
stones. Moreover, the footprint of a particular mine may
change in time depending on variations within the ore
being mined at a particular moment. The aggregation of
the outputs of the numerous mines by the De Beers
in the
Group helps De Beers
composition of its production over time. In turn, this
enables De Beers to provide a more consistent product
than available from other producers.

smooth fluctuations

The significance of De Beers position in the market is
reflected in the responses the Commission has received
during its market investigation. In response to questions
about the ease or otherwise of switching their purchases
away from the DTC, many respondents highlighted that
while they are able to purchase rough diamonds from
other suppliers, De Beers is the only producer able to
guarantee any form of consistency of supply. The fact
that the other suppliers produce their rough diamonds
from a limited number of mines means that they are
unable to provide a consistent source of supply and they
will therefore only turn to supply from other providers
on an ad hoc basis. De Beers has confirmed this factor
the outputs of
the aggregation of
in stressing that
numerous mines by the De Beers Group helps smooth
fluctuations in the composition of its production over
time.

1.6. De Beers organises the market

(63) DTC sells its rough diamonds supplies to a carefully
selected number of companies called ‘sightholders’.
Sightholders are entitled to make applications, through
their brokers, to purchase rough diamonds at the 10
annual ‘sights’ organised by the DTC.

(64)

To be selected as a sightholder by De Beers/DTC is
considered to be the highest honour in the diamond
industry and can generate confidence down the diamond
pipeline to the levels of the jewellery manufacturers and
retailers. Companies work at becoming accepted as a
sightholder by the DTC for years doing their utmost to
convince the DTC that their financial situation is strong
enough and their reputation and clientele irreproachable.

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Sightholders, once selected, have to submit detailed
confidential financial data to the DTC on a regular basis,
as well as reports on the rough and polished diamonds
they sell, their levels of stocks and so forth. The DTC
will check this data unannounced at the premises of the
sightholders or their manufacturing facilities or will
request a discussion with their bankers.

There are currently about 120 sightholders appointed by
the DTC. Their purchases of rough diamonds in 2000
are estimated to represent [65 to 75] %(*) of the total
world market for rough diamonds. Sightholders can be
traders of diamonds, cutters or polishers (manufacturers),
‘preparers’ (preparing the stones to be cut and polished
by others) or any combination of these. They are located
in the traditional diamond cutting centres, New York,
Antwerp, Tel Aviv, Mumbai/Surat, and to some extent in
South Africa and the Far East countries.

The Commission's investigation has shown that the DTC
has complete discretion over the quantity, quality and
value of diamonds it allocates to a particular sightholder
at each of
the ten annual sights. De Beers' detailed
knowledge of economic conditions downstream in the
diamond pipeline enables it to determine not only the
volume and quality of diamonds that are released onto
the market, but also the price at which these diamonds
are sold.

For each year the DTC produces an annual sales target
based on data on its share of supply available of rough
diamonds and the anticipated global demand. It then
uses six broad categories of rough diamonds to deter-
mine how that sales target can be realised across the
range of goods it has made available. Once the DTC has
determined the amount of each category it plans to sell
during that year and in what proportion these categories
should be allocated to what particular region or cutting
centre, it then forecasts the number of boxes it plans to
sell to each individual sightholder during that year.

(65)

(66)

(67)

(68) When producing the annual sales target, DTC is assisted
by De Beers' ‘Market controllers’ who have responsibility
for preparing periodic reports on prevailing market
conditions in the traditional cutting centres and are also
responsible for the proposed allocation of particular
categories of goods in adequate availability to these
regions/cutting centres and for balancing against custo-
mers' needs. The market segmentation enforced by De
Beers, in its role of custodian of the market, contributes
to keeping the market stable by ensuring that no parti-
cular cutting centre becomes too prominent by having

(69)

(70)

too large an allocation to sightholders based in that
particular centre. Statistically however, over 90 % of
rough diamonds are cut in India.

The presence of De Beers downstream of its core activity
through its Diamdel companies (14) and through its
polished division (15), which are effectively competitors
of its own clients, also contribute to the detail and depth
of
its market assessment. The Diamdel companies
purchase rough from the DTC and sell on to the
secondary market (one level down from the sightholders)
in the cutting centres. De Beers' polished division also
buys rough from the DTC and sells polished to wholesa-
lers and jewellery manufacturers and, through its activ-
ities, enables the DTC to understand the polished market
better. Feedback and market reports from the brokers
and numerous surveys of consumer taste and demand
on the market for diamond jewellery add on to this vast
and detailed knowledge De Beers has of
the entire
diamond pipeline all over the world, ‘from the mine to
the consumer’.

For internal valuation purposes, De Beers/DTC sorts the
rough diamonds by size, shape, quality and colour into
16 000 classifications, each of which refers to a price
point. De Beers/DTC determines the prices of each of
these classifications on the basis of its pricing model
which seeks to determine the value of
the polished
stones it would expect a polished rough stone to
produce. De Beers/DTC will use different sources to esti-
mate the value of the polished stones such as its polished
division price book, pricing information in recognised
trade magazines, information it obtains from the market
and so forth. By calculating the current value of the
polished diamond, the DTC then calculates a price point
for the rough. The DTC will change prices to reflect
market conditions. Price changes need not apply equally
to all categories. Changes will be made to categories to
reflect movements in the value of the polished derived
from that rough.

(71) Once the diamonds have been sorted and graded, they
are blended into a ‘selling mixture’ and divided into
specific ranges of goods which are known as ‘boxes’. De
Beers/DTC maps out the sightholders' yearly allocation
taking the following into account: the indicative require-
ments of the sightholders, the sight cycle (some periods
generating more demand because of special events such
as Christmas.), whether demand is
strong in the
consumer markets and how ‘full’ the pipeline is. The
‘fullness’ of the diamond pipeline is assessed by De Beers
on a regular basis and relates to the stocks of rough and
polished diamonds carried by entities that are active in
the dealing and manufacturing of rough diamonds or at
any other level further down the diamond pipeline. De
Beers therefore assesses demand at these different stages
and estimates whether further sales would be assimilated
and how.

(14) Based in Antwerp, Israel, India, Hong Kong and South Africa.
(15) The polished division has sales offices in London, Antwerp, Israel,

Hong Kong and Russia.

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1.7. De Beers is able to control the sightholders because

of their dependency on De Beers

control over its sightholders in order ultimately to boost
demand for polished diamonds and to increase prices of
rough diamonds.

(72)

(73)

(74)

(75)

(76)

The DTC allocates boxes to sightholders in response to
the applications it has received. The DTC has a ‘menu’ of
83 categories of boxes for which it regularly specifies
the minimum quantity sightholders may apply for (for
example ‘Indian fancies: USD 350 000’). Each category
is said to have undergone statistical analysis to determine
the minimum number of stones that a box must contain
to guarantee a consistent assortment of rough. This
minimum number of stones multiplied by the average
price per carat of the component parts of the box deter-
mines the minimum value. Sightholders apply for boxes
specifying the value they require by category (for
example
cts’: USD 700 000).
Sightholders are informed in advance how much they
will be allocated at a particular sight so they can make
financial arrangements to that effect. Cash payments are
made to De Beers before the goods are sent out.

‘spotted

box

2-4

Sightholders have no ability to negotiate on price. They
are not even informed of the individual price points
since they are purchasing a box of a selected range of
goods containing a number of price points. They have
to take it or leave it at the set price. Feeding in their
comments for the next sight is all they can do.

Sightholders often do not get the quantities they have
asked for and some get proportionally more or less than
others, because they are allocated particular categories of
requested or have been
diamonds
suspended from getting particular categories at
the
discretion of the DTC from sight to sight.

they have not

For the year 2000, sightholders refused [a small propor-
tion](*) of the boxes allocated to them by the DTC. In
part this might be due to the buoyant market that parti-
cular year but also to the fact that, being short of supply,
they do not want to jeopardise their sights by risking to
lose it.

Furthermore, De Beers has full knowledge and control
over the margins sightholders can obtain on their sales
of diamonds.
In a presentation made by Gary Ralfe,
Managing Director of De Beers, in 1999, he emphasised
that an important factor was the decision De Beers took
to ensure that there was going to be a proper margin in
the boxes when they were sold to the sightholders.

(78)

The ‘Supplier of Choice’ arrangements will formalise the
relationship between the DTC and its sightholders in a
number of ways, ultimately making sure that De Beers is
selling its rough diamonds to the strongest and most
dynamic players in the market. In order to achieve this
De Beers set out to select the sightholders to be part of
the ‘Supplier of Choice’ effort by asking extremely
detailed and confidential information from all its existing
and a few potential sightholders. The collected informa-
tion amounts to a financial audit of each sightholder
combined with an assessment of
its business plan.
Details were requested among others on each sighthol-
der's manufacturing ability, its sales strategy, its distribu-
tion ability,
its presence and strength on particular
markets, its plans to invest in promotion and marketing
and its plans to become active downstream.

(79) After evaluation,

[description of model

for assessing
sightholders' relative performance](*). On the basis of
[the results of the model](*), the DTC will be able to
select a limited number of sightholders which it hence-
forth wants to do business with and determine the level
of allocation each sightholder will receive. In order to
keep track of the best performing sightholders at any
one time, De Beers intends to update the detailed infor-
mation on its sightholders [description of the frequency
of updating](*), giving it de facto a permanent transparent
view of the largest part of the market.

(80)

In determining eligibility to be a sightholder and in
determining whether or not
to meet application for
boxes, in addition to the criteria described in recital 78,
the DTC will take into account whether the sightholder
complies with the DTC's Best Practice Principles. These
involve a commitment not to engage in unacceptable
practices such as child labour or trading in diamonds
from areas in conflict or ensuring that all treatments to
natural diamonds are disclosed.

1.8. The envisaged ‘Supplier of Choice’ arrangement is
likely to further increase De Beers control over its
customers.

(81)

(77)

The so-called ‘Supplier of Choice’ arrangements (16),
which are encompassed in the strategic review De Beers
started in 1999, are aimed at strengthening De Beers'

(16) Which have been notified separately to the Commission (Case

COMP/E-2/38139).

the mainstay of

is understood that

It
the De Beers'
pricing and allocation policy will remain unchanged. De
Beers, by [description of size of reduction](*) reducing
the number of sightholders and requesting full transpar-
ency on their activities which are not only related to the
also to the
purchase of
rough diamonds, but
sightholders' sales to their customers, will
therefore
strengthen its control over sightholders and its knowl-
edge of the market even further.

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(82) De Beers intention could be to [description of size of
reduction](*) reduce the number of sightholders, keeping
the same geographic distribution, but to supply them
fully, instead of supplying directly about [a large propor-
tion](*) of their requirements, thereby ensuring regularity
and trust through the pipeline but also creating total
dependency and thereby exclusivity. By tightening the
DTC supply channel by only supplying the best
sightholders, De Beers would reduce inter-client compe-
tition. By supplying fully a restricted number of
sightholders, De Beers would also ensure that
the
selected sightholders would be able to make long term
downstream supply commitments (17) without incurring
financial risks linked to uncertain or irregular supply.
This in turn could boost demand at the end of the pipe-
line.

(83)

This move has to be looked at in parallel with the devel-
opment of the Forevermark and the resulting regained
confidence in the DTC single supply channel with its
renewed attractiveness to new rough diamond producers
because of
the increased confidence generated from
upstream and the premium achieved downstream.

2. No significant

strengthening of De Beers' dominant
position in the market for rough diamonds through the
creation of the joint venture with LVMH

2.1. The joint venture will be able to develop and
exploit the brand potential of the De Beers name as
a synonym for high quality diamonds

(84)

The proposed creation of the joint venture with LVMH
is the result of a strategic review covering all aspects of
the De Beers' business which was started in 1999. From
this process, De Beers' management identified a number
of initiatives including measures to increase demand for
rough diamonds and opportunities to utilise the De
Beers name as a diamond jewellery brand (18). One main
pillar of the ‘New De Beers’ aims at realising the signifi-
cant untapped potential in the De Beers brand through
the creation of Rapids World.

(85) NM Rothschild & Sons, adviser to De Beers, stated in the
Confidential Information Memorandum in respect of the
Project Rapids Joint Venture under section 4, The De
Beers Brand: [description of De Beers assessment of its
brand's potential and the reasons for this] (19).

(86)

The De Beers brand heritage is based on the compa-
the diamond industry
as
ny's 112 years history

(17) Thereby effectively eliminating dealers and reducing the pipeline

somewhat.

(18) De Beers Confidential

Information Memorandum in respect of

Project Rapids Joint Venture, Rothschild July 2000, page 7.

(19) De Beers Confidential

Information Memorandum in respect of

Project Rapids Joint Venture, Rothschild July 2000, page 31.

in 1939 when De Beers

leader (20). De Beers first began to build a relationship
with consumers
initiated
marketing in the United States of America originally
focussed on the diamond engagement ring (diamond
engagement rings are now purchased by approximately
in the United States of
74 % of engaged couples
America) (21). Since the beginning of
the consumer
marketing activities in 1939, De Beers' consumer market
division has successfully worked to develop the ‘diamond
dream’ based on physical attributes — such as beauty
and rarity — and emotional values — such as love and
romance, prestige and status, mystique and history —
supplementing these core attributes with that of eternity
(‘A Diamond is Forever’) (22).

(87) De Beers' strong relationships with consumers are a
result of De Beers' communications and history which
have successfully positioned the company as a ‘mentor’
to consumers in their choice of diamond jewellery (23).
De Beers invented and globally promoted the four Cs
(carat, colour, clarity, cut) to enable consumers to make
more informed decisions as well as a diamond engage-
ment ring salary guideline advertising (‘How can you
make two month's salary last forever? The Diamond
Engagement Ring’) which led to significant increase in
prices for diamond engagement rings (24).

(88) De Beers' brand awareness and image is a result of the
diamond marketing campaigns carried out by De Beers,
between 1995 and 1999 cumulative marketing expendi-
ture amounted to approximately USD[…](*) million (25).
The De Beers brand commands high prompted aware-
ness (proportion of target consumers that correctly iden-
tify De Beers as a diamond company when the name is
mentioned) worldwide, in particular in the United States
of America ([…] %(*)), Europe (Italy […] %(*)), Germany
and Japan
([…] %(*)), United Kingdom ([…] %(*))
([…] %(*)) (26). Consumers in both the United States of
America and Japan associate the De Beers brand with
[description of type of diamonds] (27)(*). [Description of
the results of De Beers' research into brand awareness
showing the De Beers brand to be well known amongst
consumers](*) (28).

(89)

The joint venture will develop the global consumer
brand potential of the De Beers name. It will have the
exclusive worldwide rights to use the De Beers brand for
luxury goods in consumer markets. The joint venture's
immediate focus will be on premium diamond jewellery.

(20) Op. cit., The De Beers Brand, page 31 to 51.
(21) Op. cit., page 33.
(22) Op. cit., page 33 and 34.
(23) Op. cit., page 36.
(24) Op. cit., page 37 and 38.
(25) Op. cit., page 41.
(26) Op. cit., page 44.
(27) Op. cit, page 45.
(28) Project Rapids Business Plan, 15 December 2000, Executive

Summary 1.

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2.2. The joint venture will be based on De Beers unique

expertise in selecting and offering diamonds

(90)

Besides the De Beers name, De Beers significant accumu-
lated diamond expertise will be the basis for the joint
consumer offering. De Beers
venture's distinctive
through its
and
rough diamond trading
central
marketing division sells two thirds of the world's gem
quality diamonds to its sightholders in cutting centres
around the world. These diamonds are valued and sorted
by [a number of](*) experts, [description of the experts'
experience](*) (29).

better qualities of diamonds. De Beers has enormous
rough diamond allocating power
through the sight
system. Due to the take-it-or-leave-it box allocation
system, sightholders depend on De Beers providing them
with grades of diamonds appropriate to their business.
Since the sightholders have to provide De Beers on a
regular basis with detailed information on their opera-
tions,
financial performances,
their
their polished and rough stocks and their polished custo-
mers, De Beers will know which sightholders will supply
polished diamonds to the joint venture. De Beers' rough
diamond allocating power enables it
to direct high
quality diamonds to those sightholders which supply the
joint venture thus ensuring that the joint venture will
consistently receive the highest quality.

their production,

subjective

ultimately

(91) Due to their technical skills and aesthetic sensitivities, De
Beers' experts are able to assess the technical characteris-
tics of each diamond, and analyse the nuances to form
an
about which
diamonds produce the best balance and optimal level of
fire and brilliance (30). The joint venture will use De Beers
expertise in selecting the most beautiful diamonds,
alongside and yet beyond the formulaic grading of the
traditional 4Cs (31) and it will develop a distinctive
diamond jewellery consumer offering.

judgment

(92) Under the Technical Services Agreement De Beers will
transfer to the joint venture De Beer personnel and tech-
nology [description of purpose of these transfers](*) (32).
[Description of
the
related selection criteria and the manner in which the
selected diamonds will be branded](*).

the diamond selection process,

(93)

[Description of the objectives of the De Beers' Institute
and the connection that
it will have with Rapids
World](*) (33).

2.3. De Beers' dominant position in the market
over

for
rough
its
sightholders will ensure the joint venture's access to
diamonds of the best quality

diamonds

control

and

its

(94)

Polished diamond supply is the most important opera-
tional
issue for the joint venture since the De Beers
brand will rely on delivery of the highest quality. The
into [description of Rapids
joint venture will enter
supply of
the
World's
polished diamonds](*) (34).

expected arrangements

for

(95)

The suppliers of polished diamonds to the joint venture
will be probably sightholders of De Beers since De Beers
is the world's main supplier of the more expensive and

(29) De Beers Confidential

Information Memorandum in respect of

Project Rapids Joint Venture, Rothschild July 2000, page 32.

(30) Project Rapids Business Plan, 15 December 2000, Executive

Summary 5.

(31) Idem.
(32) Project Rapids Business Plan, 15 December 2000, Appendix 15.3.
(33) Op. cit., De Beers Institute, 8.1, 8.2.
(34) De Beers Confidential

Information Memorandum in respect of

Project Rapids Joint Venture, Rothschild July 2000, page 61.

2.4. LVMH's know how and expertise in developing
luxury goods brands and managing retail networks
will ensure the joint venture's success as a retailer

(96) De Beers has the brand name, the diamond expertise
and dominates production and marketing of
rough
diamonds. However, De Beers has no retail brand
management
skills and retailing and merchandising
expertise. Therefore, it did not consider starting jewellery
retailing activities on its own, but chose a partner that
would contribute know how and expertise in developing
luxury goods brands and managing retail networks.
LVMH, as the world's leading luxury product group, is
the ideal partner for developing the consumer potential
of the De Beers brand since LVMH brings extensive
experience in both developing luxury brands and rolling
out premium retail concepts (35).

(97)

LVMH has a unique portfolio of powerfully evocative
brands and great names. Its activities in luxury products
comprise wine and champagne (brands such as Moët &
Chandon, Dom Pérignon, Veuve Clicquot, Krug,
Pommery, Chateau d'Yquem, Hennessy),
fashion and
leather goods (brands such as Louis Vuitton, Loewe,
Céline, Berlutti, Kenzo, Givenchy, Christian Lacroix,
Fendi, Pucci), fragrances and cosmetics (brands such as
Givenchy, Guerlain, Christian Dior, Kenzo) and watches
and jewellery (brands
such as TAG Heuer, Ebel,
Chaumet, Zenith, Fred Joallier). In 1999, consolidated
net sales of LVMH rose by 23 % to EUR 8,5 billion (36).
In cognac and champagne, LVMH is the Number 1
worldwide with a share of 34 % for cognac and a share

(35) Joint Press Release, 16 January 2001.
(36) LVMH Annual Report 1999, page 8.

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(98)

of 19 % for champagne (37). Louis Vuitton is the world's
leading luxury goods brand (38). In selective fragrances
and cosmetics, LVMH is the Number three worldwide
and the Number one in Europe (39). In luxury watch-
making LVMH is Number three worldwide (40).

LVMH network

LVMH operates and owns over 1 000 retail outlets (41).
LVMH considers control over retail distribution to be the
key to the success of luxury brands since it enables them
to capture retail distribution margins, and to ensure that
their brand image and the environment in which their
products are sold are of the highest quality (42). LVMH
has a separate Selective Retailing business group and is
the world leader in selective retailing of luxury goods (43).
The
exclusive
boutiques and global stores of the fashion and leather
goods houses,
luxury
goods stores, the Sephora perfumes and cosmetics stores,
as well as Le Bon Marché which is positioned as the
most exclusive department store in Paris (44). DFS is the
number one worldwide in international travel retail (45).
In 2000, LVMH acquired Miami Cruiseline Services, a
US-based company, which is the world leader in duty-
free luxury goods on cruise ships and which will
complement the activities of DFS (46).

the Duty Free Shoppers (DFS)

encompasses

the

(99)

The joint venture is based in LVMH's extensive experi-
ence in both developing luxury brands and rolling out
premium retail concepts. It will become a key part of
the LVMH luxury goods portfolio (47).

2.5. The complementary strengths of De Beers and
LVMH may enable the joint venture to achieve a
leading position in retailing of higher-end (branded)
diamond jewellery

(100) Diamond jewellery (all fine jewellery pieces containing
diamonds) is estimated by De Beers to be approximately
USD 56 billion in retail sales in 1999 on a global basis
and almost USD […](*) of those sales were accounted
for by diamond jewellery pieces priced at over
USD 1 000 per piece at retail sales level
(high-end
diamond pieces) (48),
[description of Rapids World's
product focus](*) (49). The diamond jewellery industry is
still highly fragmented and the majority of sales are
made by small scale independent
typically
operating in traditional store format (50). Specialists and
stand-alone retailers account for 84 % of total retailing

jewellers,

(37) Op. cit., page 7.
(38) Idem.
(39) Idem.
(40) Idem.
(41) Op. cit., page 9.
(42) Op. cit., page 21.
(43) Op. cit., page 6.
(44) Op. cit., page 21.
(45) Op. cit., page 6.
(46) Op. cit. pages 4 to 6.
(47) Joint Press Release, 16 January 2001.
(48) De Beers Confidential

Information Memorandum in respect of

Project Rapids Joint Venture, Rothschild July 2000, page 8.

(49) Project Rapids Business Plan, 15 December 2000, Executive

Summary 3.
(50) Op. cit. page 4.

for

of luxury jewellery in France, for 86 % in Germany, for
95 % in Italy, for 74 % in Spain and for 63 % in the
United Kingdom (51). Specialists and stand-alone are also
the most
luxury
important distribution channel
jewellery in the United States of America with a share of
86 % (52), whereas in Japan department stores account
for the majority of luxury jewellery retailing with a share
of 83 % (53). Departments stores are the second impor-
tant distribution channel
in France (12 %), Germany
(9 %), Spain (7 %) and the United Kingdom (22 %) (54).
Duty free is the third important distribution channel.
Larger players in this industry are branded high-end
jewellery retailers such as Tiffany, Cartier, Bulgari and
Van Cleef & Arpels.

(101) Retail brands in the diamond jewellery sector are not yet
substantially developed. The luxury branded jewellery
segment is estimated to be USD 4,5 billion in retail
value. The leading players in luxury branded jewellery
are Cartier (1998 turnover USD 1 580 million), Tiffany
(1998 turnover USD 970 million) and Bulgari
(1998
If watches are excluded,
turnover USD 370 million).
Tiffany is the number one (1998 turnover USD 860
million) and Cartier (1998 turnover USD 500 million)
the number two worldwide. Tiffany is the leading jewel-
lery goods brand in the United States of America (55).
Tiffany accounts for 2 % of all high-end pieces on a
global scale and for 19 % of branded high-end jewellery.
Cartier is the leading jewellery brand in France, Germany
and the United Kingdom and it is the leading Western
jewellery brand in Japan (56). Cartier accounts for 1 % of
all high-end pieces on a global scale and for 11 % of
branded high-end jewellery. Cartier and Bulgari are the
leading brands in luxury jewellery in Italy and Spain (57).

(102) The proposed creation of the joint venture is based on
De Beers' heritage as the worlds foremost diamond
company, efficiencies and cost reductions in diamond
production, and broad-based brand equity and on
LVMH's experience and support in international retail
sales, operations and marketing (58). The joint venture
sell diamond jewellery through [description of
will
possible types of retail outlet](*). It will focus on higher-
end diamond jewellery. [Details of Rapids World's focus
on premium diamond jewellery](*) (59).

(103)

[Description of
World](*) (60).

the

expected structure of Rapids

(51) Datamonitor Luxury Goods 1998, Jewellery, pages 66, 68, 69, 73,

75 percentage based on value.

(52) Op. cit., page 64 percentage based on value.
(53) Op. cit., page 78 percentage based on value.
(54) Op. cit., pages 66, 68, 73, 75 percentage based on value.
(55) Datamonitor Luxury Goods 1998, Jewellery, page 64.
(56) Op. cit., pages 66, 69, 76, 79.
(57) Op. cit. pages 71, 73.
(58) Project Rapids Business Plan, 15 December 2000, Executive

Summary 2, op. cit. page 2.

(59) Idem.
(60) Op. cit. page 13.

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(104) From 2001 to 2002 the joint venture will open [a
number of](*) stores in [Details of location of store open-
ings](*). From 2003 to 2005, [a number of](*) stores will
be opened and by 2010, [a number of](*) stores will be
opened and [a number of](*) boutiques will be estab-
lished in [certain](*) locations, The geographical break-
down of the […](*) global network will comprise [a
number of](*) stores in [country name](*), [a number
of](*) stores in [country name](*), [a number of](*) stores
in key countries in the rest of the world, and [a number
of other](*) boutiques (61).

De Beers aims at significantly increasing the demand for
diamonds originating from DTC. The Forevermark is
intended to become the synonym for conflict-free and
legitimate diamonds. The DTC and its sightholders will
be [details of proposed use of Forevermark by DTC and
in showing the diamonds conflict-free
sightholders
origins](*) (64). As the result the source of each diamond
would become a greater issue for consumers who would
increasingly demand conflict-free diamonds originating
from the DTC.

and its

expertise

(105) The combination of the De Beers brand name and its
diamond expertise with LVMH's design skills, its brand
management
global distribution
network and know-how may enable the joint venture to
become a leading player in branded high-end jewellery
retailing. The joint venture's net sales are projected to be
USD […](*) by 2005 and USD […](*) by 2010 (62). On
the basis of these projections, [description of anticipated
success of Rapids World and performance relative to
other jewellery retailers](*) (projected operating results of
USD […](*) by 2010) (63). As a consequence of the joint
venture's market position, the De Beers brand will be
established as a leading brand in branded diamond jewel-
lery.

2.6. However,

the joint venture will not significantly
strengthen De Beers' proprietary supply channel in
the framework of the Forevermark

(106) Within its strategic review, De Beers has set out to sepa-
rate the De Beers name, to be used exclusively as a brand
by the Rapids joint venture, from the DTC trademark
now to be associated with the Forevermark ( ‘a diamond
is forever’). The new DTC Forevermark identity has three
main components: the company name (DTC), the world-
famous slogan ‘A diamond is forever’ and a visual icon
(DTC logo) which is called Forevermark.

(107) The Forevermark is intended to become a [proposed use
of the Forevermark](*)
for diamonds based on DTCs
Diamond Best Practice Principles. Forevermark diamonds
are natural, untreated, not from areas of conflict, consis-
tent with the best environment practices and social
behaviour and are thus ethically sound. The Forevermark
stands for the integrity of the diamond. It is not linked
to the quality and value of the diamond measured by the
traditional four Cs and thus [description of potential
scope of application of the Forevermark](*). In fact, the
Forevermark will represent the fifth C: Confidence.

(108) By establishing the DTC ‘Forevermark’ as a [device iden-
tifying selected diamonds originating from the DTC](*),

(61) Op. cit. page 11.
(62) Project Rapids Business Plan, 15 December 2000, Financial Projec-

tions, Financial Summary.

(63) Op. cit, Summary Financial Statements.

(109) De Beers' Forevermark is intended to be a proprietary
product assurance which will make DTC diamonds
intrinsically more valuable to clients than open market
rough, thus supporting a premium price for DTC rough.
De Beers aims at creating a consumer pull at the end of
the pipeline towards Forevermark diamonds and thus
concentrating demand on diamonds originating from
DTC. As a result independent producers may, over time,
decide to sell their diamonds to an even more significant
extent through the DTC channel.

(110)

In the past, De Beers was able to convince independent
producers, such as Alrosa or BHP, to devote a portion of
their production to De Beers because of De Beers' role in
price maintenance. In the future De Beers may be able
to effect the same arrangements because of the power of
the Forevermark if it has been successfully established as
a synonym for conflict-free diamonds. The added value
with which DTC could back its rough sales would raise
the cost of competition for non DTC-producers, on the
one hand. On the other hand, DTC would be able to
establish a premium price for DTC rough which in turn
would enable the DTC to pay to the independent produ-
cers. Therefore, competitors may over time decide to sell
through the DTC single supply channel with its renewed
attractiveness instead of receiving an inferior price on
the open market for their production.

(111) The joint venture will adopt and implement policies and
practices for sourcing of diamonds that adhere to the
DTC Best Practice Principles (65). [Description of terms
on which Forevermark may be used](*).

(112) However,

the Commission's

investigation has not
confirmed that the creation of the joint venture is neces-
sary for the establishment of the Forevermark or that the
joint venture will lead to a significant structural change
on the rough diamond market. The structural change
will in essence be brought about by De Beers' branding
strategy itself.

(64) The DTC will increase expenditure on its global generic marketing
campaigns to drive overall consumer demand for diamonds. It will
invest approximately USD 180 million in consumer marketing
campaigns in 2001 using the world famous strapline ‘A Diamond
is Forever’. Joint Press Release, 16 January 2001.

(65) Shareholders' Agreement, page 83.

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(113)

[Description of terms on which Forevermark may be
used](*). The jewellery industry is rather fragmented (see
recital 100). The joint venture is based on De Beers
diamond industry leadership and is intended to become
an authority in diamond jewellery retail which, as the
industrial leader, will set standards on the retail level (see
recital 93). [Description of terms on which Forevermark
may be used](*). However, such contribution would
remain very limited. The joint venture is not yet opera-
tional and will have to build up its market position as a
high-end diamond jewellery brand within the next 10
years. De Beers has publicly announced that the DTC
will increase expenditure on its global generic marketing
to drive overall consumer demand for
campaigns
approximately
it will
and that
diamonds
USD 180 million in consumer marketing campaigns in
2001 using the world famous strapline ‘A Diamond is
Forever’ (66). In view of De Beers dominant position in
rough diamonds it appears very likely that the DTC and
its sightholders would be able to successfully establish
the Forevermark without the proposed joint venture.

invest

(114)

It is therefore concluded that the proposed joint venture
would not
lead to a significant strengthening of De
Beers' already existing dominant position in the global
market for rough diamonds.

VII. SUMMARY

(115)

It can be concluded from the above that the proposed
concentration would not lead to the strengthening of
dominant positions, as a result of which effective compe-
tition would be impeded in a substantial part of the
therefore to be
common market. The operation is
declared compatible with the common market and with

the functioning of the EEA, pursuant to Article 8(2) of
the Merger Regulation (and Article 57 of the EEA Agree-
ment,

HAS ADOPTED THIS DECISION:

Article 1

The notified operation whereby Riverbank Investments Limited,
controlled by the De Beers Group, and Sofidiv UK Limited,
controlled by LVMH Moët Henessy Louis Vuitton, would
acquire joint control of the newly-formed undertaking, Rapids
World Limited is declared compatible with the common market
and the EEA Agreement.

This Decision is addressed to:

Article 2

Riverbank (De Beers)
17 Charterhouse Street
London EC1N 6RA
United Kingdom,

Sofidiv (LVMH)
15 St George Street
London W1R 9DE
United Kingdom.

Done at Brussels, 25 July 2001.

For the Commission

Mario MONTI

Member of the Commission

(66) Joint Press Release, 16 January 2001.