Business Model of De Beers:

Rhodes and Oppenheimer followed both a strategy of supply control. Due to the fact that supply overtook demand, the prices for diamonds were supposed to be lower. In this case the company would not have been that profitable. Therefore Rhodes established the “London Diamond Syndicate” and Oppenheimer transformed it into the “CSO - Central Selling Organization”. Both companies were founded to prevent an oversupply.
By buying the diamond supplies of other producers, the CSO controlled 90% of the world trade. In order to conceal the monopoly position externally, these subsidiaries were never named after the parent company De Beers. They were supposed to appear as independent companies of the diamond trade.
The core business of the CSO was to intermediate between the purchase of the diamonds from mines and the distribution of gems to different customers, such as diamond polishers or cutters. These customers were tied to the company with exclusive contracts, which made it possible to deal with diamonds outside of De Beers. The contracts included many special conditions. For example, it was not allowed to sell diamonds to retailers who could reduce prices in the market.
The contracts turned the customers to slightholders, the only people who were able to buy diamonds from De Beers. For their position as slightholders they had to pay a basic fee twice a year. Once they could no longer pay the fee, they lost their position and were expelled.
Each year the company decided which amount of their material should be sold and which amount should be kept in inventory. By doing so they created an artificially shortage.
The material was sold every five weeks in London to their slightholders in private meetings. The procedure of these meetings is still the same nowadays:
Every slightholder will be individually brought into a room with boxes filled with rough diamonds. These boxes have good as well as bad material,

whereby De Beers is capable selling the gems with poor quality as well. Furthermore it supports the strategy that there will never be too much supply on the market, because the bad gems cannot be sold profitable. The diamond claim holder has merely the choice between buying or not buying, they are not allowed to negotiate prices. The prices are fixed. It is not economical for slightholder to reject a box due to the raised basic fee they have to pay. The first slightholders are able to decide between the boxes and naturally choose the boxes filled with the best material.
In the past De Beers established a kind of punishment for slightholders who broke any of their rules by letting them into the room as the last person. For instance slightholders who gave wrong information about their inventory. Slightholders had to give De Beers all information about the market situation and a detailed list about their diamond inventory. With this information De Beers was able to evaluate the market situation and to decide how many diamonds could be delivered to the market. To control the accuracy of the given information, De Beers had the right to visit and audit them anytime without making an appointment. In case of discrepancies between their information and the inventory the slightholders were faced with punishments.
The monopoly position of De Beers was often threatened when new diamond mines were discovered. To maintain complete control about the business, De Beers bought up the whole inventories, for example in the case of a mine in Siberia in 1950. They bought the complete material of Siberia to avoid diamonds hitting the open market which would have resulted in an excess supply. All the Siberian diamonds were kept in inventory and were not released until supply decreased.
When prices of diamonds were falling, De Beers hoarded the inventory by selling less diamonds and thereby created shortages on the market. If new suppliers emerged, De Beers flooded the market with similar diamonds below the market price. No diamond supplier was able to compete with De

Beers for a long time and they were usually taken over. In times De Beers had to decrease prices they charged higher prices to their slightholders.
Thereby De Beers ensured that the monopoly position was untouched and that no emerging competitor would be able of threatening their control of the diamond world trade.
The business model of controlled supply began with Rhodes and was perfected by Oppenheimer who enabled De Beers to charge high prices for material that is worth way less. The stockpiling of mined diamonds and the selling in small amounts created an artificial scarcity to maintain the high prices of diamonds, whereby the whole network of wholesalers took profit. Since all of them benefited from the created scarcity and the artificially raised prices, slightholders and distributors supported De Beers. This can be illustrated by the fact that diamond prices constantly increase, while other commodities have seen huge price fluctuations over the year.
In order to maintain the prices, De Beers needed to control supply and demand. To quote Nicky Oppenheimer, chairman of De Beers in 1999: "diamonds are intrinsically worthless, except for the deep psychological need they fill".