De Beers

1st round interview

Prompt - Part 1

• De Beers, one of the leader diamond exploration companies in the world, is thinking
about entering the retail business. Should De Beers do so?

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Guide - Provide only if requested

• It is crucial to understand De Beers" value chain:

– Exploration – Extraction – Distribution – Polishing and Finishing – Jewelers – Retail

• De Beers is currently in exploration and extraction and would like to enter retail. They wont,
however, enter distribution, polishing or jewelling

• De Beers wants to take advantage of their brand equity to sell finished diamonds (e.g.
engagement rings)

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– They would continue selling raw diamonds to distributors and then buy finished diamonds
from jewelers
– Although this brand is not worth anything in a B2C business (info given just to mislead)

• The candidate can ignore competition and could assume that the industry is healthy

• Main focus for now it to open a flagship store in Spain to test the market

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Suggested approach - Part 1

Candidate should understand De Beers is entering a new market and has 3 main options:

• Start from scratch

• Make an acquisition
• Propose a Joint Venture

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Interviewer should then indicate De Beers in pursuing a greenfield operation
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Suggested approach - Part 1

Candidate should at least consider:

• Industry
– Market: Size, growth, margins, trends, etc.
– Barriers to entry: Economies of scale, capital requirements, learning curve, etc.
– Key success drivers: Brand, technology, patents, product differentiation, etc.

• Clients
– Segments (size, growth, trends, etc.)

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– Changes in preferences, elasticity, buying habits, etc.
– Current brand awareness

• Competitors
– Market shares, products, prices, etc.

• Product & Profitability

– Product substitutes, product mix, etc
– Revenues and costs 4
Suggested approach - Part 1

• Candidate could think of potential risks:

– In Spain people are getting married less and less

– There is a natural tendency for young people to spend less money on physical objects and
more on experiences / travelling

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– Spain seems to be entering a new recession again and there is a risk that the Government
will raise taxes on luxury items

– Potential competitors (in the retail sector) reaction, which on the other hand are our
current customers as an exploration & extraction diamond company, it could lead into a
business cannibalization

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 Prompt - Part 2

• Diamond market size in Spain (units per year)

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Suggested approach - Part 2

Possible segments to get data for, isolate & explore:

• Demographics
– Size
– Structure
– Natality
– Etc.

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• Customers
– Income level
– Purchasing patterns
– Etc.

Interviewee should: 1. Use a tree to structure the problem,2. Find the right
tradeoff between accuracy & pragmatism and 3. Sanity-check your results
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Prompt - Part 3

• Think about the revenues of this project, what characteristics would you say it has?

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Suggested approach - Part 3

• Candidate must take into account that the activity of the jewelry stores is marked by
several periods / seasons:
– Valentine's Day
– Mother's Day
– Communions (which are celebrated mostly in spring)
– Weddings (which are celebrated mostly in summer)
– Christmas

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• In the specific case of diamonds, there are typically 3 moments of consumption:
– Engagement ring
– Gifts (typically from the husband to his wife)
– Normal purchase (typically from a women to herself)

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Prompt - Part 4

• What type of costs does a project like this has

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Suggested approach - Part 4

Specific costs candidate could think of:

• Fixed
– Amortization (showcases, safe box, etc.)
– Insurance against theft
– Security system

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• Variable
– Coffee / Glass of champagne / other amenities
– Personalization / engraving
– Packaging & bag
– Sales bonus

The interviewer should let the candidate think about the key issue → Location
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Prompt - Part 5

• Calculate the main fixed cost (real estate – rent)

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Suggested approach - Part 5

• 300€ per square meter and 5,000 square meters shop in Serrano Street

• The candidate should reason that the cost per year is 300 x 5,000 x 12 months = 18M€

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 Prompt - Part 6

• Calculate the revenues

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Suggested approach - Part 6

• The interviewer should not provide the candidate with the exhibit. The interviewer should call
the numbers and the candidate should organize his/her thoughts

• The interviewer should provide the candidate with the information included in the products,
price and gross margin columns. The candidate should calculate the profit column

Profit allocation

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Avg. profit (€ / unit)

• The candidate should then ask for the number of units sold for each product. The interviewer
can provide the candidate with the historical allocation mix. The candidate can then proceed to
find the breakeven point with the average profit per unit sold
– Volume to break-even is 18M€ / 304€ = ~60,000 diamonds
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Suggested approach - Part 6

• The candidate has probably tried to calculate the market share needed to break-even, which is
small and therefore easily achievable, but... should also realize by himself that selling 60,000
diamonds per year sounds silly…

• The candidate should think creatively to sanity-check this number, one approach is as follows:

– “A good way to think about the feasibility of selling 60,000 diamonds in a year in each store is
to translate this into how many diamonds should be sold on a given day or on a given hour

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– Thus, to sell 60K diamonds in a year, the store must sell 5K diamonds per month

– Assuming that the store is open 20 days per month (a 5-day work week) then the store must
sell 250 diamonds per day

– If the store is open 10 hours per day, then the store should be selling 25 diamonds per hour

– Clearly, it is very unlikely to sell 25 diamonds per hour

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 Prompt - Part 7

• What should our client do?

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Suggested approach - Part 7

• As things are now, De Beers should sell about 25 diamonds per hour per store to break even,
a situation that is highly unlikely.

• The candidate could mention different things but the most relevant is that the biggest cost
driver is the real estate.
– The size of the store is too large given the business (5,000 m2 are not necessary to sell
diamonds, which are quite small). Other locations could also be explored.

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• Other consideration is selling only the most profitable products such as P5 and P2 or
eliminating P3 from the portfolio (or increase its price)

• Lastly, it is important to mention that potential competitors (current customers as an

exploration & extraction company) could react and lead into business cannibalization

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