Another Perspective on Lab Grown Diamonds

Article

Date May 2019

The following article is an expanded version of Leonard Polivy’s 2018 article examining changes in the lab-grown diamond market. This article uses a question and answer format which addresses the anticipated questions likely to come from retail jewelers.
 

By Leonard Polivy | Originally published in The Retail Jeweler
 

De Beers’ lab-grown diamond concept, Lightbox, had its official launch in September 2018. De Beers’ Chief Marketing Officer Sally Morrison noted that “initial sales were healthy.” As of this publication, pricing for Lightbox stones remains at $800 per carat. In late November, Lightbox opened its first pop-up store at the Oculus at Westfield World Trade Center in New York City. The temporary location was a trunk show (display only) concept to give customers an opportunity to see the product and to find out more about the line, while building brand awareness, according to Morrison. A second pop-up store, which stocked a selection of inventory for sale, ran through Valentine’s Day at the Westfield Century City mall in Los Angeles.
 

As De Beers establishes permanence and continues to expand its influence in the lab-grown market, Gordon Brothers recommends that jewelers continue to monitor sales and pricing of lab-grown product to ensure its place in their business model.
 

What do changes in the lab-grown diamond market mean for your sales strategy and inventory values?

The jewelry sector is bracing for changes following De Beers' announcement that it is entering the lab-grown diamond market. Many lenders are assessing how this may affect their borrowers. Jewelers that have lab-grown inventory as part of the borrowing base should carefully assess how changes in pricing may affect their asset-based loans.
 

What is changing in the lab-grown diamond market?

Lab-grown diamonds have found their way into retail jewelry stores over the past several years and are being sold as an alternative to mined or natural diamonds. These stones are marketed to consumers as lab-grown with full disclosure and offer an eco-friendly and conflict-free option for customers who may object to purchasing a natural stone sourced and brought to market via traditional channels.
 

Lab-grown diamonds have been around for years and if they are identical to natural stones, why is this happening now?

Over time, advances in technology have allowed lab-grown stones to be more cost efficient to produce, which positions them to compete with natural stones in the marketplace. The major shift underway now is market leader De Beers, which maintains over a 40 percent share of the diamond market and is known for its mined diamonds, is launching its own lab-grown program called Lightbox. The company plans to price its product significantly lower than its established competitors. The strategy De Beers has deployed has the potential to re-classify this product industrywide, putting it in competition with higher-end costume or fashion jewelry as opposed to fine diamond jewelry. De Beers is betting on the probability that natural diamonds will continue to hold their current financial and emotional value with consumers. The company also hopes that natural stones will increase in value due to a reduction in competition and confusion with lab-grown stones at the retail level. Nevertheless, the actual impact that De Beers’ entry into the lab-grown market will have on the market value or retail pricing of natural stones is still to be determined.
 

What does this mean for on-hand lab-grown inventory?

Since De Beers has announced the significantly reduced pricing of its lab-grown offering, this will likely cause others in the lab-grown space to lower prices on commensurate quality product, or risk rendering their products over-priced and not salable. To emphasize that lab-grown gems are unlike natural stones, De Beers’ initial retail price will be just $800 per carat, compared to the current retail range of similar quality lab-grown stones at $3,000 to $8,000 per carat. As a result, the profit margins of competing lab-grown diamond producers are expected to fall significantly. Retailers with inventory on hand should consider a sales strategy to reduce their stock position until the dust settles on this market development.
 

Should I adjust my strategy for this inventory?

While the sales of lab-grown diamonds continue as this is unfolding, retailers and lenders must decide at what point they will continue to lend on this inventory. Alternatively, retailers may decide they do not want to replace stock for fear of it not having any value as consumer perceptions and pricing shift.
 

Should I still consign this inventory?

If consignment is the option, yes, to avoid owning a potentially declining value stock item.
 

What are the implications for customers who have just invested in lab-grown diamonds? Is their reputation at risk?

Retailers must weigh whether they want to expose their business and reputation to selling something for which they have historically charged a premium and may now have very little value. The customer may try to return the item or ask for compensation to offset a recent purchase if the price is dramatically reduced. This change is expected to play out over time. Retailers currently selling lab-grown stones may cite recent market changes while others who do not sell this product may use it to prove natural is rare and has intrinsic value over lab-grown.
 

What can I do to mitigate my risk with owned lab-grown diamond inventory?

Jewelers should strongly consider selling down inventory until a new low floor has been established, then decide if the product still has a place in their business model. Many may find the post-Lightbox lab-grown price point too low to maintain gross margin and remain competitive and push to sell natural diamonds that have a history of increasing in value over time.