After reaching a historic record high in 2017, consumer prices of fine jewelry have softened so far in 2018. However, jewelry retail prices are still high, which may explain a number of consumer trends. Are these prices fueling demand for lab-grown?
We know that the US market is very price sensitive, and that dictates polished diamond prices, as well as jewelry design. For example, lighter designs do better when gold rise.
Jewelry production costs have risen almost without interruption since the start of the millennium, as reflected in the changes in the Jewelry Producer Price Index (JPPI). They declined in 2013 and tumbled in 2014 – an atrocious year for not only diamonds, but for the entire jewelry industry. In the last two years, costs rose again, before they declined this year. By the way, although the index refers to “producers,” it really means manufacturers, as it relates to fabrication, rather than mining costs.
It is important to note that even though there was a sharp decline in costs in 2014, costs were still high before they bounced up again, as the following graph shows. The squiggly line in the following two graphs depicts the multi-year trend line.
US jewelry consumer prices also have fluctuated over the years, as reflected by the Jewelry Consumer Price Index (JCPI). While, historically, prices were relatively stable with continued, albeit shrinking, growth, since 1990, prices first declined and then started fluctuating wildly.
Once we overlay consumer prices over producer costs, it becomes clear that they act in near unison, which is not surprising. However, what is surprising is how, over the past few years, manufacturers pushed up prices, and retailers did not match these increases.
So while manufacturers talk of eroding margins (and they are eroding), we see that retailers are also suffering from the same erosion.
There were two important contributing components to these rising and declining costs – changes in gold and diamond prices. Diamonds more closely correlate to consumer prices and manufacturing costs because they constitute a relatively large component of the total cost.
And while jewelry manufacturers can change a design to require less gold, in the past they seemed less inclined to drastically change the diamond component. This may have changed lately, as the following graph illustrates.
What Does This Mean?
As we haul through the holiday season, it is important to remember that the consumer is the ultimate judge. They will shift their buying to other products if they don’t get what they want for the price they are willing to pay.
In the past few years, American consumers have told retailers that jewelry retail prices are high. This was one of the explanations for why consumers turned to lower cost alternatives such as lab-grown diamonds. The American consumer market was always good at shifting their tastes when an item became too pricy. We saw such an example with the shift to princess-shaped diamonds when rounds were too expensive.
More recently, American consumers have shifted their purchases to designs with smaller goods. A couple of years ago, thirds – diamonds weighing 0.30-0.39-carats – became a far more popular item.
Therefore, it makes sense to pay attention to a number of trends emerging from the cost and price data as consumers shift their purchases to fashion jewelry, lower cost fine jewelry, and lab-grown set jewelry:
Steps That Will Preserve Consumer Demand
- The cost of manufacturing is on an upward trend, and manufacturers must find out how to reduce it if possible. At the very least, they should try to roll back to 2010 levels.
- Consumer prices tend to be relatively stable compared to diamonds and gold. Retailers know at what price points to sell. Listening to them is worthwhile, especially if you are a diamond manufacturer. Diamond wholesalers are missing a lot of data coming from the retailers and, as a result, respond slowly to market changes. This does not have to happen.
- From a consumer standpoint, jewelry retail prices tend to yo-yo, contributing to eroding confidence. Greater consumer price stabilization will ease that pressure point.
- Since 2010, retailers have been losing some of their margins, squeezed between what consumers are willing to pay and what their vendors are charging them. They act as a price buffer for the entire pipeline, and it won’t be long before they push back. It’s worth starting to think about this now and prepare.
- Gold content is viewed as something that can be adjusted as its price fluctuates. When the diamond content did not adjust with cost, consumers turned to lab-grown and smaller goods. If the industry wants to fight lab-grown, price is where the game can change. I know polished diamond prices are sliding, but just not enough yet.