Lab Grown: All Fears Materialized

Lab Grown: All Fears Materialized - Edahn Golan Diamond market analysis
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In 2018, De Beers launched Lightbox Jewelry, a lab-grown-set jewelry collection with an unstated primary goal of disrupting the lab-grown market through devaluation and separation. Divide and conquer is an age-old battle strategy, but in this case, it didn’t work as well as hoped for. Surprisingly, not only is the natural diamond industry seeing its fears materialize. So also is the lab-grown industry. Following is the sum of all their fears.

Natural Diamonds Community: Fear of Loss to the Competition

Once upon a time the diamond industry either mocked or dismissed lab grown. They called it “synthetic” to degrade it. Some still use the term. And yet, some recognized the potential threat and actively looked to defend natural diamonds’ desirability in consumers’ minds.

Despite their efforts, it seems that success has been limited at best. Following are the natural diamond industry’s fears that have materialized so far:

Growing consumer acceptance

At first, the American consumer market considered lab grown an odd novelty at best. And often, a knockoff. But those common perceptions, widespread just five years ago, are changing.

Today, the view among many is that lab grown represents a reasonable alternative, a full materialization of the natural diamond industry’s fears. This view has been normalized by a growing number of mainstream retailers who added lab grown to their offerings after years of resistance, as well as repeated claims that lab grown is more ethical.

This last claim has resonated with a growing number of consumers who are demanding corporate accountability from companies in all industries and are worried about the environment.

Coupled with the big price gap and shifting tastes in designs, the stage was set for change. Enter COVID-19.

The substantial change came during the lockdowns, when many looked not merely to spend more on jewelry, but also to buy bigger diamonds. The lower cost lab grown became an accepted choice.

Before long, Zoom-weary consumers were buying larger lab-grown diamonds, especially in earrings. Instead of pocketing the difference in price between natural and lab grown, consumers opted to maximize their purchases.

That change in perception was a crossing of the Rubicon. Before soon, this appetite expanded to other categories, such as bridal.

Market share rising fast

After a sluggish start in 2016-2018, the market share of lab grown has constantly been growing. In 2020, it stood at 3% of combined diamond sales at US specialty jewelers. It grew to 5% in 2021, and currently exceeds 7%.

Conventional wisdom has it that that this trend will continue, at least for a while.

Natural diamond players enter

Perhaps cued by De Beers’ entrance or simply by the considerable margins, many large diamond manufacturers started to buy, grow, and polish lab grown.

In a way, this makes perfect sense. Who knows better than established diamond manufacturers how to buy and polish rough? Who knows better than they do how to sell to jewelry retailers?

After all, if established diamond companies don’t enter the lab-grown arena, others will. So why leave this budding business to others when you can enjoy an inherent advantage?

Standardization: increased government standards and regulations normalize lab grown

In a seminal decision published in July 2018, the Federal Trade Commission (FTC) decided to drop the word “natural” from the definition of diamonds.

By defining itself as special, natural diamonds have by default crated the separate category of LG.
That was a crucial official step at legitimizing lab grown. Other official decisions included what terminology can be used to describe lab grown, the creation of separate lab grown customs codes, and more.

Not only governments, but other highly respected bodies took steps to set lab grown apart. For example, GIA decided to grade lab grown employing the same terminology, but to create a distinctly separate report format.

These steps, many taken to essentially set lab grown apart from natural diamonds, more clearly set a divide, but also gave lab grown attention. As every advertising person knows, when you are number one, you never mention your smaller competitors.

In this case, defining natural diamonds as special has by default crated a separate category.

Specialty jewelry retailer penetration rises

Earlier I noted that adoption by retailers helped to normalize lab grown, but this also works the other way around. Retailers will often go where their customers want them too.

Currently about half of specialty retailers sell jewelry set with LG.
And that they do. Based on Tenoris data, less than 19% of US independent jewelers sold lab-grown diamonds in January 2020. Currently, about half of specialty retailers sell jewelry set with these stones.

The swift rise in acceptance reflects the fear of missing out. Retailers, even higher-end jewelers where “‘synthetics” are unacceptable, want to enjoy some of the income they can generate from this new product.

Not just fashion: expansion into bridal

This is the deepest fear of the natural diamond industry because bridal is the most lucrative part of the diamond industry. Most of the diamond marketing budget over the years has been bridal focused.

The “a diamond is forever” campaign was primarily focused on bridal, the ultimate love occasion. The first major push into China was to generate demand for diamond wedding rings. Bridal was always the engine pulling the entire diamond train forward.

If the American consumer abandons natural diamonds in bridal, the industry will lose a major diamond-buying driver responsible for about half its revenue in the US.

lab grown vs Natural diamond engagement ring Unit Sales - Jan 2020-May 2022 - by Edahn Golan Lab Grown: All Fears Materialized. Data source Tenoris.bi

Lab-Grown Community: Fears of Loss of Value

While the natural diamond industry fears the loss of cultural relevance, the lab-grown industry fears losing economic relevance.

The critical point is that lab grown is a technologically driven product. As such, over the years, the cost of production has fallen, and it will continue to decrease as efficiencies improve.

Retailers also wised up. Realizing that wholesalers’ profits were exceptionally large, they demanded and got lower costs.

The squeeze between these two, technological advancement and retailer price reductions, form the single-most impactful force dictating the fate of the lab-grown economy. And by extension, its future.

Declining wholesale prices

The rising popularity of lab grown has created a frenzy, no less. Producers, manufacturers, and traders rushed in with an appetite for the (initial) considerable margins. However, after a while, the market got crowded, supply outpaced demand, and wholesale prices inevitably declined.

Since 2018, when De Beers announced Lightbox and a revolutionary price structure, inner trade wholesale prices have been declining.

Lab grown diamond price chart and price Index 0.30 + 1 Ct - Q3 2018 - Q1 2022 - Lab Grown: All Fears Materialized. By Edahn Golan Analysis

If in 2019, traders were talking of “84 back”, meaning an 84% discount from the Rapaport price list, then today a 95-97% discount to the list is far more common.

It’s not just inner trade prices that are falling. Our Tenoris retail cost tracker is also showing that retailers’ buying costs are declining as well.

Decreasing retail prices

Retailers are reducing prices, forcing a reduction on wholesalers as well. The decline in the average retail price per carat, translating into a lower average price per carat retailers pay when buying the goods, is resonating up the lab-grown pipeline.

Lab grown diamond price chart and average Per Carat Price and Cost - Jan 2020-May 2022 - Lab Grown: All Fears Materialized. By Edahn Golan. Source Tenoris.bi

Squeezed midstream players that won’t play along may find it difficult to generate business in this increasingly competitive market.

In this market, dictated by consumers, wholesalers and manufacturers should and can pressure growers to lower prices as well. Meantime, wholesalers are supplying a large chunk of their goods on memo, resulting in cash flow pressure.

Smaller players, with limited financing, may find this situation spiraling out of control.

Eroding margins

While retailers fiercely protect their gross margins (and their incredibly handsome significant margins in loose lab grown), wholesalers are suffering from an ongoing erosion.

After a period of LG retail price declines that superseded cost reductions, retailers lowered prices slower than costs, improving their profitability in 2022.
Once again, in the brief commercial history of gem-quality lab grown, considerable shifts have taken place in the last five years.

Initially, wholesale margins were exceptionally generous. So much so that one of the unstated goals in launching Lightbox was to lead to a decline in wholesale margins.

The low pricing scheme at Lightbox started the pressure on lab grown wholesale margins, but it was the crowded scene that really hurt margins. A combo of a growing number of up- and midstream players, with an oversupply of goods forced suppliers to cut back prices faster than their costs were reduced.

Today margins are considerably lower than they were in 2018, and the enduring fears are that margins will continue to shrink for a while.

Manufacturers’ market share battle ground

The most challenging sector of the lab-grown pipeline is the crammed midstream. The manifestation of the overcrowded sector extends beyond price reductions and margin erosion.

In the past, one of the biggest ills of the natural diamond midstream was the level of goods supplied on memo to retailers. Available bank financing and an attempt to capture market share were the leading drivers of this supply.

With market share in hand and the cost of financing weighing on the bottom line, fewer natural diamonds were supplied on memo, shrinking to a low double digit these days.

The lab-grown suppliers are bringing memo back. With strict financing still in place, the sole reason is market share – making sure your goods are in retailers’ stock and not your competitors.

This is unhealthy. The financial burden is uneasy to bear and far from being low cost, even if memo goods ultimately sell at a higher price than an item paid for up front. The issue with memo is its impact on cash flow.

Some companies’ business model is to be a memo house. That, however, is a specialty. Most companies should want to avoid this as much as possible. The lab-grown midstream will need to wean itself from this harmful practice.

Not expanding much beyond the US consumer market

Lab grown is very much an American thing. While we think of lab grown as exploding in the consumer market, this is accurate only in the US.

We see some demand in other English-speaking countries such as Canada and Australia, but not much beyond. Having a sizeable but limited market is a concern in itself.

In most other countries, lab grown is viewed as not being the genuine thing. If it wants to expand outside of a single market, it will require a considerable investment to change consumer sentiment. That said, this is not impossible.

With no distinct story, confronting the threat of losing consumer view of “uniqueness”

Lab grown is very much sold as the “other diamond,” often using negative context. A marketing program based on the (real or not) shortcomings of the original product is unsustainable.

To succeed, lab grown needs to develop its own distinctive story. It’s not “forever” or a creation of nature. And to be honest, “sustainable” is not only a negative reference to the competing product, but it will also hopefully be a given in all aspects of our lives.

Its physical attributes will soon be less of a story too. Once all lab grown are D color and flawless, the only differentiating attribute will be brand. And brand is a story.

Until lab grown secedes from natural, it will continue sinking in value: both monetary and perceptional.

Share of sales rising, but still limited (this may change)

Earlier, we said that share of diamond sales is rising fast, up to 7% today from just 3% in 2020. While this concerns the natural industry, from the perspective of lab grown – that is not much.

Lab grown proponents are after a considerably larger share of the business, and many expected that by now they would be biting a much larger chunk out of natural diamonds. That hasn’t happened – at least not yet.

The Bottom Line

The diamond industry as a whole, natural and lab grown, has a lot on its plate. Both have financial issues to resolve, both need to improve their relevance in the eyes of consumers, and both need to ensure they are acting ethically and sustainably.

No one side can claim sainthood and simply point blamingly at the other.

The good news is the growing competition between the two is also forcing them to up their game. In that regard, this is a very welcome outcome.

If you are interested in more details on the specific data behind these trends, than by all means, get in touch.

About the Author:

Edahn Golan
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Edahn Golan has 20 years of experience as a diamond industry analyst. He has a unique ability to provide a global view with context to the exclusive granular data he shares. The New York Times, Wall Street Journal, Business Insider, and other leading publications quote him regularly.

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Comments 14
  1. The market is taking a complete flatline in the last month with Natural Diamonds sales, we have started to look into alternatives that are more cost effective. It’s a very pivotal time for manufactures and wholesalers/dealers like ourselves.

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      There is clearly a slowdown compared to a year ago. That said, 2021 was an exceptional year and the cyclical nature of business is at play here.

  2. Edahn,
    Calling lab-grown diamonds ‘synthetic’ is not meant to demean them as you suggested. The fact is that ALL man-made gemstones with the same chemical optical and physical properties of their natural counterparts are, and always have been known, as synthetic. The lab-grown industry has made false claims, that their diamonds are “identical”, which is absolutely not true – otherwise they would not be able to be separated by testing. The lab-grown industry calls natural diamonds “earth mined”, which is clearly intended to denigrate natural diamonds. Interestingly, I haven’t met a single jeweler or their sales associates who have no problem referring to natural diamonds as earth-mined, use the same nomenclature when referring to any other natural gemstone in their stores. In other words, no one is selling ‘earth-mined’ sapphires, or earth-mined gold. The huge margins in the lab-grown space will allow for further decline in prices. It will be interesting to watch how this impacts consumer confidence relative to natural diamonds.

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      Coining the term ‘earth mined’ is a great success of the LG sector. But as I noted in the article, you don’t promote your product by pointing out the competitions shortcomings. You only associate yourself with something negative. That is harmful in the long-term.

  3. Edahn — a superb piece, even by your usual high standards. One thing that stood out is that the industry is, for the most part, playing without a strategy. It’s clear from your data on bridal that the De Beers attempt to positioning LGD as “only for fashion” has failed. Moreover consumers decided that rather than use the lower costs of grown diamonds to save money, they are — for now — upgrading in size. So the two areas one would have most closely associated with mined diamonds have already been breached by the newcomer. It should be easy for LGD dealers to expand from that surprisingly solid base. And that begs the question, what is the response from mined producers?

    In the old days, eyes would have turned to De Beers in search of leadership. More recently it was the NDA. But given Alrosa’s withdrawal, there doesn’t seem to be any body or movement within the industry that can sit everyone down and say, “This isn’t playing out like we thought. What do we do now?”

    That’s not good, as it’s likely to lead in consumer confusion, and mixed messages at the point of sale. It also feels like a missed opportunity to clean up some bad practices from the past — particularly memo goods, which will be an increasingly tough game to play as interest rates rise. Also, as you note above, a situation where the two options try to advance by tearing down the competition is bad for the industry overall. I hope there are discussions about the way forward taking place above my (admittedly low) level. But if so, I haven’t seen anything in the way of output.

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      David, you hit the nail(s) on the head. To answer your question, the larger producers (sans ALROSA) are investing in NDC and supporting its efforts. In addition, De Beers has a series of initiatives aimed at promoting natural diamonds’ image. They include their wild life programs in Southern Africa and the recent promotion of black jewelry designers. Is that enough? If other companies would take similar steps, it may collectively create a powerful halo effect.

  4. Well done Edahn, as usual. I would add a comment that expands on your solid review of declining margins and growing competition. There are aspects to the diamond and jewelry business that have not changed and will not change despite the serious efforts of many. The business has low barriers of entry, which means that at every level, other than mining, any individual can easily enter the business. In the past, that has meant that excessive competition has always been there. The business did not consolidate, except at retail, which only made mid-market competition even stiffer.

    Inevitably, as we have seen in recent years, abuses arose as some heavily committed and indebted companies started the round-tripping trap or mixed in LGDs to boost margin. Margins for all mid-level companies got squeezed by suppliers and customers, and that left the business largely unable to afford the product development, branding and marketing that it needed. Of course, the guild end of the business mostly escaped this pressure, but those companies were typically born as designers and retailers, not miners and diamond companies.

    Now, as you have well stated, we are seeing the erosion of margins in the LGD end of the business, and for the same reasons. Low barriers of entry, leading to excessive competition and supply, leading to ever-lower margins (exacerbated by ever more efficient technology), which will lead to the inability to brand and market properly, or to gain wealth, image and visibility.

    As I have said in the past, at some point LGDs will need to fill the ever larger hole left in supply by depleted mines. Will the message have evolved by then for both naturals and LGDs? Will the public be listening? Judging by the structure of the business, we have reason to doubt it, sad to say.

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      Excellent point, Ben! And how true. The low barrier of entry has hurt the industry for many years, contributing to a dilution of the industry’s ability to develop. And although we did see a certain amount of consolidation in Antwerp and Tel Aviv as business declined in those centers in the past few years, over all this remains an issue with wide reaching ramifications. Thanks for pointing that out.

  5. Until LGD’s dont detach themselves from the naturals modus operandi you will have plenty writing materials as a comparisons base. After the great detach (which will eventually will happen) LGD’s will be taking the jewelry industry to new presently unknown design & marketing levels. What has been happening to LGD’s during the last two decades is a simple reflection of old-world thinking and trading models which are deeply erred from within their roots. Changing of the winds are already evident if we look carefully. Creativity has no boundaries but innovations is not a stronghold…, yet!!

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  6. Thanks for sharing the useful information about the Lab grown diamond. Really informative post, very helpful. Wish you good luck for your future blogs.

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