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Expanding Horizons

Expanding Horizons

A look into how and why jewelers are selling lab-grown diamonds

By Sharon Elaine Thompson

Man-made diamonds have been around since the 1950s when General Electric produced the first stones for industrial use. For the last 30 years, interest in gem-quality, lab-grown diamonds has been slowly snowballing among consumers and retailers alike.

And as the technology behind their creation has improved, making it possible to create high quality stones, lab-grown diamonds have been having their moment to shine. Last year, the DeBeers Group unveiled its new Lightbox Jewelry division putting a “tremendous stamp of credibility on the lab-grown business,” says Marty Hurwitz, CEO of MVI Marketing in Paso Robles, California. “We’re seeing the evolution of a new product category. It will be very disruptive.”

Whether or not you’re dubious about this new product—which has been somewhat controversial over the years—there are good reasons to consider adding them to your product mix: growing consumer demand, attractive retail price points, and a healthy profit margin. But lab-grown diamonds will take some careful presentation to the consumer. Although you can use the same diamond clarity and color descriptions for them as you would with mined diamonds, the wording you use to describe the product must present the stone as a man-made, lab-grown product. You also have to consider how you’ll market them to consumers, who may be unfamiliar with them or have preconceived notions about what they are and how they differ from mined diamonds.

To help understand how lab-grown diamonds are now being marketed and sold, we’ve spoken with several jewelers that have embraced these lab-grown stones. They discuss the reasons why they’ve decided to introduce these stones into their lines as well as the best ways they’ve found to promote them with consumers.

The Retail Experience

The reaction to lab-grown diamonds among retailers ranges from lukewarm to enthusiastic. For Bay Area Diamond Co. in Green Bay, Wisconsin, which already offered a variety of diamonds, clarity-enhanced diamonds, and diamond simulants, such as CZs and Moissanite, lab-grown diamonds were just one more product. “You need to have everything the industry offers, educate the customer on the products, and let them choose,” says company president Brian Rouse.

Jon Walp, general manager of Long Jewelers in Virginia Beach, Virginia, describes himself as a “traditionalist.” Initially, he was reluctant to offer the stones due to the potential for fraud and confusion, but he eventually added lab-grown diamonds to the company’s marketing mix to help differentiate themselves from a nearby competitor. It took a two-carat diamond customer to convince Walp that lab-growns had a place in his store.

“We mark [our diamonds] aggressively,” he says, with very little margin. “There wasn’t that much difference in the price between the lab-grown and the mined diamond of the same quality and carat weight. The customer took the lab-grown stone.” Walp decided it wasn’t his place to tell the customer what to buy. And, he adds, “I didn’t want to lose a two-carat sale.”

While some retailers are ambivalent, Jonathan McCoy of McCoy Jewelers in Dubuque, Iowa, is a lab-grown diamond cheerleader. Although his father, who started the business in 1973, was skeptical of the stones, “We decided to get about a dozen and see what the reaction from the market was.” They were shocked when the lab-grown diamonds “flew out the door.” Since then, they’ve made lab-grown diamonds a standard part of their diamond presentations.

They’ve been rewarded. McCoy’s quarterly sales of manufactured diamonds have climbed steadily to overwhelm mined-diamond sales. Though sales figures fluctuate from quarter to quarter, he says, “mined diamond sales are fairly consistently under 10 percent of our overall diamond sales. It’s very surprising.”

McCoy Jewelers Banner

McCoy Jewelers has made lab-grown diamonds a standard part of its diamond presentation. The company has a page on its website dedicated to the stones, explaining that they have the same makeup as minded diamonds but are available at a lower price.

Marketing and business consultant Andrea Hill of StrategyWerx in Chicago is less surprised by the sudden growth of lab-grown diamond sales. While diamond sales still underpin the jewelry industry, she says, they do not have the strength they’ve had in the past. “Diamonds as a category has lost much of its sparkle in recent years. Recent research indicates that the average ‘spend’ on an engagement ring is more like two weeks of pay than two months,” she says. “The diamond category continues to sustain the overall jewelry industry (in terms of dollars) and post marginal growth, but with nowhere near the strength it had in the past.” Retailers should not be dismayed by this, she adds. “Lab-grown diamonds should be embraced as a way of expanding sales potential with opportunities to tell new stories to new groups of consumers.”

“Margins [on mined diamonds] have eroded so much over the years,” says Walp, that retailers should also welcome the much larger margin offered by lab-grown diamonds. While the markup on diamonds varies from retailer to retailer, at Long’s, says Walp, they “pass the savings along as much as possible. The margins on our lab-grown diamonds generally average a couple of hundred dollars per carat more than mined, still making the lab-grown a bargain if customers are just comparing price.”

Lab-grown diamonds, says Hurwitz, are “an opportunity for everyone in the pipeline to make a better margin, and the consumer gets a better deal. It’s a win-win situation.” Margins increase with stone size, says Hurwitz. For stones “two carats and above, the size-to-value ratio is extremely attractive.”

Another advantage, says Walp, is that lab-grown diamond manufacturers are working so hard to get the stones into stores, they are willing to memo them. “I don’t have anything invested in them.”

Who’s Buying Them and Why?

According to Rouse, the market for lab-grown diamonds is “skewed heavily to the younger buyer,” who asks for the stones specifically after seeing those purchased by friends. In a survey conducted last year by MVI Marketing, 70 percent of Millennial respondents said they would consider buying a lab-grown diamond as an engagement ring center stone. This preference seems to be borne out by jewelers selling colorless lab-grown stones, who say that most of their lab-grown diamonds are sold to the engagement ring market. In fact, at McCoy’s, lab-grown diamonds make up a whopping 78 percent of their engagement ring sales, which in turn makes up 98 percent of its business.

It’s not only bridal customers buying lab-grown stones, however. “A significant group of older couples who couldn’t afford a big diamond in their first go-round,” says Hurwitz, “are also taking a hard look at lab grown” when they are ready to upgrade that early engagement diamond. Eleven percent of McCoy’s restyling customers also choose lab-grown diamonds instead of mined stones.

The biggest reason for the seismic shift of buyers to lab-grown stones is the price. Lab-grown diamonds sell for 20 to 40 percent less than their mined counterparts, depending on the supplier, size of the stone, and the retailer. That means the customer who comes in with a $3,000 budget for a diamond, walks out with a 1 carat or even a 1.25 carat lab-grown stone, not a 0.75 carat mined diamond.

The same is true for side stones. McCoy’s lab-grown melee sales have tripled in six months. “Instead of getting 0.25 carat side diamonds, customers can go larger,” says McCoy. While good for the customer, it’s also good for McCoy’s. Though selling stones at a lower price per carat, “we have not seen our engagement prices drop.”

Yates Jewelers Post Example

Instead of focusing on selling near-colorless lab-grown diamonds for the bridal market, Yates Jewelers has honed in on the popularity of pink lab-grown diamonds. The company frequently makes the stones the focus of its social media posts.

The bulk of the U.S. demand for mined diamonds is in the 1 carat, near-colorless (G-H), SI-clarity range. Understandably the demand for lab-grown stones falls into the same range. “[Lab-grown diamonds in high qualities] are being produced, but they are not being produced in huge volumes,” says Hurwitz. “There is limited consumer demand for those [qualities] as there is in mined diamonds.”

While most retailers are selling the near-colorless stones into the bridal market, Ron Yates of Yates Jewelers in Modesto, California, has found that customers are excited about owning pink lab-grown diamonds, which “are a gorgeous color and cut in very good to ideal standards.” Customers love them because the price differential is huge. “They can afford to get a 1 carat total weight pair of pink diamond earrings. You can’t do that with mined [pink] diamonds.” During a recent internet search, Yates found a round, mined, 0.3-carat fancy purple-pink diamond retailing for $78,000. “A lab-grown in that shade,” he says, “would retail for $1,000. Maybe less.” Any customer interested in a pink diamond would be over the moon. “Pink lab-grown do pretty well for a small jeweler.”

Sourcing larger stones for bridal settings can be difficult. “Even with more companies buying machines and producing more stones, it’s still not meeting demand,” says McCoy, who may make as many as six calls to find the stone he wants. This is a function of production time: larger stones take more time to grow. This may be one of the reasons that, at this time, Lightbox Jewelry is positioning themselves in the fashion jewelry market, as fashion jewelry is often set with smaller stones (the largest single stones offered by Lightbox, at this time, are 1 carat).

Another reason Lightbox may be positioning itself in the fashion market is its potential, which Hurwitz foresees as being even larger than the bridal market. “The opportunity in fashion is quite significant,” he says, “But right now, there is not enough product to show consumers.”

Lightbox is not the only company in-terested in a fashion offering. JCPenney and Macy’s are already carrying lines of lab-grown diamond jewelry; Fred Meyer is looking into it. “Signet is about to test the market with a lab-grown bridal campaign,” says Hurwitz. “That’s very large and will very quickly capture the huge amount of the high-quality lab-grown production just to supply Signet.”

Getting the Word Out

Consumer demand, highly appealing price points, and improved profit margins are all reasons to carry lab-grown diamonds. But how do retailers present these stones to customers?

For Rouse, lab-grown diamonds are simply one more product. “We explain each one and let the customer choose.”

Walp says his staff are incentivized to sell mined diamond brands “because we want to promote what differentiates our store from the competition in our area. There is not an incentive to sell [lab-grown diamonds]. We present them as an alternative—an ‘if this isn’t right for you, maybe you can consider this’ option.”

McCoy and his staff integrate lab-grown diamonds into their standard sales presentation that includes an explanation of color and clarity grades. The second part of the presentation explains the difference between mined and lab-grown stones. “We don’t offer [lab-grown diamonds] as the final option. We put them on an even playing field,” he says. When they do that, he says, people almost always opt for the lab-grown stone as opposed to paying $3,000 more for the same mined diamond.

Yates, who gets inquiries from all over the country through his website, works hard to be sure online customers are getting just what they expect. “Customers don’t buy off the site,” he says, like you might buy another mass-produced product. Selling diamonds of any kind is still dependent on building a trusting relationship. “We send them a video of the stones. We have a conversation, by e-mail or phone, and sometimes it takes a couple videos before they buy.” Eighty percent of his pink, lab-grown diamond sales are made online.

Engagement Ring

"[Customers] can afford to get a 1 carat total weight paid of pink diamond earrings. You can’t do that with mined [pink] diamonds." —Ron Yates, Yates Jewelers

Correct representation of lab-grown diamonds is vital. Because the term ‘synthetic’ has been misused, the public considers it synonymous with ‘fake.’ Understandably retailers may shy away from the word when presenting lab-grown diamonds. Care must be used, however, in explanations of how and why lab-grown diamonds are diamonds. Because the public generally understands the terms ‘real’ and ‘genuine’ to mean natural stones, says Tiffany Stevens, CEO and general counsel at the Jewelers Vigilance Committee, “they can only be used to describe natural diamonds...those that come out of the earth.” Using the term ‘diamond’ alone also means natural diamonds to consumers. When selling lab-grown diamonds, “you must always disclose that they are manufactured,” she says, by using the terms ‘lab-grown,’ ‘lab-created,’ or ‘created’ used with the manufacturer’s name. “You can also use ‘man-made’ or ‘manufactured.’” 

To explain the difference between mined and lab-grown diamonds to his customers, Walp uses the hothouse analogy. “To make it easy, we say, one is mined and one is grown in a ‘greenhouse,’” he says. Customers immediately understand that field-grown and hothouse-grown flowers are identical, and it helps the retailer avoid words such as ‘real’ and ‘genuine,’ which could create misunderstandings.

The hype around any lab-created gemstones often touts their environmental friendliness. Surveys say Millennials, in particular, find this of importance. That might be true when they research the stones, but retailers say virtually no customer even brings it up. “No one mentions the environmental issues,” says Walp. “Not one person has asked about that.” It’s the price they’re sold on and their ability to get a larger stone than they’d anticipated.

The idea that “lab-grown diamonds are an ‘environmentally positive’ alternative to mined diamonds is not inherently true,” says Hill. They are “an environmentally ‘different’ option relative to mined diamonds” because manufacturing diamonds requires a lot of electricity. In fact, according to JewelleryNet.com, a recent letter from the Federal Trade Commission admonished several jewelers who were not in compliance with federal guidelines, “not to use unqualified claims such as ‘eco-friendly,’ ‘eco-conscious,’ or ‘sustainable,’ as it is highly unlikely that they can substantiate all reasonable interpretations of these claims.”

The availability of a steady supply of electricity is one reason diamond manufacturing is growing in the U.S. However, before claiming lab-grown diamonds are ‘made in the USA,’ be sure you’re on firm ground, cautions Stevens. “‘Made in the USA’ means that all parts are made domestically. If the diamond is grown in the U.S., but cut in another country, it cannot be marked ‘Made in the USA.’ It has to be grown and cut here.”

The Future of Lab-Growns

Hurwitz sees the introduction of lab-grown stones into the jewelry market as a “revolution.” Will the growing interest in lab-grown diamonds reduce or eliminate the market for mined diamonds?

“I don’t see lab-grown ruining the mined-diamond market,” says Rouse. “I think it will continue to be an option that is attractive to some and not to others. I don’t see that making mined diamonds go away.”

Walp thinks lab-grown diamonds may just be the latest new thing. “Lab-grown diamonds will not take the place of mined diamonds. I don’t think that will ever happen. I think it will fade away. A few years ago, everyone wanted a Moissanite.”

One area that may feel the impact of lab-grown diamonds more severely is that of melee. Hurwitz predicts that “in a few years, the mined diamond melee market will evaporate and the lab grown will take over for it. One of the reasons is that the sources of mined melee are drying up. Also the quality of mined melee has been deteriorating in consistency in grade. Lab-grown melee are going to be readily available, and mined melee will not be.”

One thing that will probably also happen is that prices of lab-grown diamonds will begin to fall. While it’s expensive to manufacture lab-grown stones now, says Hill, and it’s expensive to build the plants, “the ROI on these plants is starting to look pretty good.” As more stones are produced and come on the market, prices will drop. “The current pricing strategy—where lab-grown are priced equal to or barely below mined diamonds—is more of a ‘make hay while the sun shines’ strategy than a necessity. Everyone knows it’s not sustainable.”

Lab-grown diamonds are a new product, and despite predictions, it’s hard to say what will happen over the next 10 years. But it’s reasonable to bet that these stones are not going to go away.

“Jewelers need to compete by figuring out who their true target market is and then telling the stories and selling the products that work with that market,” says Hill. “If they have found success selling lab-grown engagement rings, they should continue with their strategy while keeping one eye on how the market is evolving. Because, evolve it will.”

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