More importantly, how will retailers pivot once these goods cease to be profitable?
The conversation about synthetic diamonds has reached a fever pitch as oversupply and cheaper production costs continue to push down prices and trade-in values, even while consumer exposure and demand rise. Meanwhile, the natural-diamond industry, smarting from man-made diamond competition and its own oversupply issues, is continuing to feel the pinch.
Where is the market for synthetics headed? Some analysts are peering into their crystal balls and seeing further price drops at both the wholesale and retail levels, an erosion of profit margins, and an eventual customer migration away from lab-grown engagement rings simply because they’re too inexpensive for a commitment purchase. Meanwhile, synthetic diamonds appear poised to take over the fashion-jewelry category and steal market share from moissanite, lab-created white sapphires, and other diamond simulants.
We’re not quite there yet. In 2022, the global synthetic-diamond market was valued at $24 billion, according to Allied Market Research, which expects that figure to jump to $59.2 billion by 2032 at a compounded annual growth rate (CAGR) of 9.6%. While some analysts dispute these high projections, there’s little question that consumer demand is still robust, particularly in North America, which continues to dominate the synthetics industry in terms of market share.
Still on the rise, for now
Retailers and other direct-to-consumer businesses say the category remains strong.
“Over the past three years, we have experienced exponential growth, confirming the strong demand for our products,” reports Ornella Siso, cofounder and chief marketing officer of synthetic-diamond jewelry brand Idyl. “Our customer retention is exceptionally high; we see that customers keep coming back.”
The numbers buoy claims like these. In July, unit sales of lab-grown diamond jewelry were up 59% year on year, and revenue from those sales rose 52%, according to jewelry-data analysis group Tenoris. Synthetic diamonds now make up as much as 20% of the total diamond jewelry market, says diamond analyst Paul Zimnisky. In the US bridal market, that number is even higher, with some estimates pegging it closer to 50%.
Millennials and Gen Z continue to be the main consumers of synthetic diamonds in the US, enticed by sustainability claims, human-rights concerns about the natural-diamond mining industry, and most of all, price. As Amish Shah, founder and CEO of lab-grown jewelry brands Altr and J’evar, puts it: “Find me a girl who doesn’t want a larger, beautiful diamond on her finger or in her ear.”
Cranking up the volume
The problem is that the supply of synthetic diamonds has flooded the market in recent years. China is the top producer of these stones; in 2022, it accounted for 20 million carats, or 40% to 50% of global production, according to the Gems and Jewelry Trade Association of China. India is the second-largest producer, making about 3 million carats, or 15% of the global total, according to CareEdge Advisory. Other significant producers include the US and Singapore.
As with other technology-based businesses, efficiency and volume have also pushed production costs down. As a result, synthetic-diamond wholesale prices have plummeted by 87% since 2018, Tenoris reports. Earlier this year, synthetic diamonds were going for $99 per carat at the JCK Las Vegas show.
Notably, there’s been a lag between wholesale and retail price drops. This means profit margins will increase for the next while, analysts say. Tenoris’s latest numbers show synthetic engagement rings selling for an average of $2,710, and higher gross margins than ever at 65%.
“There is a floor, and that’s why retailers are taking advantage of these huge margins while the consumer isn’t aware of the true value of the lab-grown,” says Olivia Landau, founder of natural-diamond purveyor The Clear Cut.
However, those retailers must sell a lot more synthetic diamonds just to make the same profits they did a few years ago.
Vishnu Batwara, CEO of New York-based jeweler GemsNY, acknowledges the issue, but has found that consumers often buy more anyway: “We are seeing a lot of repeat business where customers have purchased a ring and are now completing the set with earrings, pendants and bracelets. The lower
price point is also allowing customers to buy a full set from the get-go, giving a boost to overall sales.”
For many retailers, though, “lab-grown prices are decreasing faster than unit sales are increasing,” says Tenoris founder Edahn Golan. “You’re still making money, but if prices are down 20%, you have to increase sales by 25% just to generate the same income. Retailers are in a big dilemma. Are
you going to give customers what they ask for, or are you going to protect your income?”
No business for growers
Several major retailers have already jumped ship. In June, De Beers made the decision to stop producing synthetic diamonds for its Lightbox jewelry brand and to focus instead on industrial applications. Signet Jewelers has shifted its synthetics usage from bridal to fashion, a move signaling a broader direction in the trade overall. And many independent stores in the US are rushing to unload lab-grown diamonds before those enviable gross margins start to fall.
“I think it is just a matter of time before lab-grown diamonds’ downstream margins normalize, especially if we are just talking about loose, generic goods,” says Zimnisky. Even with synthetic-production costs potentially falling even further, he observes, other supply-chain expenses like cutting, grading and distribution remain “stickier.”
Idyl’s Siso agrees. “While the production costs of synthetic diamonds may stabilize, each stone still needs to be cut, polished and shipped, and undergo various other processes, all of which contribute significantly to the total expense,” she says. “As a result, fluctuations in the cost of synthetic diamonds alone will not drastically impact the pricing of jewelry.”
If you’re solely a synthetic-diamond grower, there’s not much further to fall, analysts maintain.
“We’re nearing a point where it is impossible to make a profit if you’re a grower,” states Golan, noting that producers are getting close to cost-plus and that “there are fewer and fewer [such companies]. The only business that works is a combination of grower and manufacturer. You can still have a very nice profit if you subsidize as a polisher or a jewelry manufacturer.”
That’s likely to be a boon for India, the world’s largest manufacturer of polished natural diamonds. Some 90% of Indian companies that cut natural diamonds have now entered the synthetics market as cutters, growers, or both, according to the Lab-Grown Diamond Subcommittee of India’s Gem & Jewellery Export Promotion Council (GJEPC). And those companies have factored the price decline into their business models.
Switching the focus
In the US, says Zimnisky, retailers are pivoting back to natural or looking at the next phase of the synthetic-diamond business strategy: taking market share from moissanite, lab-grown white sapphire, and cubic zirconia.
Doug Meadows offers consumers what he calls “the diamond solitaire challenge”: a side-by-side comparison of natural, synthetic, moissanite and cubic zirconia. “We’re trying to educate the consumer and give them a choice,” says the owner of David Douglas Jewelers in Marietta, Georgia. “However, more and more, as prices of [synthetics] drop, we’re switching our focus to how to talk about natural diamonds.”
Taking a cue from other luxury categories like designer fashion, some synthetic-diamond sellers have started playing up other quantifiable attributes like cut, design and branding. Synthetics offer more variety in cuts, including ovals, radiants, elongated cushions and emeralds, while most natural sales tend to be of rounds. “As [lab-grown diamonds] evolve, true entrepreneurs are the ones who focus on value based on the creativity in the jewelry,” says Shah.
Jeweler Brilliant Earth is highlighting the sustainability angle with its Capture and Renewable collections, both of which launched last year. The synthetic diamonds in the former are created by capturing carbon emissions before they can enter the atmosphere. In the latter collection, the jeweler uses 100% renewable energy to grow, cut and polish the stones. The aim is “to create a more transparent, sustainable, compassionate and inclusive jewelry industry,” wrote cofounder Beth Gerstein in a recent social media post.
The natural dilemma
Meanwhile, synthetic diamonds continue to have an adverse effect on the natural-diamond industry, particularly at the latter’s lower price points. Along with economic challenges and weakening demand, strong competition from synthetics has been a factor in the erratic performance of US natural-diamond jewelry retail sales this year. Overall sales declined 1% in the first half of 2024, according to Tenoris.
Many argue that synthetics are cheapening the perception of natural. However, others say they whet the appetite for larger natural diamonds, and more of them. Sales of natural-diamond jewelry in the $20,000 to $50,000 price range enjoyed double-digit increases in the first half, Tenoris reports — a trend to watch in the coming months.
“I do think that further diverging prices between lab-grown diamonds and natural will further distinguish the products,” comments Zimnisky. “But the industry still has to convince consumers to pay a big premium for natural stones.”
Main Image: Campaign shot by jeweler Kimaï, featuring rings with synthetic diamonds. (Kimaï)
This article is from the October-November 2024 issue of Rapaport Magazine. View other articles here.
