The Lab Grown Diamond (LGD) Disruption is now entering the third phase of what I believe will be seven predictable discrete mini epochs in the evolution of LGD en route to becoming a mature product category. Each phase will open new opportunities for both suppliers and retailers, but each will also likely create turmoil as well as financial turbulence. Over time, we will see an ever-increasing emphasis on higher price point fashion as LGD recreates the diamond jewelry business, but for now, we are still witnessing a narrow collective focus on bridal applications. And since this particular phase inevitably involves a collapse in Average Unit Retail (AUR) prices in bridal, I’m writing to make some suggestions, both to help you to weather the storm, as well as to maximize the benefits that this opportunity provides. But first, let’s look at what’s happening, and why.
Last fall we saw the beginning of the Darwinistic cleansing of the LGD supply chain, as dealers, both large and small, reacted to the precipitous decline in LGD prices by dumping goods, which served only to hasten the decline in prices. In turn, this caused aggregated AUR in engagement rings to begin to collapse, a trend that has now accelerated in 2023 to the extent that the Edge Retail Academy reports a spectacular 30 percent decline so far this year. The collapse has been so severe for some that I have heard whispers that certain retailers are even considering dropping lab altogether, in hopes that they can somehow re-energize their mined business by not offering the lab grown counterpart.
This strategy strikes me as analogous to Verizon or AT&T choosing to opt out of cell phone sales twenty-five years ago because it was killing their landline business. Obviously, that choice would have been catastrophic. Sadly, for industry purists, the LGD genie is out of the bottle, and the notion that one can successfully survive as a niche player selling only mined centers strikes me as impossible, unless you’re one of many retailers in a high-density population market. Furthermore, the choice to go “mined-only” leaves you incredibly vulnerable to a competitor with a well-developed LGD revenue stream who can simply sell mined diamonds at cost until you’re forced to abandon that segment of the business. Want to spend the rest of your career completely out of the bridal business? I suspect not.
Fortunately, there are answers to the strategic challenge posed by the decline you’re experiencing in bridal AUR. Here are a few of the most powerful options:
1. Go Big
There is absolutely no reason for your bridal AUR to collapse, provided that the size of the diamonds you’re selling increases proportionately to offset the decline that’s occurring in price. The problem you’re experiencing has as its core cause the fact that perceptually, mainstream consumers are unaccustomed to seeing 4 and 5-carat centers on their friends’ hands. Yet the hyper-affluent consumers in the 60s who shopped at Tiffany and Harry Winston had no problem purchasing engagement rings containing large diamonds. As an aside, can you imagine Elizabeth Taylor complaining that a 4-carat diamond was too big? Yet I know that you are hearing young women saying that a particular diamond is just too big for their hands.
Fortunately, there is a simple solution to this problem that can be found in the neurophysiological paradigm that humans (as well as all higher order primates) evaluate objects not in terms of their actual size, but rather in terms of their relative size. Want to sell her a 3-carat? Show her a 4-carat. Want to sell her a 4-carat? Show her a 5-carat. Simply show her a large size that she can reject as being too large, so that she can then opt for a diamond that is smaller than the one that was “too large.”
2. Stock semimounts configured with heads and shanks for larger size diamonds
Just as there is a neurophysiological foundation for “going big”, we can similarly use the psychological concept of “Cognitive Dissonance” to provide another answer to the challenge of selling larger diamonds, and to illustrate, I’ll refer to a recent personal experience. My daughter decided to get engaged in February (to a terrific guy!), and so I sent her to several jewelry stores in her local market that I knew would have excellent assortments for her to try on. But when she called me that Saturday evening after her shopping trip, she summarized it with a remarkable pronouncement. “Dad,” she said, “all of the oval diamonds over two carats looked too big for my fingers.” What a remarkable statement! I puzzled over it for some time, and given the fact that I know that there’s nothing about her fingers that would preclude wearing a larger diamond, it occurred to me that the problem might not be caused by the diamonds being too large. Instead, I suddenly realized that the semi-mounts she was seeing were configured to accept diamonds that were too small.
With this in mind, I mounted up a 3-carat, and Fedexed it to her. She called me with glee when she opened the box, to inform me that I was right, the 3-carat “looks perfect” on her fingers. So clearly in this case, what was keeping her from selecting the larger diamond wasn’t the way the diamond looked on her fingers. It was the awkward way the diamond looked on a semi mount that was clearly too small for a larger center stone. Awkwardness of any kind converts the prospective buyer into a state of “Cognitive Dissonance” resulting from the fact that what they are seeing doesn’t make sense, and this in turn will cause them to freeze. Avoid this, by being sure to stock some semi’s that can accommodate the size diamond that you need to sell to increase your bridal AUR.
3. Start diverting part of your lab inventory to asset
The two strategies outlined above can help you elevate your bridal AUR and stem the decline in your bridal revenue/profit stream, but they may not solve the problem completely. So in order to elevate your gross profit on smaller (2-3 carat) LGD sales, it may be time for you to start mixing some asset purchases into your on-hand LGD inventory. No, I am not suggesting that you start buying LGD on asset across the board. There is still way too much volatility in the market to take significant risks owning LGD that will likely be declining in value. What I am suggesting instead is that you start selectively buying certain sizes and shapes on asset so that you can expand your margins and blunt part of the impact of LGD price decreases.
I would especially encourage you to plot your prior year sales of 2-3 carat rounds, ovals, and emerald cuts, as well as 2 ctw round diamond studs, to build a mathematical model for your likely sales of these items during any 60-day period. By moving the part of your inventory that you are likely to sell quickly into asset, the savings from lower asset prices will allow you to recapture some profit, potentially offsetting a portion of the AUR decline.
These three moves can significantly alter your bridal revenue/profit stream in ways that can compensate for industry-wide declines in bridal AUR, but they are only a few of the ways to accomplish this objective. If you’d like to read more, email me at george@surrealdiamond.com and I’ll send you a Phase 3 LGD Survival Guide.
Class Dismissed!
