Whether you currently sell lab, or at some point may begin selling it, there is no question that lab grown diamonds (LGD) represent the most disruptive force in the jewelry industry for the current generation of retailers. So the decisions you make about how to handle the whole lab issue – especially how to source it – will have an immense impact on the trajectory of your company’s future sales and profitability. This article is designed to help you ask the right questions of potential suppliers, so you can be assured of making the best possible decision.
Question 1: Are you a grower?
More than any other consideration, the question of whether a specific prospective lab grown supplier is actually a grower will be the most important question you can possibly ask. Why?
Because as you consider the business models in the LGD supply chain, you’ll find that the vast majority of the profit in lab is concentrated in two places: at the beginning (at the level of the grower) and at the end (at the level of the retailer). So with respect to price, terms, memo, and support, no one in the supply chain will be able to provide value in a strategic partnership the way a grower can. It’s just a fact: in the final analysis, establishing an exclusive with a grower will be the most important move you can make. If you want the very best deal, and the most powerful long-term relationship, you’re going to need to seek out a grower.
Question 2: Are you a cutter?
The next role in the supply chain is the cutter. And as profit centers go, this one is also important. So if you can’t work directly with a grower, seek out a cutter, and you’ll eliminate the profit that wholesalers will then be applying on top of the cutter’s margin.
Question 3: Are you a manufacturer?
The next step in the supply chain is jewelry manufacturing. And while it’s true that the major overseas manufacturers are generally making a fixed margin on both labor as well as stone content, if you can buy directly from a manufacturer, you’ll eliminate the 30 – 40 percent margin that wholesalers who buy from manufacturers typically put on the goods they sell. Remember – the wholesaler has significant infrastructure costs, plus they have to pay a salesman’s commission, so if you can sidestep the wholesaler and buy directly from the manufacturer, you’ll likely get a much better deal, and transfer the margin from the wholesaler’s bottom line to yours.
Question 4: Are you a direct supplier or a wholesaler?
If you can’t buy from a grower, a cutter, or an overseas jewelry manufacturer, then the next best thing is a direct supplier. In this case, an overseas jewelry manufacturer may have established an office in the US, but without the same added markup structure as a true wholesaler. But no matter how you slice it, the aggregated margins of individual grower, cutter, and manufacturing steps will inevitably produce a higher price, a lesser value, and will probably compromise the supplier’s ability to support you properly, especially as LGD becomes ubiquitous.
Question 5: How extensive is your complete LGD product line?
At some point in your discussion with a prospective LGD supplier, you’re going to need to try to ascertain just how serious they are about the jewelry side of the business. Remember – most of the people selling lab today were mined polished diamond suppliers who weren’t profitable, so they got into lab because the margins are at least temporarily friendlier. Fortunately, it’s easy to make that determination, by simply asking how extensive their complete LGD product line is. If all they have is studs, sols, a dozen bridals, a few bracelets, and a handful of fashion pieces, then they’re really not serious, and long-term, they’re unlikely to have staying power. Remember, as lab becomes more and more important, it may wind up being twenty percent of your business, perhaps even more. So, you need a lab supplier who can supply a breadth of products to enable you to hit those numbers.
Question 6: How rapidly can you resupply sold SKU’s?
Here’s another great question that will tell you whether you’re talking with the right supplier. If you speak with the experts at the Edge Retail Academy or at Balance to Buy, they’ll tell you how incredibly important capacity to resupply on an immediate basis can be for product turnover and profitability. Capacity to replenish is absolutely critical, and if the supplier you’re talking to isn’t maintaining an in-stock program, your sales and profit results will be compromised.
Question 7: How much is your memo price premium?
For a variety of reasons, the LGD B to B model is primarily a memo business. So it’s critically important for you to discover what the memo vs asset premium is on a specific prospective supplier’s product line. Recognize that every penny of that difference comes directly off your bottom line, and interferes with your ability to compete for market share. So if the premium is high, you’re going to have to look elsewhere.
Question 8: Do you have a comprehensive strategic marketing plan with geographical exclusivity?
This one is a really big deal, because as LGD becomes better known and more ubiquitous, you’re going to need more than just a great source of supply. You’re also going to need a powerful set of marketing tools, so that as the total piece of the jewelry pie that LGD represents continues to grow, your own slice in your local market will be protected from what will probably be pretty heavy competition.
And make sure about the exclusive. What will it take on the front end, and what will be required as LGD grows, based on the size of your market, to ensure that you don’t plow the field with a brand, only to see your competitor harvest the crops when the category matures.
Question 9: Can you help me acquire and sell Gen Z customers?
Recognize that in the next three years, the oldest members of Gen Z will age to the point that they represent your average engagement ring customer. And if you think shifting gears to selling Millennials was hard, wait until you meet Gen Z!
Fortunately, LGD possesses intrinsic characteristics that are perfect for attracting and selling to the Gen Z consumer. Product features like provenance verified in blockchain, as well as carbon neutrality and social responsibility/sustainability, are right up Gen Z’s alley. If your prospective LGD supplier has imbued their diamonds with the right characteristics, ideally with third party verification from SCS, their brand will represent exactly the right magnet for attracting this new, incredibly important consumer segment to your store, and to your bridal case.
Question 10: What is your company’s long-term game plan?
If your prospective supplier has made it this far through your interview, then now’s the time to get an understanding of where they plan to take their company, because if they become your primary partner in LGD, you will only be able to go as far as they can take you.
How serious are they? Are they a former polished mined dealer who was having trouble making a profit in mined diamonds, so they flipped to lab because the margins were better? Or do they plan on dominating the category, outcompeting the many companies who are already in the space, as well as the ones who are coming, and surviving what will unquestionably be a period of great turmoil, so that they become one of the few survivors who will dominate the diamond landscape in coming years. Do they possess the production capacity, as well as the deep pockets, to ensure that you’ll get your fair share of this business as the category reaches maturity.
There are, of course, other questions that you may want to ask. But I hope by providing this list, it’ll help you obtain the information you need to arrive at the right decision. The diamond business is at an interesting crossroads, and will surely be disrupted by these new forces. But with the right strategic partner, you’ll be able to manage the disruption, and use LGD as a gateway to higher levels of sales, market share, and profitability.