Disruption in the Diamond Industry
Driven by technological advancements, lab grown diamonds have seen a consistent plummet in prices, mirroring Moore’s law’s predictions for the tech sector. Initially posited by Gordon Moore in 1965, Moore’s law forecasted that the number of transistors on a microchip would double approximately every two years, fueling rapid progress in computing capabilities. This principle has been outpaced by innovations in microchip design and manufacturing, with companies like Nvidia advancing faster than Moore’s law suggests.
Similarly, lab grown diamonds have surpassed Moore’s law, with efficiency gains and competitive pressures leading to an oversupply and a race to the bottom in pricing. Unlike Nvidia, which has expanded its market and added value, lab grown diamonds have struggled to carve out new markets, relying instead on selling in jewelry market using traditional pricing benchmarks like the Rapaport Price List. The traditional natural diamond price list is based on the natural scarcity of supply at the higher color, clarity and carat ranges – which allows for an exponential increase at the higher colors and clarities. Lab grown diamonds however have no such scarcity at the higher ranges of cut, clarity and carat ranges. The cost structure for lab grown diamonds follows a strictly linear scale, but by piggy backing on the natural diamond price list, it has allowed synthetic diamond growers to pad their profits. They should have never followed this system to begind with and now we are finally seeing it break away from this system and be sold strictly on a per carat basis as it always should have.
Now as LGD prices in wholesale have entered sub $100 price range the key questions facing the Natural Diamond Industry:
- Market Displacement: To what extent have lab grown diamonds displaced natural diamonds in bridal jewelry? And how much of that is permanent?
- Fashion Jewelry Disruption: How is the affordability of lab grown diamonds affecting the fashion jewelry sector?
- Price Floor: Given the cost-plus business model of lab grown diamonds, how low can prices realistically go?
- Commodity trap vs Branding Opportunity: Could the commoditization of lab grown diamonds present an opportunity for brands like Swarovski and Pandora to command high margins based on brand value, and what does this mean for commodity sellers?
- Retail Shift: Online and traditional brick and mortar retailers have made a killing so far on lab grown diamonds – with many selling easily at 3-10x markups. How long can they hold these margins and where will they end up longer term, especially if growers increasingly sell direct to consumers? Once the retail markup shrinks due to inevitable increased competition and transparency, at what point will they switch back to promoting natural diamonds over lab?
- Cultural Perception: As lab grown diamonds become more widespread, and large carat synthetic diamonds become common – will the allure of natural diamonds diminish, or will they regain their mystique, akin to natural pearls and precious colored stones, which also went through a similar onslaught?
- Consumer Reaction: How might consumers react upon realizing the diminished resale value approaching ZERO of their lab grown diamond purchases (especially for those who spent tens of thousands), and how will this damage their long term trust in jewelry retailers? How will this affect their perception of gold and diamond jewelry as a traditional store of value?
- Eco-Friendly/ Conflict Free Claims: Lab grown diamond growers have pumped significant marketing dollars towards touting their products as eco friendly and conflict free. Many of which are arguably false or at least overstated. Can the natural diamond industry effectively counter lab grown diamonds eco-friendly claims, and what efforts and costs would be required to shift public perception?
The Future of diamonds:
The diamond industry stands at a crossroads, with lab grown diamonds challenging the status quo while crashing and burning. As the market evolves, answers to these questions will shape the future of both lab-grown and natural diamonds, influencing consumer choices, industry practices, it’s viability, and the very essence of what a diamond represents. We have an idea of where things will end up due to the basic economic principles of supply and demand – but the long term effects on the future of retail and the consumer mindset are anyones guess at this point. There is increasing optimism on the side of the natural diamond industry currently where it appears that there is a shift already occuring back towards natural diamonds among a large sector of the retail and consumer market. However, a large part of the market has alreadt been cannibalized by lab grown diamonds, and much of it will never come back. Lab grown diamonds are here to stay, but so are natural diamonds.
PS. While it may appear that some questions posed here are rhetorical, we must acknowledge the industry’s earnest search for clarity amidst uncertainty. Your insights and contributions to this dialogue are highly valued.