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Technology vs monopoly. Market overview of lab-grown gem-quality diamonds. Part 3. Downstream*

13 january 2021

Authors: Galina Platonova and Valery Zakharov, Ultra C

In the previous articles published on May 11 and July 15, 2020 in the Expert Reports Column, the methods of growing laboratory diamonds were discussed as well as the production companies (upstream), their moving through a diamond pipeline, cutting&polishing and diamond manufacturing (midstream).

Today, the most anticipated and most interesting topic in the entire cycle of the publications, perhaps, is the market, product promotion to the end consumer (downstream).

The focus is on the changing consumer preferences, product positioning, pricing, marketing and advertising.

The experts from the Ultra C company tell what global changes are taking place in the most conservative and traditional diamond market under the influence of the disruptive technology.

* The downstream sector is about promotion of a product in the market to the end customer.

A bit of history

(«Navigator of Jewellery Trade») - The De Beers’ success story is impressive. The discovery of a 21-carat diamond in the Orange River Valley in the 1860s attracted treasure seekers from around the world. Cecil Rhodes who supplied equipment to the artisan diamond miners got a share in the diamond mines. In 1883, he founded the De Beers company. In 1902, when Cecil Rhodes died, De Beers controlled 95% of the world’s diamond production.

The creation of the global monopoly was completed by Ernest Oppenheimer. In 1926, he joined the De Beers board of directors, and a year later, he became its chairman. With the Oppenheimer’s participation, De Beers became the largest both in the diamond mining and in the polished diamond manufacturing. It is this company that turned a polished diamond into a symbol of love and eternity in the world. It is unique that the marketing campaign began in the period of recession, stockpiling and declining diamond prices.

De Beers decided that good advertising would help slightly transform the demand. The choice fell on N. W. Ayer, one of the oldest advertising firms in the country founded back in 1869. To achieve the goal, they chose a win-win strategy and associated diamond rings with the engagement tradition.

N. W. Ayer identified the target group for the advertising campaign - those were young and wealthy men on the verge of marriage. They should have to associate the diamond ring with a romantic gift to a fiancée. Moreover, the size of the stone should be proportional to the depth of their feelings declared! The same idea was supposed to be instilled in young girls.

By 1941, over just three years of the campaign, the diamond purchases in the United States had grown by 55%. And finally, in 1947, N. W. Ayer copywriter Mary Frances Gerety coined the tagline ‘A diamond is forever’ for an ad depicting a couple in love in the moonlight. In 2000, the slogan was voted as the ‘best advertising slogan of the 20th century’ by the Advertising Age magazine. It is still used by De Beers. And among other things, it says that polished diamonds will never lose their value.

The myths that created the diamond industry

Why is it necessary to make a retrospective journey into the history, which everyone knows? Just to remember what were the three pillars the diamond market stood on in the pre-tech times. Myth 1: A diamond is rare. Myth 2: Diamonds have an investment value. Myth 3: The symbolic value of a diamond as the token of love and eternity.

Myth 1. The rarity of diamonds. Is one of the most abundant elements in nature - carbon - rare? By the way, graphite and anthracite are also carbon. Now let’s imagine that about 120 mn carats of gem-quality diamonds are mined annually. The stones may be not of the top quality but promising to become polished diamonds. But this ‘product’ is not used as food, does not corrode, does not burn in engines. It accumulates. And here, we come to Myth 2.

Myth 2. The investment attractiveness. ‘A flawless investment’. It’s like any car bought yesterday at a prestigious car showroom, today is minus 30% to its selling price, so is a polished diamond purchased in a jewellery store. It is not possible to sell it at the purchase price. You can make money on today’s acquisition in 20 years only if you have a truly unique stone in terms of its colour and quality, and, of course, its size also matters.

Myth 3. The symbolic value of a diamond as the token of love and eternity. This last myth is the real achievement of the most successful and expensive advertising campaign of the 20th century (today, the average annual budget is about $200 mn per year). This unique position of the polished diamonds among other gemstones greatly stimulated the development of technologies for the production of lab-grown stones because the market of expanding consumption looked very attractive. And this myth that is of great importance needs to be preserved and supported by the polished - lab-grown or mined - diamonds suppliers.

The emerging new players on the market

Who was the first to offer gem quality lab-grown diamonds to the market? Those were tech companies that, on the one hand, had the diamond growing technology and, on the other hand, they had no idea or understanding of the diamond market and had no experience in working with diamantaires. Rough diamonds are still the main product of the lab-grown diamond producers. The New Diamond Technology Company was one of the first to stop selling the rough diamonds in order to avoid competition with their own goods in the large diamond niche. Some companies have followed the company’s example, especially those with a size/quality advantage over the mass market. Other lab-diamond growers either keep a certain proportion of cut/rough stones, or remain on the rough diamond market. The reasons are clear - it’s difficult to enter the polished diamond market and it is necessary to maintain a certain level of the company’s revenue. Rough diamonds are definitely more liquid.

The companies buying rough stones and manufacturing polished diamonds have appeared in the supply chain. And, as mentioned earlier, the Indian companies have chosen to form a full cycle - from the lab-grown diamond production to the polished diamond and even jewellery manufacture.

What was the market like when the laboratory-grown diamonds emerged?

Figure 1. The growing consumer awareness about the laboratory-grown polished diamonds

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Source: MVI Research Studies: 2010–2019

The market was definitely not ready to accept the new product. Less than 10% of the respondents in 2010 knew about the lab-grown polished diamonds. First of all, there was not enough information since no funds were invested in this product promotion. Along with this, there were cases of unscrupulous mixing of lab-grown diamonds into small-sized categories with an attempt to pass off the lab-grown stones as natural ones. All this negatively affected the attitude towards the laboratory diamonds as a whole. As a result, there was a growing demand for detectors, and the role of expert assessments, international and national gemological laboratories increased. The lab-grown diamond image suffered from the greed of those who cheated the consumers to get their additional profit taking advantage of the imperfect detection methods and low awareness of buyers. All this is the result of the collision of a high-tech product with the world of mined diamonds.

On the other hand, the lab-grown diamonds had to face the simulants. Moissanite - sometimes mistakenly or sometimes on purpose - are called ‘lab-grown diamonds’ to give them a ‘precious’ image. And the lab-grown diamonds are sometimes called ‘simulants’, ‘fake’. Not only incompetent consumers call them this way but also the professionals. Therefore, the time has come for the lab-grown diamonds to become a standalone product. Undoubtedly, as a disruptive technology, the LGDs (lab-grown diamonds) fully used the established diamond traditions in the market such as the 4C grading system, certification using these parameters, and the Rapaport Diamond Report for pricing. Nevertheless, the issue of the self-identification was on the agenda.

In 2018, an ad hoc working group was set up under the CIBJO (World Jewellery Confederation), which later became a full-fledged Committee for the development of the recommendations on the lab-grown diamonds for their inclusion in the Blue Book. The development of the terminology for the lab-grown diamonds, recommendations for using and positioning the lab-grown diamonds, standards of working with them is underway. The Ultra C Company initiated the creation of this committee. Its founder, ex-president of ALROSA Andrey ZHARKOV, is one of the leaders of the committee chaired by De Beers representative Wesley HUNT.

The CIBJO’s recommendations should help shape the market for the lab-grown stones as a standalone product category. The jewellery companies working with these stones will receive a guideline on how to describe the product, how to present it to the consumers, how certificates should be drawn up, and much more. The CIBJO and IGDA (International Grown Diamond Association) made it clear that the producers do not want to be subject to claims made by deceived buyers. Their task is to sell their goods providing the buyers with the most transparent information about what they are buying, and to win the buyers’ loyalty.

Diamond is the diamond

There is every reason to believe that the demand for the lab-grown diamonds will keep on growing. Let’s refer to one of the latest studies of MVI Marketing, a U.S.-based consulting company pulbished in 2019. The survey involved 1,154 respondents (50% were from the United States and 50% - from Canada), they were the millennials aged 21-36 (50% were men and 50% - women).

Figure 2. Willingness to purchase engagement rings with lab-grown diamonds


Source: MVI Research Studies May 2016 and July 2019

What is the motivation?

74% say they will prefer the lab-grown diamonds because “I can get a larger diamond for the same money I would spend on a natural diamond.”

70% say they will prefer a high-tech product because they don’t like the environmental impact of the mining companies.

68% will prefer the lab-grown diamonds because they dislike the use of the child labour.

Such statements are reflected in the ways used by the suppliers of lab-grown diamonds while dealing with the final buyers - they call the LGDs ‘eco-diamonds’, ‘green diamonds’, ‘non-conflict’ ones. In contrast, those who prefer natural diamonds (‘naturalists’) call the lab-grown diamonds ‘fake’ ones since they have no history of several billion years and they were ‘baked’ in a reactor during two weeks. How can they be compared with the mined diamonds? Can a technology product have an eternal value?!

We see how - in an attempt to convince a potential buyer of their product superiority - the sellers offer to choose between a ‘bad’ stone and a ‘fake’ one. Unfortunately, all of the above can be painful for polished diamonds in general, regardless of their origin.

At the beginning of the article, we said that the symbolic value of polished diamonds is unique and should be carefully maintained by all the participants in the diamond market - both those preferring the natural diamonds and those preferring the lab-grown diamonds being the product of ‘technology’. An important step in this direction was taken by the US Federal Trade Commission that declared in July 2018 that ‘Diamond is the diamond’ regardless of its origin.

Pricing

The monopolistic market, which became the oligopolistic one with the entry of some new players into the market, such as ALROSA and Rio Tinto, made it possible to effectively control the price growth. To date, the influence of the lab-grown diamonds on the price level is not so great; in the first article (No. 3, 2020 ‘Navigator of the Jewellery Trade’) we discussed the market volume and estimated that of rough diamonds at 7.5 mn carats in 2019. But within the next 5 years, with a multiple increase in the output, we will undoubtedly see the effect of the technology on the price. And not only on the high-tech product price, but also on the natural diamond price, especially in the highly competitive size and colour categories.

The Rapaport Diamond Report is used to determine the price of the lab-grown diamonds. The expression ‘How much from Rapa?’ became a usual one. This means either a percentage of the price, for example, 20% of the price from the Table, or a discount minus 80% in this case. Everyone criticizes this system, but continues to use it. The argument is convincing ‘There are no other systems’.

If you need to make sure that the offered price is really the market one, you can look at various websites for the price of a similar polished diamond. The most popular is Brilliant Earth (www.brilliantearth.com) offering a huge choice, any fancy shapes, many colours. The downside is a rather large range of prices for the stones having similar characteristics. Apparently, this is due to the fact that the goods come from different sellers and each has his own pricing idea. As for the plus point, you can see the minimum/maximum bid price for similar goods. There are other websites such as James Allen (www.jamesallen.com) or Mia Donna (www.miadonna.com). Of course, this is just an example of sources of the pricing information.

A much more complex issue is the pricing of the lab-grown coloured diamonds. The comparison with the natural ones is not objective as the rarity and uniqueness are valued in the natural stones. Some suppliers determine the price of yellow, pink, blue lab-grown diamonds based on the price of colourless stones adding a premium ‘for colour’. Of course, the purchase price is always a matter of bargaining and the seller’s ability to convince the buyer that he or she is purchasing a unique piece.

Who is working successfully with the lab-grown diamonds today?

The lab-grown diamonds are present in the diamond jewellery market and fashion jewellery market categories. Here are some examples of jewellery brands that successfully launched jewellery collections.

1. The brands of the lab-grown diamonds in the fashion jewellery market

The De Beers Group (www.debeers.com) has started selling its own lab-grown diamond jewellery line under the Lightbox brand. The Lightbox collection is aimed at young buyers and offers simple designs of earrings and pendants with lab-grown diamonds in several shapes and colours in sizes up to 1 carat and it is positioned as fashion jewellery. The trend has gained great popularity.

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Atelier Swarovski, Austria (www.atelierswarovski.com), offered bright collections with lab-grown diamonds - Diama and Penélope Cruz. The Swarovski laboratory diamonds are produced at the independent factories in Switzerland, India, America and China. The colour range is much larger than that of the lab-grown Lightbox Jewelry diamonds. Each of the Swarovski fancy coloured diamonds is available in sizes from 0.25 to 1.50 carats, and the diamonds of some colours are up to 2.50 carats. The colour is achieved by the standard processing methods such as irradiation and annealing, and the stones over 0.70 carats are IGI certified. At the same time, Swarovski relies on dividing the market and the company wants to create both luxury jewellery and more affordable one in line with the brand’s commitment to affordable jewellery.

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2. The brands of the lab-grown diamonds in the diamond jewellery market

The laboratory diamonds are an excellent material not only for the fashion jewellery market, but also for the traditional diamond jewellery market.

Courbet, Paris (www.en.courbet.com) offers a wide range of goods ranging from the traditional engagement rings to contemporary designer jewellery pieces.

Little Switzerland, Caribbean, Puerto Rico, Florida (www.littleswitzerland.com) launched the Engrace Diamonds and Nuri & Ash brands. The lab-grown diamonds are sold both loose and in ready-made jewellery pieces. They are available in a variety of colours including white, pink, blue, orange and olive green. According to a representative of Little Switzerland, the diamonds are grown in the United States. The diamonds used in the 14- and 18-karat gold jewellery pieces are laser-marked and certified by an international laboratory.

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Michael Hill, Australia (www.michaelhill.com) currently having more than 300 stores in Australia, New Zealand, the United States, and Canada, presents the jewellery with lab-grown Fenix diamonds.

Signet Jewelers, USA (www.signetjewelers.com), one of the major retailers in the United States, launched its collections with the lab-grown diamonds. The collections are available on Jared, Zales, James Allen, and Kay marketplaces. Signet Jewelers, in our opinion, will play a very important role as the company’s goods will gain a growing recognition.

Among the pioneers in the luxury segment is Shiphra, Switzerland (www.shiphrajewelry.com). It entered the market successfully with its large and coloured stones, as well as designer jewellery studded with calibrated fancy-cut diamonds.

The example of these pioneer companies (however, we have presented a far from complete list) is impressive and inspiring, is not it?

Conclusion

The three articles offered helped the reader make a journey along the chain from the LGD production to the jewellery collections.

We really hope that we could draw your attention to a unique high-tech product, expand your understanding of it, give more knowledge and arouse your interest in it.

The MVI Marketing research says that the product awareness is growing exponentially but end-users still require more educational programmes. 15% of the respondents said that they would make a purchase if the information about the lab-grown diamonds being similar to the natural ones was brought to them by the jeweller whom they trusted.

The market for the lab-grown diamonds is growing, their quality is improving, the range of colours is expanding, and calibrated fancy-shaped stones are being produced now - everything is done to attract the attention of the jewellers to the possibilities of the high-tech product.

The article was prepared by the experts from Ultra C (ultrac.ru).