Grown Versus Mined: The Retail Battleground

RAPAPORT... Is the growth in lab-created diamonds being driven by consumer desire or the retail jeweler's sales pitch? The question arose in a recent episode of the Rapaport Diamond Podcast, as well as in a webinar panel discussion Rapaport hosted earlier this year with lab-grown producers and marketers.The podcast guest was Kieron Hodgson, managing director and research analyst for commodities and mining at UK investment bank Panmure Gordon. He called out jewelers for the narrative they were pushing about lab-grown versus natural goods. "How [synthetics] are being sold to consumers has left me dismayed at the level of mistruth being conveyed," Hodgson lamented, reporting on a recent trip in which he visited various jewelry stores. "Retail outlets are willing to portray natural diamonds as something that is not a benefit to the industry, whereas lab-grown is that ethical alternative."He found himself "getting particularly annoyed because I have seen firsthand the benefit that mining operations bring to communities that otherwise have no form of income," he continued. "The industry has allowed the mistruths to permeate through to the wider consumer, and that is difficult to reverse once it becomes embedded in the consumer psyche."Hodgson's comments struck a chord with one listener, an executive at a major New York-based jeweler, who wrote in an email: "I thought the last few minutes [of the podcast] on the lack of messaging, or misinformation, as it relates to natural versus lab-grown, was so on point.... The point by your guest on the consumer psyche is what is keeping me up at night."The exchange highlighted the role that retail jewelers have played in the synthetic-diamond sector's recent growth spurt. It is no secret that jewelers are seeing stronger margins from lab-grown than from natural. As such, they might be forgiven for pushing consumers toward the product in their sales pitches. As Marty Hurwitz, CEO of lab-grown-focused consultancy The MVEye, remarked in the July webinar: "That's capitalism - when you have a willing seller and a willing buyer."Size mattersThe webinar panelists argued that growth starts with the consumer; retail jewelers are simply responding to the rapidly rising awareness of, and interest in, the product. "If I look at the trajectory over the last five years, the socially, environmentally and economically conscious consumer now has a choice," said Amish Shah, president of lab-grown brand Altr Created Diamonds. "They have a choice to get almost twice the size of a diamond for almost the same price or a little more."Beryl Raff, the recently retired CEO of US jeweler Helzberg Diamonds, first highlighted that point at the Dubai Diamond Conference in March, declaring that "the 2-carat lab-grown diamond has become the new 1-carat mined diamond." In 2021, Helzberg sold 50 times more 2-carat lab-grown diamond pieces than the same size in mined diamonds, she reported. Those economics run contrary to the initial projections of how the lab-grown diamond market would develop. Rather than selling an equivalent diamond for less and saving the consumer money, jewelers are filling the customer's budget with a larger stone - especially in America, "where it's all about size," Shah observed.Melee challengesThe shift to larger lab-grown sizes at retail also contrasts with the earlier assumption that synthetics' main growth opportunity lay in smaller stones, particularly since natural melee was facing a potential shortage due to the Ukraine-related sanctions on Alrosa goods. However, there is currently no shortage of natural melee on the market, and jewelers are not shifting to synthetics for this category. Natural melee has a better look, and that's enough to keep jewelers using it instead of small lab-grown goods, Hurwitz said. Acquiring a consistent supply of lab-grown melee is also a challenge, particularly for fashion jewelry, which uses this size heavily, he added. Besides, the grower needs to decide what to do with the rough crystal during the growth process, and most prefer to manufacture larger stones, which are more economically viable.Reliable supplyIn fact, getting a consistent supply of lab-grown is a challenge in all sizes, the panelists noted. "Major jewelry retailers and the manufacturers that supply them are challenged to get consistent supply that is required to put together their collections and run large campaigns," Hurwitz explained. "You need quality product, and you need it consistently every month." The lack of that consistency is holding back some larger retailers from moving into the space, he suggested. While quality producers will move quickly to provide custom goods for their bigger, better-paying customers, he explained, those goods will get snapped up quickly, making it hard to keep pace with demand from all the interested companies. Shortages of what?Yet the shortage is not just in the number of diamonds, but in the number of scientists who can provide that consistency, Hurwitz observed. It's not simply a question of flipping a switch to produce more stones. "Not all lab-grown is created equal," he stated. "Those chambers that have the best technology are not coming out of the box. There's a tremendous shortage of knowledge right now, and this is not progressing as rapidly as the company line might suggest." Fellow panelist Nick Smart - commercial director at De Beers lab-grown brand Lightbox Jewelry - acknowledged the mismatch between supply and demand in the short term. But while it does take time to build supply, "there isn't really a barrier to how much you can produce," he retorted. Once you perfect the growing process, agreed Shah, it becomes about how fast you can expand your capacity to add more equipment. Already, technology has helped improve the stones' quality, Shah added. Whereas between 2016 and 2018, the conversation centered around I to K colors for lab-grown, stores today are looking to offer E to G. A bigger pieIn a startling revelation on his LinkedIn profile earlier this month, Shah pointed to a Kay Jewelers listing for a pair of 0.25-carat lab-grown earrings, with the footnote that "due to supply constraints, these earrings may include natural diamonds."He had argued in the webinar that mixing natural and lab-grown in jewelry was primarily a trade concern, whereas consumers had "absolutely no reservation" about putting a beautiful earth-mined diamond in the same piece as a lab-grown. That does challenge the trade to make the right disclosures so it can effectively communicate what it's selling to the consumer, Smart stressed in the webinar. The grading labs play a key role in the disclosure process, added panelist Avi Levy, president for North America at the International Gemological Institute (IGI). "Transparency, chain of custody, integrity and honesty [are as] critical in the lab-grown space as [they are] in the mined-diamond space," Hurwitz maintained. Nevertheless, the possibility of mixing suggests that the two products can, in fact, complement each other rather than cannibalize each other. The panelists noted that both the natural and synthetic diamond sectors had grown in 2021 and, in so doing, had expanded the overall jewelry market.Arguably, this year will be the real test of whether that dynamic is true or not, since 2021 was an outlier year in which most segments of the diamond jewelry market saw gains. Smart expressed confidence that the momentum could continue for both products, pointing to increasing evidence that the introduction of lab-grown was good for the industry because it increased the size of the entire fine-jewelry pie. He urged the industry to use lab-grown to reach new customers, rather than frame the market as one product versus the other. Hodgson echoed that message on the podcast; the research analyst emphasized the crucial role jewelers could play simply by choosing what narrative to offer consumers, especially heading into the holiday season. "The mistruths about the benefits of lab-grown need to be moderated.... The pure lies that a lot of retailers are willing to say about natural stones is a firsthand frustration for me," Hodgson asserted. "Lab-grown and natural diamonds need to be more harmonious together, because they both serve to grow the industry as a whole." This article first appeared in the October issue of the Rapaport Research Report. Subscribe here. Image: Illustration by Rapaport designer David Polak.