Lab-grown diamonds are the most exciting (and polarizing) thing to hit the jewelry business in recent years. Profit margins are great. Customers love the low-price points. They sell themselves (and they might be chipping away at the natural diamond industry’s market share).
I saw my first lab-grown diamonds 10 years ago. The diamonds were altogether unimpressive – smaller 0.50ct diamonds, with brown tints, and expensive. However, as in past technological innovations, the lab-grown diamond manufacturing techniques have improved. We have witnessed tremendous supply increases and quality improvements, and prices have also decreased significantly. D-VS diamonds are readily available and at affordable prices.
While the industry is riding the wave, it is important to think about 2 key questions:
Do you know what your best-selling diamonds are?
The jewelry industry relies on a “just-in-time”, short-term memo model. Retailers rely on trusted diamond dealers to augment their inventory and send memo diamonds. Consumers are understanding of this business model – because natural diamonds are far rarer and more expensive.
The memo paradigm does not work in lab-grown diamonds. Given the nature of growing, LGD are less expensive and more readily available. If you do not have the right mix of product, customers are far more likely to leave and purchase elsewhere.
Identify your best sellers. Monitor sales data and know what sells most in your store. This helps you merchandise accurately, avoiding products with low sell-through and focusing inventory dollars to popular products. This ensures higher revenue and profitability. Furthermore, identifying best-selling diamonds will help you tailor consumer-education and marketing efforts.
Here are a few trends from Q1 of 2023 to help you understand your inventory:
- 75% of sales are split between rounds and ovals
- 70% of sales are 1-2ct
- 75% of sales are D-G color
We all understand that LGD prices are falling, but do you know how this price change is impacting your business?
Retailers have grown to love the high margins of LGD, but you can achieve higher percentage profit margins but make less dollar profit.
Illustration:
50% margin on $2K (1.25ct D-VS1 GIA 3EX LGDR) = $1,000 gross profit
50% margin on $3K (1.25ct D-VS1 GIA 3EX LGDR in 2022) = $1,500 gross profit
20% margin on $10K (1.25ct G-SI1 GIA 3EX Natural Diamond) = $2,000 gross profit
In the above illustration, the natural diamond produces a great profit despite the lower profit margin; because the ticket price is higher, the gross profit is higher.
The author cedes that LGD offer higher margins, but your gross profit dollars will continue to decrease as LGD prices decline.
Are you watching your average ticket price for your bridal sales? Believe it or not: you can sell more units at higher margin and make less money.
Our industry continues is evolving, and lab-grown diamonds are here to stay. As merchants, we need to ensure our profitability. Start thinking about your business strategically today to ensure you adapt to the times.