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Commentary: The Business

Lab-Grown Diamonds Have an Impact on Profit

Retailers are beginning to shift focus back to natural diamonds as a result.

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THE CONTINUED DECLINES in lab-grown diamond prices are having a negative impact on net profit for retailers. Lab-grown diamonds have taken market share from natural diamonds over the past six years, in many stores exceeding the number of natural diamonds sold. However, with the decline in lab-grown prices, top-line sales revenue in the loose diamond category is falling, as is the average selling price and gross profit dollars per transaction. The recent collapse of wholesale prices is accelerating this trend. The first report shows the results on both sales revenue and gross profit dollars when roughly half of loose diamond sales are from lab-grown diamonds.

This first report represents only 50 companies (roughly 100 doors) that are members of our Plexus Performance Groups. I’m using this specific data since all categories are normalized for these stores regardless of which POS system they have and what categories they use.

Of the 9,783 loose diamonds sold over the 12-month period ending May 10, a bit more than half of the units were lab-grown. Those 4,963 lab-grown diamonds sold for one-third the price of natural diamonds. Note the differences in gross profit percentages: 62% for lab-grown and 39% for natural diamonds. While many celebrate the gross profit achieved from lab-grown diamonds, the more important number is gross profit dollars per diamond sold, which is $3,522 for natural and $1,892 for lab-grown.

Lab-Grown Diamonds Have an Impact on Profit

The selling price and unit trends over the past several years are in the next report. This is from a single Plexus group (representing approximately 20 doors) showing results for the first eight months of each year, trended over a three-year period, but the results are similar across all retailers. Both natural and lab-grown average retail prices are declining as of May when compared to previous years. The average sale for a lab-grown diamond in 2021 was $4,735, dropping to $3,836 by August 2023, but as of May 2024, the average sale was $3,044, a 21% drop in one year and a 36% drop per sale since 2021. The average cost was $2,463 in 2021 and $1,602 in 2023, but it dropped to $1,153 in May 2024, a 53% decline in cost of goods sold since 2021.

Lab-Grown Diamonds Have an Impact on Profit

One of the arguments in support of selling lab-grown diamonds over natural is the idea that more people will buy diamonds since they are more affordable. Notice the total number of diamonds sold by category since 2021. The same group of jewelers is selling nearly identical numbers of loose diamonds, but the ratio of natural to lab-grown has flipped.

Lab-Grown Diamonds Have an Impact on Profit

Retailers who have been paying attention to declines in their average sale and gross profit dollars over the past year have begun switching back to encouraging natural diamonds over lab-grown. The declines in gross profit dollars don’t just impact stores, but staff as well. Sales associates compensated based on gross profit dollars would need to double their unit sales to make the same commission.

Lab-Grown Diamonds Have an Impact on Profit

The gross profit dollars per natural diamond sold have declined slightly from 2023 but not nearly as much as lab-grown diamonds. The lower end of the natural diamond market appears to be going to lab-grown diamonds, leaving higher ticket sales to natural diamonds. Meaning, the more lab-grown diamonds that are sold, the lower total sales will be for the overall diamond category, as well as lower gross profit.

The significant reduction in the costs of, and profit from, lab-grown diamonds should be considered when making marketing, merchandising and financial plans going forward. The mix of natural versus lab-grown, markups and gross profit per item sold may need to be adjusted to achieve net profit goals.

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