Lab Test

When Richard Kessler decided to sell laboratory-grown diamonds in his seven Kesslers Diamonds stores in Wisconsin and Michigan a couple of years ago, he jumped into the market with both feet. “We don’t do anything halfway,” he says. “We brought in a nice selection, trained our people how to explain the process and how they are the same as mined diamonds and how they are different.”hen richard kessler decided to sell laboratory-grown diamonds in his seven Kesslers Diamonds stores in Wisconsin and Michigan a couple of years ago, he jumped into the market with both feet. “We don’t do anything halfway,” he says. “We brought in a nice selection, trained our people how to explain the process and how they are the same as mined diamonds and how they are different.”

Within a month, Kesslers Newborn Created Diamonds outsold the company’s signature Kessler 81 diamond that debuted in 2005.

Now Kesslers cuts its Newborn Created Diamonds into the Kessler 81 faceting pattern, and three out of four customers choose the created version. “It’s amazing, absolutely amazing,” Kessler says. “We’re selling the living daylights out of these things and our competitors are telling everyone ‘You don’t want these ‘fake diamonds.’ The fact is they are taking hold.”
When De Beers announced on the eve of the JCK Las Vegas show in May that it would enter the laboratory-grown diamond market in September with Lightbox Jewelry — ungraded laboratory-grown diamonds set in 10K gold and sterling silver earrings and pendants — Kessler says many of his peers panicked, fearing prices on laboratory-grown center stones would plummet.

De Beers said it will sell its Lightbox diamonds by weight alone at $800 per carat, significantly lower than current market prices, which are generally about 30 percent below natural diamond prices. De Beers will market the line as a sparkly, stylish accessory that can complement an outfit, not a serious piece of jewelry to commemorate a momentous occasion.
“The guys I hang with were beside themselves,” Kessler says. “I wanted to take a wait-and-see attitude. But I don’t think De Beers is making a good business decision, and I think it’s a lose-lose for them. It can hurt the laboratory-grown diamond manufacturers, but it’s going to hurt De Beers at the same time on the mined diamond side. There’s little doubt that the price will come down. We’ve already seen some pressure. Prices were based on a percentage below mined diamonds. And mined diamonds have come down.”

These risks, however, are part of the business, he says. “We have the same business risk with the price of gold or platinum nose-diving,” Kessler says.

Kessler says he’s able to reassure customers that whatever they buy will retain its value, at least in his store. His 100 percent trade-in policy might be crazy, he says, but it offers clients the confidence they crave. “So if the created diamond industry crashed to the ground tomorrow and consumers come in and say, ‘This thing is worthless,’ I can say, ‘No it’s not; you can trade that in for $3,000 and not pay an extra penny.’”

DEFINING DIAMONDS

Debbie Azar, president of GSI, which grades laboratory-grown diamonds, says despite the flurry of recent news coverage sparked by De Beers’ announcement, consumers remain confused about what laboratory-grown diamonds are and are not. “To clarify, laboratory-grown diamonds are not simulants (like CZ, moissanite, etc.). Laboratory-grown diamonds are, indeed, diamonds that share the same physical and chemical properties as natural diamonds.”

Azar says both natural and laboratory-grown diamonds should carry grading reports from reputable gemological institutions in order to provide the consumer with the trust and confidence that their diamond is “what we say it is.” On July 24, the Federal Trade Commission’s jewelry guidelines were revised to include laboratory-grown diamonds in the commission’s definition of diamonds.

The FTC’s previous definition of a diamond was: “A natural mineral consisting essentially of pure carbon crystallized in the isometric system.” The new listing does not include the word “natural.” “When the commission first used this definition in 1956, there was only one type of diamond product on the market — natural stones mined from the earth,” the FTC said. “Since then, technological advances have made it possible to create diamonds in a laboratory. These stones have essentially the same optical, physical and chemical properties as mined diamonds. Thus, they are diamonds.”

Despite the groundbreaking feel of this announcement, not much has changed in how laboratory-grown diamonds can be marketed to the consumer, says Tiffany Stevens, president of the Jewelers Vigilance Committee. Marketers still cannot call a laboratory-grown diamond a “diamond” without a qualifier — laboratory created, laboratory grown or (manufacturer name)-created. The term “cultured” can be used, but only in conjunction with another approved description. The FTC removed “synthetic” from the recommended language, and while it still can be used, it should not be used by a competitor to disparage another seller’s laboratory-grown products.

The FTC has also specified that the words “real,” “natural” or “precious” cannot be used in laboratory-grown diamond marketing.

If the conversation turns to green issues, caution is required there, too. You can’t just claim that laboratory-grown is the green option. The FTC green guides inform how these conversations should be conducted. “It has to be green or not; it can’t just be greener than someone else,” Stevens says.

But Jean-Marc Lieberherr, CEO of the Diamond Producers Association, says the new FTC Guides fail to provide the clarity needed to avoid more consumer confusion and deception, instead introducing unnecessary ambiguity.

Lieberherr says the DPA appreciates that the FTC still requires marketers of man-made stones to differentiate their product from natural diamonds. But Lieberherr expressed “deep concern” that the FTC has approved the qualified use of the term “cultured diamonds.” He says the majority of consumers mistakenly interpret “cultured” as a description used for natural diamonds. Lieberherr expressed surprise, too, by the wide use of the expression “mined diamonds” throughout the FTC Guides in lieu of “natural diamond.” Lieberherr says that “mined diamonds refers to an extraction process and not to a creation process, and the vast majority of the world’s diamonds will never be mined, making this an incorrect qualification.”

INTRODUCING LIGHTBOX 

Steve Coe, general manager of Lightbox, says De Beers recognizes laboratory-grown diamonds aren’t going away. “You can’t put it back in the box,” Coe says. So, De Beers took a pragmatic approach and developed a line of jewelry based on the company’s consumer research.

That research confirmed that consumers confuse laboratory-grown diamonds with simulants. Once they do know what they are and how they are made, they like them, but prefer them for “lesser” gift-giving occasions, such as a Sweet 16 birthday, for self-purchase and for travel jewelry. But, according to the research, consumers still express a strong preference for natural diamonds for important occasions. “The other thing we heard was that consumers expected it to be a significantly lower price than natural diamonds,” says Coe. They decided to offer jewelry in the $200 to $1,000 range with laboratory grown diamonds in three colors: white, blue and pink.

Beyond whatever effects it may or may not have on the market, Lightbox is “absolutely” expected to make a profit. Coe says De Beers has a huge advantage because its division, Element Six, has been manufacturing diamonds for more than 50 years for industrial applications and has invested more than $100 million in research and development, which has led to advanced technology and capacity, allowing them to produce high quality laboratory-grown diamonds relatively inexpensively.
 “My personal view is that’s where laboratory-grown diamonds would have ended up in a few years’ time, so we’re just doing it now instead of later,” Coe says. “To be honest, this is like any manufacturing technology,” Coe says, citing the trajectory in the sales price of flat-screen TVs. “As technology improves and volume increases, prices always come down.”

Lightbox will initially be sold online, beginning in September. “Once we’ve got that up and running, we will have discussions with retailers about selling it,” Coe says. In the future, Lightbox plans to introduce other shades of blue and pink, and is experimenting with yellow, green and violet, which could be available within a few years. They’re also investing in a new manufacturing plant outside of Portland, OR, intended to significantly increase the volume of product they can supply by 2020.

Suraj Mehta, director of Pure Grown Diamonds, a laboratory-grown diamond manufacturer, says De Beers’ announcement has not affected his pricing as business continues to grow unabated, particularly in bridal. “Ultimately,” he says, “retailers are realizing that it is a choice that consumers would like to have.”

Mehta disagrees with De Beers about the value proposition. “It’s extremely difficult to grow diamonds,” Mehta says. “When the consumer is shown the growing process and it’s explained that each diamond is unique and some diamonds are great and some are not great, it really fascinates them.”

Amish Shah, founder and president of ALTR Created Diamonds, says education is at the core of his product, and he produced a documentary film that retailers can use to demonstrate how created diamonds are grown. “We want to help the retailers’ associates understand that they ARE diamonds. Ones grown above the earth.”

Laboratory-grown companies provide grading reports, but De Beers has said it will not. Lightbox will be priced by weight alone. Coe says DeBeers sees no need to grade them, because once they pass the quality threshold the company has established, they are all nominally of the same “high” quality. “We just took the view that this is a manufactured product and one of the advantages is it’s pretty consistent,” Coe says. “With mined diamonds you get a huge range of quality.” Each will be inscribed with the Lightbox logo beneath the surface, inside the stone.

Edahn Golan, an independent analyst who specializes in the economy of the global diamond industry, says De Beers won’t grade laboratory-grown diamonds because it wants to completely kill diamond terminology in relation to laboratory-grown diamonds. But Golan, who has seen the product, agrees that it’s consistently clean with a great color.

Mehta says transparency offered by grading is very important to the consumer. “They’re not all alike,” he says. “They do come in all colors and qualities.”

Robert Smith of EM Smith Jewelers in Chillicothe, OH, says De Beers has a history of taking a sledgehammer to their competition. “I’m good friends with several growers, and I don’t think they’re going to stand idly by and let De Beers destroy their businesses. If they start a war, it could get really ugly and everybody’s going to lose.” “I think their aim is clearly to drive the growers out of business and then control the laboratory-grown market themselves; a strategy they have used often in the past. The control that De Beers has had over the diamond market has been a huge benefit to jewelry retailers for generations, but their hostile approach to this new challenge may be the death knell for the diamond business as we know it.”Golan suggests De Beers has proved diamonds can be grown less expensively and that U.S. retailers would be wise to demand lower prices from their own vendors. In effect, Golan says, De Beers entered the market to drive down the price and take on the growers who have made laboratory-grown an increasingly important category in the diamond bridal business. “Basically, they disrupted the disrupters,” he says. “That describes their whole strategy.”They are betting that strategy will completely change the game, he says. Golan believes De Beers will win that bet.

MILLENNIAL APPEAL: PRICE, SIZE & TECHNOLOGY

Meanwhile, despite De Beers’ effort to disconnect laboratory-grown diamonds from the ideas of rarity, romance and permanence, retailers and other experts report that those often-unpredictable millennials continue to be intrigued with laboratory-grown center stones for engagement rings. Anecdotally, they’re buying them in droves. Says Shah of ALTR Created Diamonds: “She wants the largest and most brilliant diamond he can afford. We are telling her she doesn’t have to compromise.”Pat Henneberry, “The Jewelry Coach” and vice president of Global Training and Development for Hearts on Fire, says friends of her 27-year-old nephew often call her and ask about laboratory-grown diamonds. But she tries to redirect them. “I tell them that I think laboratory-grown is not what you want to be part of your bridal story. What I hate to see is when a customer comes in, and if their first question is ‘What do you think about laboratory-grown?’, immediately a sales associate walks them over to the laboratory-grown counter, even if they also sell natural. Let’s at least walk over to the natural counter first!”

David Brown, president of the Edge Retail Academy, says many a millennial prefers putting money toward a house and an exotic honeymoon rather than a traditional ring. “They’ll do their research online, and when they decide there’s nothing much wrong with laboratory-grown diamonds, they may go that route, as long as it’s being sold by a merchant who can demonstrate the value and show the trust and give them a quality product they can stand by.”

British jewelry designer and retailer Stephen Webster has found that young buyers are often attracted to the technology and modernity of laboratory-grown diamonds. Webster partnered with Swarovski to create a line of jewelry using laboratory-grown diamonds. “Because it’s Swarovski, who don’t mine things anyway, it certainly makes sense,” Webster says. “I have no problem with it as long as it’s defined. It’s very much like fur and synthetic fur. If you’re into fur, you’re not going to be into synthetic fur. But somebody who’s new to jewelry might be attracted to laboratory-grown diamonds.”

As Don Palmieri of GCAL Laboratories puts it, “the younger generation” is not afraid of the terminology “laboratory-grown” because they were raised with technology. “It’s not a negative to them,” Palmieri says.

Timothy Andre of Emma Parker, a retailer with a showroom near Seattle and a primarily e-commerce customer base, says millennials look at laboratory-grown as a solution. They’re in a tight spot if they want to get engaged and also buy a house, which in Seattle means an investment of at least half a million dollars. “Couples come to us, average age 28 or 30, and maybe finally they have a good job and even though they’re both making $90,000 or even $100,000, they’re staring at a tract house for $675,000. There is no point in paying for a natural diamond in this situation, like none at all.”“I’m super-practical,” he says. “If customers are open to laboratory-grown, we show them a 1-carat lab grown, a 1-carat Amora simulant and a 1-carat natural diamond and we’ll just let them pick.”So, in his world, laboratory-grown and other non-traditional centers make up an average of 35 to 40 percent of sales. When it comes to the value question, Andre is blunt. “I tell them if they’re investing in diamonds at all, they should go in another direction. Diamonds (mined or laboratory-grown) are a terrible investment.”

VIABLE OPTION OR LAST RESORT?

Retailers who have gone the laboratory-grown route and are able to explain it well to customers say they find little resistance.Jonathan McCoy of McCoy Jeweler in Dubuque, IA, realized the potential four years ago when he picked up half a dozen and they flew out the door. So far this year, 84 percent of center stones sold at McCoy are laboratory-grown. “We discuss the rarity of mined diamonds and lack of history of lab,” McCoy says. “Our whole presentation is offering options and showing stones next to each other.”

Brian Rouse, owner of Bay Area Diamond Co., Green Bay, WI, likes to use the term “above ground” diamonds, believing the term laboratory-grown is a little negative. “We want to have everything in the store that the market has to offer and let the customer decide. They look identical. And so, 90 percent of the time, clients pick the laboratory-grown diamond.”

Richard Bennett, owner of PK Bennett Jewelers in Mundelein, IL, says his first laboratory-grown sale was accidental. A couple came in looking for a diamond upgrade to a 2-carat or larger. “When we talked price, it was going to be hard to meet without going down in quality.” While he was searching, a laboratory-grown diamond dealer dropped in. “I asked him if he had a 2-carat radiant and he did, and it was very close to what these people were looking for and within their budget. The whole laboratory-grown thing, that didn’t matter to them at all. It was the beauty of the stone.”

Joseph Villarreal, owner of Villarreal, Designers of Exquisite Jewelry in Austin, TX, mentions the option of laboratory-grown only “as a last resort.” He doesn’t believe they’ll hold their value and he finds it unsettling that wholesale prices can vary widely. “I love the margin,” he says. “However, when I’m asked about the future value, I simply tell them I do not have a crystal ball.”

This article originally appeared in the September 2018 edition of INSTORE.