Tuesday, May 26, 2015

The Top 10 issues for 2015 - #1: The Three Tipping Points of Man-made Diamonds

First off, my apologies to readers of this blog, for not having written for a while.  No, I have not disappeared, just had a busy time for a few months.  But here we are running into the Summer trade shows, so it's time to offer some perspectives!

In thinking over the cross-currents pummeling our business these days, I realize that we are but one cork bobbing around in heavy seas.  True, we have issues that are peculiar to the business, but economic, technological and political upheavals occurring world-wide are also making it very difficult to get clarity on where we might be heading.

Still, some developments warrant a close look, even if the effects will not be fully felt for a few years.  One that I have written about before is the rise of man-made diamonds (MMD's) in the trade.  In my view, there will be three moments in time when MMD's will reach tipping points, moments when their presence in the marketplace will force us to adapt.  I'll cover tipping point #1 here, and write of the other two in future blogs.

First, some indisputable facts about where we are today.  Production of MMD's continues to ramp up.  I have long stated that a good percentage of the consuming public will have no problem in buying MMD's, and that appears to be proving true.  Retailers today are beginning to use MMD's as alternative lower-priced "diamonds."  The machinery is improving, and the cost of equipment is declining.  It now only takes about 18 months or less to fully amortize the cost of a machine.  (I am talking about the CVD process, but it applies to HPHT as well.)  And we can only expect costs to decline even further.

At the present cost differential between naturals and MMD's, which can be 30-40%, retailers can hit much more attractive price points while improving margin.  (Never mind using SI or VS quality instead of I2 or I3.)  That alone will become a bigger and bigger factor, especially for so many retailers that are located in areas that have not seen real improvement in the economy.  As we know, the US economy is showing slow but steady growth, but that is not true everywhere.  Retail sales in general have seen declines for the last six months.

That is only one side of the situation.  Two other factors are at work that retailers are watching; diamond producers (De Beers and others) are pushing to raise prices as high as possible; and recycling is offering retailers the ability to acquire diamonds well below wholesale prices.   

So what will be tipping point number 1?  Independent retailers will be the first channel of traditional jewelers to expand merchandising of MMD's.  (Other non-traditional channels, such as apparel, resort, accessory, gift, etc., will also readily get into MMD's, as they do not have the same stake in the diamond business as do traditional stores.)  Major chains will hold back, understandably, as they are unsure of the effect MMD's will have on the viability of millions of dollars of inventory in natural diamonds.

But at some point, it will be obvious to everyone that a significant piece of business, one with higher margins, is being pulled away from core jewelry retailers, and they will be forced to make a change.  How, and when, is a different question.  It will not be tomorrow, but when it happens, it will be sudden and broad, as no chain in the mass market will want to be left behind.  My guess is that the first one to jump will do so in order to obtain first mover advantage over the competition.

This will be the moment when MMD's will attain credibility and market acceptance.  To some degree the change will be forced, as production of naturals will continue to decline steadily; as marketing of MMD's as non-abuse products will take stronger hold; and as the price differential grows larger and larger.

The context here is important.  The impact on engagement rings of, say, one carat and larger will be less affected - though I recently saw a new program of engagement rings with MMD centers that was excellent.  The major effect will be in body jewelry, an area that is giving many retailers problems. 

We will then see tipping point #2.  That's for next time.