In a recent article published on his website, diamond analyst Paul Zimnisky claims that the sales of lab-grown diamonds (LGDs) are helped by not only lower prices and marketed ethical and sustainable benefits, but also by another – often overlooked – factor: The retail gross margin of LGDs; by gross margin, Zimnisky refers to the retailer’s top-line profit when selling a diamond (the sales price relative to the wholesale cost of the diamond).
Comparing Margins of LGDs and Natural Diamonds
According to Zimnisky, who compared popular carat-sizes of wholesale and retail prices of both LGDs and natural diamonds, the retail gross margin of LGDs in these categories “is as much as 1.8-times that of natural diamonds”. In some cases, he says, “a retailer would theoretically only have to sell $5,000 worth of man-made diamonds to generate the same gross profit as selling almost $10,000 worth of equivalent natural diamonds”.
This, he says, is important for retailers selling both types of stones, since the retailer may be more incentivized to sell LGDs over natural diamonds.
That being said, Zimnisky emphasizes that despite the growing availability of lab-grown jewellery in recent years, it is still estimated that only 1 in 5 diamond retailers in the US carry lab-grown diamonds. Outside the US, that number is even smaller. In addition, the inventory offered to customers is still limited. This, he says, “has perhaps allowed the few retailers that do carry man-made diamonds [LGDs], especially those that are more fully stocked, to charge premiums”.
Another factor working in favor of LGDs is their lower-production costs, especially in the case of larger carat-sizes stones. This, Zimnisky says, makes it “theoretically more affordable for the supply chain to offer man-made diamonds to retailers […] on consignment”. Because goods on consignment carry lower, or zero, inventory capital costs, retailers can “be more selective in offering discounts to the consumer, perhaps resulting in more resilient profit margins”.
Zimnisky concludes by saying that as lab-grown diamond jewellery evolves, with new producers and better production technology, “the product will likely become more commoditized”. As a result, “retail margins could erode and eventually fall to within that of natural diamonds or even lower”.
