Past and Future of the Gems and Jewellery Industry

Written By Vinit Jogani - Diatech AI

Exploring the State of the Natural Diamond Industry with Data

There is a cloud of uncertainty hovering in the Natural Diamond Industry, and numerous opinions are swirling about the state of the industry. Some argue that there's a palpable lack of demand, while others posit that the rise of lab-grown gems is cannibalizing the natural diamond market. This industry, like any other, lives on a plethora of perspectives, and the result is an aura of negativity that has enveloped it. However, as we delve into the data, we find that much of this prevailing pessimism lacks a solid foundation.

The truth is, there are pockets within the industry that have been facing significant challenges. But when we step back to examine the broader landscape, we find that a portion of this pessimism might be somewhat exaggerated. We invite you to be the judge as we present a comprehensive analysis, grounded in data and insights that will shed light on the true state of affairs.

A Story of Consumption

So, let's start by addressing the first question: Has jewellery demand overall indeed decreased, and if so, by how much? Furthermore, is this a permanent shift that the industry must adapt to? To answer these questions, we turn to data.

Let’s look at the real U.S. jewellery consumption figures, i.e. adjusted for inflation, spanning from 2017 to 2023. This data will help us shed light on the prevailing state of jewellery demand and the trends that have emerged. By exploring the figures, we aim to provide an understanding of the industry's current trajectory and its future prospects.

To truly understand the state of the Natural Diamond Industry, we first need to assess the overall health of the jewellery industry, so this first part of our analysis encompasses jewellery consumption, including non-diamond, and natural/lab-grown jewellery. This broader perspective allows us to set the stage for our in-depth examination of the natural diamond sector. When we compare the years 2017, 2018, and 2019 – the pre-pandemic era – with the present, we see a significant increase in jewellery consumption. Examining the annualized growth rate and the trajectory, we find ourselves either at or slightly above where we ideally should be.

In real dollar terms, the US jewellery consumption is up by ~12% compared to pre-pandemic levels. On the other hand, there is marked 7-8% drop in comparison to the peak in March 2022. This begs the question -- what's the ideal benchmark for our assessment? Should we consider March 2022 as the benchmark and think – well demand is surely hurt significantly, or should we use the pre-pandemic years, 2017-2019?

While the real consumption declined around 7-8% since March, there was only a 3% decline in nominal

terms (i.e. without adjusting for inflation). In fact, at a closer look on the correlation of nominal consumption with money supply, we quickly see why consumption increased so much in the first place.

This chart illustrates the significant rise in nominal U.S. jewellery consumption following the pandemic. It seems that contrary to popular theories of pent-up demand and lack of travel spend (which may all be small factors in the equation), much of the sudden and dramatic increase in consumption in 2021-22 can be attributed to the U.S. government infusing a substantial amount of money into the economy, which trickled down in form of greater consumption.

When looking through this lens, the eight percent decline since March 2022 can also be attributed to inflation finally catching up. We can observe this by examining the Consumer Price Index (CPI) over the same time frame. Inflation typically lags behind changes in the money supply by about six to eight months, and it dramatically increased close to the March 2022 peak. This led to rising interest rates, which stabilized money supply and subsequently restored demand to more realistic levels.

Sidenote: For those who wish to explore these indicators further, these and many other indicators are available on our free app and analytics platform at Diatech.ai It allows you to analyze how different attributes of the industry such as rough production, inflation, jewellery consumption, and import indexes, correlate with each other.

Certainly, rising interest rates to curb inflation have influenced consumers' spending habits. When prices rise rapidly and interest rates are high, people are less inclined to use debt and are more likely to save or invest. That said, all this has only undone an unrealistic euphoria. Demand had been increased artificially, and in absence of that stimulus, it has just went back to its previous state.

The peak in March 2022, therefore, was a unique and transient period, driven by a high money supply and low inflation, due to a systemic lag. By design, it was not going to last forever. All this to drive at the argument that March 2022 is a terrible benchmark! In contrast, looking at revenues of some of the largest jewelers like Signet, Richemont, Chow Tai Fook, Kering, Tanishq etc. – revenues are unequivocally up from pre-pandemic levels even though there may be an YoY decline due to these economic circumstances. Compared to a pre-pandemic level, jewellery demand overall is strong.

Further, while we talk about US, the demand in India, Middle East and certain ASEAN economies is growing materially. If and when China’s economy stabilizes and consumption rebounds, the overall demand for G&J should go up further.

The Lab-Grown Factor

To gain deeper insights into consumer behavior and dispel the notion of cannibalization within the diamond industry, let's explore the data on lab-growns.

To really understand consumer preferences and behavior, we first look at search traffic. The chart clearly does illustrate a significant uptick in search traffic related to lab-grown diamonds since 2017. There's been an exponential increase in recent years as more people are curious about these gems. However, it's essential to note that the overall search traffic for real diamonds remains substantially higher than that for lab-grown diamonds.

Moreover, while more people are showing interest in lab-grown diamonds due to their curiosity, this hasn't come at the expense of natural diamond searches. Over the past two decades, the search traffic for natural diamonds has remained relatively stable and consistent. In fact, it has seen a slight increase in recent years. Hence, the term "cannibalization" might be somewhat exaggerated. The evidence suggests that people remain just as charmed by natural diamonds.

Going a step further and analyzing the top search queries, we find that very few people are actively searching for lab-grown diamonds directly. Most of the top searches are generic in nature, such as "oval diamond engagement rings" or "halo diamond engagement rings." This indicates that people are more focused on generic searches. While there is interest in lab-grown diamonds, it hasn't reached a point where consumers are solely seeking them.

In fact, consumers seem more concerned about what celebrities like Jennifer Lawrence or Margot Robbie are wearing. This trend emphasizes the influence of celebrity endorsements in shaping consumer preferences. Therefore, it becomes evident that the story between natural and lab-grown diamonds has, to a significant extent, become a branding game. While LGD might have capitalized on this front with its sustainability and ethics claims in the short run, ongoing branding and differentiation are essential in this industry, as in any other.

And efforts are being made on that front. Recent efforts from industry bodies, like De Beers resuming its "Diamonds Are Forever" campaign and the Natural Diamond Council (NDC) onboarding more manufacturers to further increase investments in branding, indicate a concerted push to promote natural diamonds and distinguish their story from that of lab-grown diamonds. Various councils, associations, and stakeholders are invested in safeguarding the natural diamond industry's branding.

80% of all jewellery sales in branded jewellery. In essence, branding is pivotal in shaping people's opinions and preferences and that should not come as a surprise!

Market Values and Cannibalization

At this point, you might say hold on – didn’t LGD unit share grow to 50% in USA as per some articles and reports ?! That’s surely cannibalization, right?

Truth is that this number is widely misunderstood also.

Firstly, it represents a subset of independent jewellers and excludes big-box retailers and e-tailers which account for a significant chunk of demand. Secondly, the numbers simply don’t add up! Through trade statistics, we know that the value share of LGD sits at 23% at the retail level but the prices of, say, an average natural engagement ring vs a lab-grown engagement ring only differ by 30%. Running a simulation on the data suggests that at the jewellery level, unit share cannot go beyond 30%! Upon closer inspection, we find that this 50% number is only imputed at a loose level and represents the pipeline not the demand! This statistic continues to be a cause for a lot of pessimism.

On the other hand, using engagement rings as the average article and extrapolating based on the jewellery consumption statistics, we would find that even with this unit/value share, ND value sales are also up by at least 12% compared to pre-pandemic levels, and unit sales are up 3%. Again, while there is an YoY decline due to reasons stated earlier, this does not seem to suggest a permanent shift in consumer preferences! In fact, we estimate that LGD have grown the consumption in unit terms by over 45% since 2017! Such double-digit growth was never going to be realistic in ND and it suggests that for the most part, LGD has created brand new demand by appealing to a wider audience and those who could never afford a natural diamond.

To that end, even if LGD does one day grow to be 50% of unit share (if it isn’t already), it would be unfair to cry cannibalization because the evidence strongly suggests a growing market. Just for some context -- India’s cut & polished ND exports for 22-23 were $22B. LGD exports were not even $1.8B! At the moment, top 2% of the population accounts for 40% of all luxury spend. HNIs will buy natural diamonds for the same reason they buy original paintings, which are also equally indistinguishable from cheaper alternatives, whereas the LGD story is a lot more about accessibility.

Furthermore, despite higher margins, jewelers will have to sell 3-4x as many units to maintain similar income with LGD. Especially as LGD finds its way in the Walmarts and the Costcos, LGD may not provide long-term sustainability for traditional jewellers with high-overheads. Bridal jewellery accounts for 47% of all consumption in the US. Just because rings become cheaper, engagement rates are not going to rise dramatically. Thus, with finite demand, there are incentives for jewelers to resist LGD especially for bridal because limited market, falling prices, shrinking margins mean less value for everyone throughout the supply chain.

On the other hand, 46% of consumption is actually fashion jewellery where LGD can create massive value in fashion segment with increased applications through accessories, costumes, props, etc. This market can grow to be much bigger than it is today. With product differentiation allowing for better branding, and higher volumes at lower prices, this will likely grow to become the more sustainable fit for the LGD industry in the long run.

All this goes to say is there is less evidence that suggests cannibalization. While some consumers may surely switch, LGD is creating new demand and possibly appealing to a different audience. The ND story and its appeal to HNIs, who account for most luxury spend, is strong. Plus, retailers have vested interest to preserve ND to maintain bottom lines.

Price, Price, Price

If there is less evidence to suggest cannibalization, and overall jewellery demand is strong, why have ND prices dropped by over 35% in certain segments?

In considering the falling natural diamond prices, it is crucial to understand how these price dynamics unfolded. To begin with, even though diamond prices reached their peak in March 2022, the B2B diamond inventory continued to grow throughout the year. In value terms, the overall inventory expanded by more than 20%. This growth is particularly noticeable in the 1-4ct diamond size segment, which is a significant portion of the U.S. market. In this range, the overall value and number of carats increased by a substantial 45% in 2022. This growth in supply outpaced the growth in demand, which increased by only around 12%.

While inventory levels have seen a decrease of around 15% in value and 9% in carat terms in 2023, the 1-4ct range's inventory has only fallen by about 2-3% during this period despite a reduction in new supply. This indicates a supply glut that is putting constant pressure on prices.

LGD has also affected some segments more than others. In early 2021, 1-4ct stones accounted for approx. 57% of all certified stones sold. By mid 2023, this had grown to 66%. Lower value goods like dossiers & caraters with lower colors (JKLM) & clarities (Sis and below), are seeing a more permanent shift in demand with consumers preferring better LGDs as well as a sluggish China. Looking at the movement map below from Diatech Ai -- on average, better colors and clarities see faster movement. SI & lower i.e Pique goods are the worst hit, also seeing excessive memo returns as that shelf-space gets replaced by LGD.

This is reflected in the prices as well. Over the last month, IF-VVS goods have dropped around 5% in prices whereas SI goods have dropped as much as 14%.

Adapting to Market Dynamics

All that said, it's important to emphasize that the natural diamond industry is self-regulating. As pressure mounts on lower-color and clarity stones, mines specializing in these goods may shut down. Reducing supply should eventually stabilize prices, as the rough prices for these colors and clarities will become less feasible for miners to operate.

Nonetheless, it is essential to recognize that factors beyond lab-grown diamonds, such as economic conditions, also play a role in influencing diamond prices. The interplay of market dynamics, changing consumer preferences, and economic factors has resulted in the price shifts we've observed in the natural diamond industry.

The diamond industry is in a state of flux, influenced by a combination of factors such as economic conditions, interest rates, and changing consumer preferences. When evaluating the data, several key takeaways emerge:

Demand metrics and retailer revenue indicate that consumer preferences have not shifted dramatically away from jewellery despite the economic challenges.
Lab-grown diamonds have influenced consumer preferences, particularly in certain product categories (dossiers and caraters of lower colour and purity) and audience segments.
But largely Lab-grown diamonds has created and will continue to create new demand with the NEXT BILLION consumers. Lab-grown has increased the accessibility of jewellery and is a product for the mass fashion and gifting market unlike ND which is a luxury product.
In the last 2 years, de-leveraging has significantly impacted the ND industry, with a focus on reducing inventory and other liabilities.
For both, LGD and ND, the price decline is more of a supply-side story than a demand-side one, with a sharp increase in supply causing price pressure. This over supply scenario should ease in coming months and that will give support to the prices and the confidence can return back.
The industry's fundamentals remain strong, with significant growth expected from India, certain Middle East and ASEAN markets, and maybe Chinese demand resuming, but at the same time, the industry needs to adapt to changing conditions.

For more insights, write to md@diatech.ai