The mined-diamond industry is mightily concerned that the rapidly growing man-made diamond industry is on a course to disrupt their business. At least that is the conclusion I draw from the Diamond Producers Association’s new marketing campaign “Real Is Rare.” The DPA was organized in May 2015 by seven of the world’s leading diamond companies. Its new marketing efforts are backed up by a study conducted by KRC Research entitled What Women Really Want among 1,000 millennial-aged women (18-35 years).
The research conclusions, according to Deborah Marquardt, DPA’s chief marketing officer, are: “When evaluating luxury purchases, they seek items that are genuine, unique…not mass-produced, and have inherent meaning and value.” Authenticity is the key value these women identified when considering luxury purchases, such as diamonds, with nearly 9 in 10 (89%) agreeing with the statement “When treating myself to a luxury item, I look for authenticity.”
The research also delved into millennial women’s attitudes and purchase plans for diamond jewelry; however, what they didn’t report is how these women feel about cultivated, man-made diamonds as compared with natural, mined ones. They didn’t ask whether cultivated diamonds, which are “real” diamonds in their chemical and physical composition and indistinguishable from the mined version only with the aid of laboratory equipment, not the naked eye or a jeweler’s loupe, are an acceptable substitute for the mined version, especially considering man-made diamonds cost less.
The natural-diamond industry is doubling down on the potential disruptive threat from the man-made alternative with the Federal Trade Commission as well. Currently, the commission is considering letting the term “cultured” be added to these currently accepted descriptions of man-made versions, such as “lab-created,” or “laboratory grown.” The mined-diamond industry is fighting this addition tooth and nail, while the man-made producers are intent upon dropping any reference to “laboratory created” or “laboratory grown” in favor of “cultured” alone.
As for me, I prefer the term “cultivated” as in grown from a seed, rather than “cultured” which, though better than lab-grown to my mind, is more appropriate for pearls than the process of growing a diamond in the factory. Ultimately the decision is in the hands of the regulators.
But no matter what we call them, I reached across the aisles to those in both the mined-diamond and cultivated- diamond camps to assess the potential disruption to the $80 billion global diamond-mining industry that the man-made, cultivated diamonds represent.
Tradition favors natural diamonds, but is there really a diamond tradition?
Those inside the established mined-diamond industry cling to the tradition of diamond gemstones. “Across cultures and demographics, humans want to own and hold small, precious gems in their hands,” said Eric Mor, of Abe Mor Diamonds. “The distinct value and exclusivity of natural diamonds will shine through in the long run.”
And Thomas Gelb, a gemologist with Diamond Asset Advisors said, “Natural diamonds are billion-year old precious gems which have inherent and symbolic value. As undifferentiated industrial products, synthetic diamonds will never catch consumers’ imagination in the same way.”
Overwhelmingly, the establishment insiders hold natural diamonds as the ultimate expression of love and the preferred stone for an engagement ring. “A natural diamond is always going to be more valuable than a cultivated diamond,” said Anne Chertoff, trends expert with WeddingWire.
Sonia Esther Soltani, editor of the Rapaport Magazine, a leading trade journal for the diamond industry, said, “Cultivated diamonds have a very interesting industrial and scientific story to tell, but how can this compete with the intrinsic mystique of natural diamonds? It’s easy to argue they have the same chemical composition, but who is buying a chemical formula as a symbol of love or status? When it comes to the most important diamond purchase of a lifetime, the engagement ring, a natural diamond has magical allure.”
But that is just it. The tradition of a diamond as a symbol of love is a man-made, not a natural one. “Diamonds are valuable because people believe they’re valuable,” said Ira Weissman, Diamond Pros.
“Until De Beers began their famous marketing campaign of the 1940s, diamonds weren’t really all that special. De Beers at that time began to convince everyone that ‘Diamonds are Forever.’ This means that diamonds are both a symbol of everlasting love and a permanent store of value. So people began to buy them believing that they were worth something, and they’re still in demand for the same reasons. People believe that the supply is limited. Their prices have also risen more or less consistently over the last 70 years. So the historical facts pretty much bear witness to the myth that was created,” Weissman explained.
Marketing made diamonds what they are today. “The reason Americans buy diamonds for engagement rings and believe them to be valuable is because of marketing done by De Beers. It is not an ancient tradition. So De Beers has pushed the natural unique characteristics of a diamond shaped by the earth, but again it’s all marketing,” said Scott Selby, a trademark attorney who wrote his master’s thesis on marketing of man-made versus mined diamonds and is author of Flawless: Inside the Largest Diamond Heist in History.
Or as Rohin Dhar, CEO of Priceonomics, bluntly wrote in the Huffington Post article, “Diamonds Are Bulls**t:” “Not only is the demand for diamonds a marketing invention, but diamonds aren’t actually that rare. Only by carefully restricting the supply has De Beers kept the price of a diamond high.”
What’s the value? How much does it cost?
Warren Buffett famously said, “Price is what you pay, value is what you get.” The established-diamond industry is banking on consumers valuing natural diamonds more, while the cultured-diamond marketers are intent on price as their competitive edge. Given my research with consumers and what we are seeing in the retail market overall, price is a key driver for purchase decisions, and interestingly even more of a factor among affluents who can afford to pay higher prices. After all, they didn’t get wealthy by spending as much as they can.
Further confirmation of the outsized influence price plays in consumers’ purchase decisions comes from Stax Inc., a global strategy consultancy. The firm conducted a big-data analysis of over 40,000 survey respondents and found “Price remains the main decision driver with 50% of consumers acknowledging it as one of their top three considerations.”
To date, the real price advantage of cultivated diamonds has yet to be realized, but it is coming and I suspect it will have a profound downward pull on the prices that the natural-diamond marketers can command. “Lab-made diamonds are the result of a technological process which means their prices will drop like any other technological innovation, an effect described by Moore’s Law. Our team predicts that as the prevalence of lab-created options increases in the market, their wholesale rates could drop 20-40% – due primarily to the prospect of unlimited supply and increasingly lower production costs,” explained Punit Shah, chief marketing officer at MyTrioRings.com.
The economic principles of price elasticity tied to supply and demand mean that the prices for the two diamond alternatives will forever be linked, as Weissman said “If there’s one thing everyone can agree on, it’s that lab created diamonds draw their value from the (at least perceived) value of natural diamonds, i.e. if there was no market for natural diamonds, nobody would be trying to sell lab-created ones.”
While mined-diamond insiders believe that their diamonds have an intrinsic value, others, like Dhar, dispute that. “A diamond is a depreciating asset masquerading as an investment. The market for them is neither liquid nor are they fungible.” Or in layman’s terms, “With the exception of large, high-quality, fancy-colored diamonds, almost all diamonds have terrible value in the resale market,” said Selby.
What marketing gives, marketing can also take away
In the end, its marketing that is going to make or break the cultivated-diamond industry’s potential to disrupt the natural diamond market. If cultivated diamonds can get the marketing proposition right, e.g. “real” diamond for an “unreal” price, the natural-diamond industry could be on its heels.
Naturally, the mined-diamond industry is fighting back with “Real Is Rare” and implicitly positioning its goods as the authentic luxury alternative to made-man, laboratory-produced diamonds. Yet the higher the natural-diamond industry moves its prices to take advantage of the “Veblen pricing effect,” specifically that for luxury goods as prices rise so seemingly does demand, the more attractive the cultivated-diamond alternative will look to many consumers. Furthermore the cultivated-diamond producers will be able to command higher prices too, all the while keeping the price to the consumer under that of natural diamonds.
To my dismay as a free-market capitalist, the regulators in Washington may determine the future for the cultivated diamond upstarts. It’s likely to all come down to a battle over words: cultured vs. man-made, cultivated vs. laboratory-grown.
In marketing, perception is reality. The future potential for cultivated diamonds will largely depend on what the FTC allows them to be called. “If you call such a diamond ‘synthetic’ almost no one will buy it. If you call it ‘cultured,’ some will buy it. But, as it is a diamond, it doesn’t need a modifier, and is simply a ‘diamond,’ then it will destroy the mined-diamond market as we know it,” Selby predicts.
On the other hand, I see the potential for the cultivated-diamond industry to use marketing to infuse a cool factor into having and owning one of these gems. We live in a high-tech world. A machine-made diamond is the space-age alternative for an instant-gratification culture. Cool! And with celebrities like Leonardo DiCaprio getting behind the industry with his investment in the Diamond Foundry, they become even cooler.
One company, R.A. Riam Group, is playing on both sides of the aisle. The Riam Group is a century-old, mined- diamond house that has also launched ALTR Created Diamonds. Headed by Amish Shah, a third-generation diamond manufacturer, he clearly sees the opportunity in cultivated diamonds and the disruption that is coming to the established natural-diamond industry. He notes that the best cultivated diamonds have all the key characteristics that consumers look for when buying a diamond, e.g. size, brilliance and impact, but at a reduced price.
“The introduction of hot-forged jewelry-grade diamonds, identical to those the earth takes eons to mete out, has sweeping implications for the $80 billion industry that has relied on the perceived scarcity of mined diamonds to drive up value,” he concludes. “Sales of lab-created diamonds, now estimated at $150 million, are expected to increase to $1 billion by 2020 and outpace mined diamonds, which have been in decline.”