Retail Margins Could Be Boosting Man-made Diamond Sales

While lower prices as well as marketed ethical and sustainable benefits relative to that of natural diamonds has been the prominent narrative around man-made diamonds, a seemingly less-obvious factor is also likely helping to drive the product: the profit margin they offer retailers. 

When analysing the wholesale and retail prices of unbranded man-made and natural diamonds, it appears that the retail gross margin of man-made diamonds in popular carat-sizes is as much as 1.8-times that of natural diamonds (see below figures).

To further quantify this, for example, in some cases aretailer would theoretically only have to sell $5,000 worth of man-madediamonds to generate the same gross profit as selling almost $10,000 worth ofequivalent natural diamonds. Here, “gross margin” is considered to be aretailer’s top-line profit when selling a diamond, i.e. the sales pricerelative to the wholesale cost of the diamond. 

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This is important metric for a retailer selling bothman-made and natural diamonds because the theoretical high gross profit marginof man-made diamonds serves as an implied incentivize to prioritize sellingman-made diamonds over natural –as long as the profit margin differentialremains in place. Further, given that retailers are the direct point of contactbetween a consumer and a diamond, retailers may be more inclined to promote thebeneficial attributes of a man-made stone over a natural, thereby influencing acustomer’s longer-term perception of the products. 

Despite the significant growth in the availability ofman-made diamond jewelry in recent years, it is estimated that still only 1 in5 diamond retailers in the U.S. carry man-made diamonds; and outside of theU.S. the figure is even (much) smaller. Further, many of the jewelers and otherretailers that do carry man-made diamonds only have limited inventory ascustomer appetite for the product is tested. This has perhaps allowed the fewretailers that do carry man-made diamonds, especially those that are more fullystocked, to charge premiums. 

Further, given the relatively lower-production costs ofman-made diamonds compared to that of natural (especially notable in largercarat-sizes given that man-made diamonds are a manufactured good), it istheoretically more affordable for the supply chain to offer man-made diamondsto retailers on memo (i.e. consignment). With goods on consignment, retailerstypically have lower, or zero, inventory capital costs and can therefore bemore selective in offering discounts to the consumer, perhaps resulting in moreresilient profit margins. 

However, going forward, as the man-made diamond jewelrycomplex matures, as new producers and better production technology increasessupply and as more retailers compete downstream, especially those sellingunbranded goods, the product will likely become more commoditized. Resultantly,retail margins could erode and eventually fall to within that of naturaldiamonds or even lower.