WOTS #13

In mid-2023, India's Hon'ble PM Narendra Modi gifted a 7.5 carat lab-grown diamond ("LGD") to US First Lady Jill Biden. Since then, millennials and celebrities alike have taken to this trend - popularizing and legitimizing wearing LGDs without the fear of feeling cheap or worse. Reports claim that LGDs are already at ~20% market share and growing much faster than the overall market.

Multiple articles have been written on the portfolio management of the Indian home-maker and how her gold jewelry has been the source of tremendous wealth creation and safety net across society, compounding at ~13%/ 11x over the last 20 years (Rs 5850/10g in 2004 to Rs 64,000 today).

However, if we try to see the same chart for natural / earth-mined diamonds - it is nowhere to be found (the only established publisher of price is Rapaport which is a subscribed service that 99% of end-users have no clue about). In fact, the prices of earth-mined diamonds are so opaque that for the customer it is unclear what exactly is the materials cost and the making charge of the product. Over time, it is starting to become clear to the public at large that the shine of such diamonds is unlikely to extend to their portfolios - and it is highly unlikely to generate any form of price appreciation (much less a manifold return)

In the absence of any investment property in the product, the availability of LGDs at ~10% of the price of earth-mined diamonds has changed the game :

• But for the trained eye, it is impossible to differentiate between earth-mined and lab-grown diamonds when worn - draining the social/ snob value from the purchase. Chanel and Hermes bags are valued because of the incredible social status they indicate which is visible clearly and with IP around copies enforced diligently
• Given the rise of multiple startups (Avtaara, Lime Light, Jewel Box, Moissani, Brilliant Earth, Fiona to name a few) in the LGD space, supply of the product is abundant (unlike earth-mined diamonds where supply is largely controlled by DeBeers). Given the supply and no differentiation within the suppliers themselves so far, it stands to reason therefore that margins should trend away from luxury (~25-30%) to nominal (~10%)

Over the last couple of years, multiple jewelry companies have listed on the markets tapping on the success of Titan/ Tanishq and have had a dream-run. While gold forms the base of their business, earth-mined diamonds can constitute ~10% of revenue but ~25-30% of profits (given higher margins due to price opacity).

Because companies don't disclose segment-wise numbers, we cannot empirically ascertain whether growth and profitability in the diamond-space has already started to decline - but we can surmise that historical trend is unlikely to continue in the future.

Similar to how IT companies had to navigate the transition to digital (Social, mobility, cloud) while cannibalizing their bread-and-butter application development business, jewelry companies will have to transition their diamond businesses following customer preferences without destroying their brand image. Over the next few years, it will be interesting to witness if a LGD - based brand can make it to the list as a top jewelry company.