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Oversizes
May 1, 1998 5:00 PM
By Martin Rapaport
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RAPAPORT...
Publisher
Now, everybody knows that the larger the diamond the greater the price. In fact, diamond prices do not merely increase proportionately with size. A two carater cost much more than twice the price of a two one carat stones. This is because larger diamonds are scarcer and it is why diamonds are priced per carat rather than size.
For example, the price per carat for a two carat H VS2 at $8300/ct. is 43% more than the price per carat for a one carat H VS2 at $5,800/ct. The differentials grow even larger when we look at prices per stone as do consumers. Total price for a two carat H VS2 comes to $16,600, 186% more than $5,800 for a one carat stone. While 100% of the increase can be explained by the fact the consumer is getting twice the points (i.e. more diamond), The additional 86% represents a premium for size scarcity.
Consumer attitudes towards higher prices have shifted greatly over the years. While the whole number sizes such as 1.00 and 2.00 are still magic numbers, the importance consumers place on having a full sizes and their willingness to pay substantially more for the have greatly diminished. These days consumers want a stone that looks bigger. While they do want good quality and cut, they are more interested in the flash for the cash then the numerical value of the stone.
Obviously, market prices have come to adjust to the new reality. The discounts for oversizes such as 90's, 5/4, 7/4 and 2.50-3.00 ct. have dropped in relation to the discount for straight sizes such as 4/4 and 8/4. Even 4 caraters have become a strong item.
While the trend towards higher prices for oversizes clearly reflects consumer preferences we should recognize that it is also based on the consumers strong desire to buy value. Frequently, consumers are being told that oversizes represent an opportunity to buy more diamond for the same price per carat. Unfortunately, this may not be the case.
The problem is that prices for oversizes do not just reflect the demand side of the equation. For a number of reasons the supply of these stones is severely limited and prices have significantly increased because there are not enough of them to go around. In some instances, prices for oversizes are so high that they represent poor value for the consumer. In other words the consumer may be getting less diamond for their money instead of more diamond.
In order to understand why the supply of oversizes is so tight we should consider the position of the diamond cutter. The role of the cutter is to find a reasonable balance between yield (i.e. the size of the polished diamond) and cut. For example, given a choice between cutting an excellent cut 1.80 and a medium cut 2.00 the cutter wil almost always choose to cut the 2.00. There are two reasons for this. Firstly, the 2.00 carries 11% more weight and will therefore bring 11% more when sold. Furthermore, the price per carat for two caraters is 20% greater than 6/4's.
A medium make two carater H-VS2 at -35% easily brings $10,790 while a excellent cut 1.80 would have to sell at -13% below to bring the same price. More often than not it does not pay for cutters to lose the weight and size category, hence there is a chronic shortage of oversizes.
Interestingly, the strong trend towards very fine cut diamonds has made the supply side even tighter. Generally, in order to create an ideal cut the cutter must sacrifice weight from what could have been a very nice, say 60/60 stone. As explained few cutters are willing to loose the size premium to create an oversize ideal cut. Furthermore, in order to meet strong demand for ideal cuts, cutters are taking stones that would have finished into very nice 5/4 or 7/4 and converting them to 4/4 and 6/4 ideal cuts. The trend towards ideal cuts has reduced the supply of well cut oversizes.
Given the fact that prices for oversizes have risen dramatically, retailers should question the value opportunity these sizes represent for the consumer. It may very well be that dollar for diamond a 2.00 now represents a better value for consumers than a 1.75. This is because the price differential between these two sizes has narrowed and with a relatively small increase in payment the consumer can get a diamond in a higher size category..
The chart below incorporates our general opinion of discount levels in the cash market and explains the relationship between prices and sizes. Please note these percentages are only estimates and vary from market to market, Also retail markups will not affect our representation since we are relating to percentages.
For example, consider a buyer contemplating the purchase of a 1.75 H VS2. The buyer could spend 13% more and get a 2.00 carat diamond that is 14% greater in weight. Alternatively, a buyer considering the purchase of a two carater saves only 12% by downgrading to a 1.75 and gets 14% less diamond.
While the cost benefit analysis of oversizes provides some indication of relative value it is important to consider that consumer demand for specific sizes also represents their sensitivity to price points. Some in the trade refer to 90 pointers as the 'poor mans' 4/4. In other words the consumer would like to buy a 4/4 but doesn't have enough money.
Demand for oversizes is actualy demand for undersizes, i.e. stones that are close to full size but cost less. For many consumers the issue is not optimizing values but buying the best diamond they can on a limited budget. To some degree strong demand for undersizes is an indication that diamond prices are too high for consumers that are not willing to pay full price for full size stones.
Over time continued demand for oversizes or undersizes will present opportunities for cutters to rethink their strategies for optimizing weight to specific size categories. The key factor for cutters is not really the yield in terms of size but rather the yield in terms of dollars. If consumers are willing to pay significant premiums for well cut stones that are slightly below full sizes then the traditional price jump for full sizes will decrease.
Perhaps the most important lesson here is that consumers are no longer willing to be told how much a diamond should cost. Instead of having prices dictated to them they are telling the retailers how much they are willing to spend and sticking to their numbers. Consumers are telling the trade that just because a stone weighs a certain amount on the scale is not necessarily justification for a significantly higher price. The trend towards fine cut undersizes and away from poorly cut full sizes indicates that for many consumers the size of a diamond is not really measured in carat weight but rather in appearance.
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Tags:
Consumers, Martin Rapaport
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