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Charles & Colvard hoping to move out of diamond's shadow with millennials

May, 5 2017, 8:30 AM

Charles & Colvard Ltd., the Morrisville-based producer of moissanite stones and jewelry, finally feels it can establish itself as a luxury brand and move out of the diamond’s shadow.

Diamonds have always been considered a girl’s best friend, but Charles & Colvard has been trying to change that for the past 22 years.

The company is undertaking the feat using moissanite, a man-made gem created from silicon carbide, chemical formula SiC.

Moissanite is found in the Earth, but it is so scarce that no pieces can be found large enough to cut a stone from. Because of that, companies such as Charles & Colvard grow it in labs.

It’s also one-tenth the cost of a diamond.

There is real hope it may be able to surpass the diamond this time as Generation X exits the consumer market and millennials begin to enter it.

“The issue of lab-grown diamonds is dominating industry debate right now,” says Neri Tollardo, an analyst with Morgan Stanley’s Europe, Middle East and Africa Metals & Mining research team that was quoted in an August research report.

According to Morgan Stanley research, synthetic gems could account for almost 10 percent, roughly $1.4 billion, of sales in the global diamond market within the next five years because many of the alternatives have the same physical properties as the naturally occurring diamonds.

Charles & Colvard wants to capitalize on that transition as it expands its product selection and enhances of its gem quality.

The company has completely altered its branding strategy to emphasize its Forever One stone, which has the D-E-F grade of a near colorless diamond, and focus on building luxury. That focus included a $1.3 million increase in spending on sales and marketing expenses for 2016 to enhance the new branding.

On the March 10 earnings conference call, Chief Executive Officer Suzanne Miglucci announced the re-designed and re-named web presence Charles & Colvard will move forward with to “shed the deep discount bargain brand image.”

The company attributes decreases in e-commerce sales with that transition. The e-commerce sales were down 15 percent to $4.6 million for 2016’s fiscal year. Although overall, net sales for the year were up 14 percent to $29.2 million.

Forever One or Forever None

Charles & Colvard is focused on shifting away from being another alternative to diamonds such as cubic zirconia and trying to carve a space for moissanite to stand-alone in the gemstone market.

Up until two years ago, the company held the patent on moissanite and was the only company able to create and sell it. However, with the expiration competitors have emerged like Australian-based Moissanite International and Raleigh-based Moissanite Neo. Each company has its own line of moissanite jewelry comparable to Charles & Colvard’s.

But Charles & Colvard does not seem too threatened.

According to Director of Marketing Sarah O’Dea, “Competition is a good thing because it means there is a profitable market that other companies want a piece of, but we’re 20 years ahead of them.”

The man-made stone is attractive to gem producers because it’s a 9.5 on Mohs hardness scale and has a clarity and refractive index considered better than diamonds.

O’Dea said, “Not all people today want diamonds, but the industry has done such a fabulous job marketing that no one thinks of anything else.”

The company’s sales and marketing expenses totaled $7.04 million for 2016, 13.6 percent of which was spent directly on advertising.

Jewelry designer and blogger Kristin Coffin, uses a wide array of conflict-free gemstones, primarily moissanite along with some diamonds and sapphires but finds many men feel pressured to buy a diamond, not necessarily by their significant other.

She wrote in an article, “For over half a century we’ve been conditioned through extremely effective advertising to think you must buy a diamond ring.” She continued by discussing the diamond advertisements that bombard consumers everyday, but alternatives are rarely seen.

This is why Charles & Colvard is focusing more on the Forever One collection. Not only is it improving company margins due to the higher price, but it has already accounted for 55 percent of all loose and finished jewelry sales in the fourth quarter, which equates to about $3.3 million, even though its only been on the market for about a year.

It is an opportunity to move upmarket and compete directly with diamonds for wallet share, said Miglucci. The move upmarket included the discontinuation of clearance inventory when the website presence was recreated.

The legacy inventory, which includes the lower quality stones like the Forever Classic, is being reduced as the company “positions charlesandcolvard.com with a new audience” according the 2016 10-K filing.

“Historical customers who are aligned with our original products and price points will continue to consume our legacy inventory. As these inventories are exhausted, we will determine their fit for future product lines,” said Miglucci on the earnings call.

O’Dea considers this to be more of a product story than a true rebrand because Charles & Colvard has been able to create a moissanite stone better than anything the market had seen before.

“The website was similar to a liquidation site before because the products weren’t as high quality or competitive,” she said.

Now the company feels it has something of true luxury quality.

Heidi Hennink-Kaminski, an associate professor of social marketing and strategic communication at UNC-Chapel Hill, agrees with the company’s new focus on Forever One and movement away from “fake.”

She pointed out, “Charles & Colvard doesn’t want to be lesser it wants to be different. A guy doesn’t want to make his girlfriend feel like she wasn’t good enough for a real diamond.”

“I work at a grocery store.”

“Consumer demographics will evolve, with retiring and elderly consumers expected to generate the majority of global urban consumption growth by 2030, and with Millennials becoming the largest age cohort in the US,” stated the 2016 Diamond Insight Report published by the DeBeers Group of Companies.

That is exactly the market Charles & Colvard hopes to capitalize on going forward. The 2016 advertising expense increase included $225,000 spent directly on social media marketing.

Being present on social media and online retailers like Bluefly is extremely important to the CEO because she believes its important to be involved in all the places the consumer will be on their shopping journey.

Charles & Colvard increased Facebook following by 65 percent, Instagram by 62 percent, and had 250,000 more views on its YouTube videos. It also secured coverage in magazines such as People and InStyle.

Last year, Miglucci announced the implementation of a three-point plan to target the millennial market. She thinks millennials are ideal because for them “its Netflix versus television and Uber versus taxi” and, hopefully, moissanite versus diamond. She discussed the aversion millennials have towards traditional markets.

Hennink-Kaminski agrees, “They need to get in front of millennials now so it will already be in their consideration as opposed to being a trade down when they get into jewelers and realize they can’t afford a real diamond.”

In a tweet published by The Economist, a link to an article titled “Shine on: the diamond industry” had the caption “Why aren’t millennials buying diamonds?” and cited lack of ethics in the industry as a main cause.

The Comptroller Stringer Report revealed that millennials, specifically in New York City, are earning 20 percent less money than the generation prior even though the rate of college attendance has increased. Between 2000 and 2014 the number of young adults with low wage jobs increased 10 percent.

While not great for millennials, it is great for Charles & Colvard due to its lower price point.

The idea to target a younger audience was further cemented by another part of the DeBeers report that stated, “Consumer preferences can be expected to change, with an increased focus on self-expression; as a result, design and branded jewelry will continue to increase in relevance.”

Charles & Colvard has started to tap into the self-expression portion of that with its Gemvara, Inc. collaboration.

Gemvara is a non-traditional online jewelry retailer that allows customers to create their own custom jewelry, which could include Charles & Colvard Forever One gems.

The Insight Report also discussed the push towards ethical products.

Being an alternative is becoming a new trend.

Even Leonardo DiCaprio funds a lab grown diamond company.

Social responsibility has been one of Charles & Colvard’s biggest selling points from the beginning.

“Our socially responsible and ethically sourced products align directly with the principal and purchasing preferences of the millennials,” said Miglucci.

She also emphasized the reasonable price as strong selling point. O’Dea agrees as most of the marketing work she does focuses on emphasizing the lack of conflict for no extra cost.

Charles & Colvard executives know that developing a brand image, especially an upscale one takes time, but they feel after 20 years the company has finally reached the right moment.

Déjà vu?

Although this isn’t the first time Charles & Colvard has made a push toward the luxury market, it is the first time it has a product that meets the specifications.

There has been frequent overturn in C-Suite positions, including the recent departures of the Chief Financial Officer Kyle Macemore to return to a “larger and growing” company and Chief Revenue Officer Steve Larkin. The CEO position has also been filled by three different individuals over the past fiver years.

Perhaps it has finally hired the right team.

Bob Thomas, CEO from 2000 to 2008, and Randy McCullough, CEO from 2009 to 2015, each made a push to the luxury market too with similar strategies of being in chain retailers and advertising in well-known publications.

They both had little success with declining stock price and underperforming jewelry in retailers, such as J.C. Penney, Macy’s, and Zales that resulted in discontinued distribution.

But that was before ideological millennials became consumers in the jewelry market, and now the stones are being asked about in the big box retailers.

“Bigger box stores now want to have an alternative to diamonds whereas in the past they didn’t want diamond competitors, but customers are asking now. The stores are coming to us because we have established a name in the lab-created sector,” said O’Dea.

Charles & Colvard recently expanded its partnership with Helzberg Diamonds and will be available at 54 stores, about 22 percent of the retailer’s locations.

Store Manager of the Oak Brook, Ill. Helzberg, Eli Zabib, said, “The people that come in and buy Charles & Colvard have done their research and come in looking for it. If they don’t ask for it when they walk in, they typically aren’t interested.”

While he would not disclose specific sales numbers, he did concede that more and more people are coming in asking for moissanite and other alternatives. However, he does not suggest or push the product to customers that do not inquire.

The company feels strongly about its online presence too, according to O’Dea.

“The philosophy right now is being wherever the consumer is. Searches aren’t all about Google, 55 percent of ours start on Amazon so we need to be everywhere it seems.”

If the product can’t be found it can’t be bought.

No money, more problems

Despite the growing success with retailers and progress with millennials, the stock price is currently at $0.90 and has not been traded above $1 since March 27. It hasn’t been above $2 since Nov. 3, 2014. That is a minus 95 percent decline from the company’s height of success in 2005 when it traded at $21.86.

Investors are remaining skeptical.

The last year that Charles & Colvard had a net income instead of loss was 2012. It earned $4.4 million in net income, but it has lost millions each year since.

The company has started to narrow the losses though. In fiscal year 2016, it lost only $4.5 million, a minus 53 percent change from 2015.

But Clint Pete, interim chief financial officer, feels confident about the company’s financial future. He said, “Overall, from a financial perspective, 2016 represented a pivotal year for the company.”





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