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A study of moissanite jewellery industry and its global market

Moissanite is used as an alternative to diamond jewellery. It is regarded at par with the diamond when compared on the basis of quality and physical properties. Moreover, moissanite glitter more than diamond due to a higher refractive index and is as hard as diamond. A layman may barely distinguish between the two and mostly a distinction can be drawn through a laboratory test. However, the moissanite jewellery is cheaper in comparison to diamond and this makes it a better substitute for the stone. Chemically, moissanite is silicon carbide (SiC), this is naturally unavailable on earth and found its way through meteors, which entered earth’s atmosphere. Hence, it is a rare mineral. Conversely, it can be artificially produced in a laboratory and Charles and Colvard developed the technology to produce moissanite synthetically. The company held patents for this technology and thus, it was the sole source of moissanite jewellery globally until the expiration of patents in 2016.

The below table gives a relative comparison of fine gemstones.

Charles and Colvard solely sell moissanite jewellery and this is done through select distributors and company-owned retail channels. Therefore, only authorised retailers are permitted to sell Charles and Colvard products in order to prevent counterfeiting. Furthermore, the firm is an exclusive manufacturer of moissanite jewellery. The revenue of Charles and Colvard has historically depicted the demand for moissanite jewellery worldwide. This was due to the patents held by the firm in the US and 25 nations in the world, hence, no other organisation was in a position to sell moissanite jewellery. Consequently, the revenue of the company was increasing until 2005, as shown in the beneath graph. The firm always had few select customers and there were lower purchases owing to business reorganisation by its largest customer in 2006. Thereafter, an exit of this customer from moissanite business in 2007 led to a fall in revenue in the same period. The company was enjoying the power of monopoly and sold its products at the price of its choice.

Televisory assume that the firm invariably used the pricing power to its advantage from the gross profit margin curve. The gross profit margin for the company constantly remained above 50% after 1999. The steep drop in revenue of Charles and Colvard in 2008 reflects a fall in the global retail sector on account of the economic recession. The revenue reached its lowest in 2009 and again picked up subsequent to 2010. However, even during the recession, the company maintained its leverage on pricing power and its gross profit margin remained around 60%. The revenue once again rose from 2011 onwards, barring a small dip in 2014.

The patents of the Charles and Colvard expired in 2015 in the US and in the rest of the countries in 2016 except Mexico, where this will expire in 2018. The firm knew that other players would enter the markets after the expiry of patents in different regions. Therefore, it began to lower the prices of its products following 2011 and decreased them substantially in 2014, as is evident from the gross profit margin curve. However, another reason for lowering the prices was the increasing availability of substitutes such as synthetic diamonds which were sold in the market at a comparable rate. This caused a dipping point in the revenue in 2014. The company began to take some aggressive steps in 2010 in order to maintain its market share as the patents were to expire in the upcoming five years.

Televisory found that the company made relatively higher capital expenditures after 2010. In addition, prior to 2010, Charles and Colvard sold only loose moissanite jewels. Although, after 2010, Charles and Colvard started selling both loose moissanite jewels and finished moissanite jewellery products. The company also increased its operating expenses on research and development, and marketing past 2010. Thus, as a result of increasing operating expenses, the company witnessed negative EBITDA after 2012, as can be seen from the below curve.  The company launched a new line of products under brand names ‘Forever Brilliant’ and ‘Forever One’ moissanite jewel in 2015. These products proved successful for the firm and were sold at a premium. Consequently, the revenue of the company was the highest in 2015 out of the eight years since 2007. The gross profit margin and EBITDA margin of the company also improved in 2015, as compared to its value in 2014.

Thus, after the expiry of patents, new players entered the market on expected lines. Moissanite International based out of Australia was the one and the other was Wholesale Moissanite in the US. But, Charles and Colvard had an advantage due to years of learning and experience curve. It is assumed that new players will require a few years to match the quality and efficiency of operations achieved by Charles and Colvard. Interestingly, these new players are headed by former Charles and Colvard employees, who served the firm for many years during the tenure when it held patents. These employees possess a lot of intellectual expertise of Charles and Colvard in the form of manufacturing process accuracy and efficiency, supply chain and marketing relationships and other trade secrets. In addition, Wholesale Moissanite is also based in North Carolina, the US, as Charles and Colvard. It is run by Guy Stimpson, who is a former employee of Charles and Colvard since its inception until the expiry of the patents. Charles and Colvard was heavily dependent on a single supplier, Cree, for its strategic raw material for moissanite, silicon carbide. It is now quite likely for Cree to forward integrate to produce moissanite. The entry of new players will lead to more awareness of moissanite as an alternative to diamond. It will also further reduce prices of moissanite jewellery and increase the quality of available moissanite jewellery. Lastly, it is hard to predict the future of Charles and Colvard in the upcoming years. The gross profit margins of the company may erode as it will face pricing pressure due to competition.

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