The Internet Strikes Back

It's easy for jewelers to be smug about the online sector, since so many sites that premiered with a bang are now quietly resting in peace. Among the notable flops were Miadora, Adornis, Denmans, iJewelry, Firstjewelry, and the industry-supported "clicks-and-bricks" experiment enjewel.

But don't get too complacent. The hype about the Internet may have died down, but the remaining sites are not only alive but also gobbling up a growing chunk of the industry.

"The players that are left are basically the big boys," says Rakesh Shankar, an Internet analyst with West Chester, Pa.-based Economy.com. "There's not much of a concern that you're going to see a lot of people disappear anymore."

In some ways, of course, these sites have been seriously de-fanged. They no longer have access to the unlimited capital available in 1999, so they've stopped pricey TV and radio buys and now advertise primarily online, particularly on Web "portals." And they all aim to be, in the oft-used phrase, "a real business"—which means they've boosted the extra-thin margins that once drove jewelers crazy.

A fast-growing category. Jewelry is one of the fastest-growing categories on the Web. Online jewelry sales account for 2% of total online retail sales—about the same proportion as its offline sales. According to Forrester Research, online jewelry sales hit $1.1 billion in 2001, up from $952 million in 2000.

Even though much of the novelty of online buying has worn off, more people than ever are shopping online. And while the growth of online purchases may have slowed, it's still increasing at a rate of 8% to 10% per year.

"Anyone who thinks the Internet is going to reverse itself because of all the problems in the industry is making a mistake," says Vernon Keenan, an industry analyst with San Francisco-based Keenan Vision. "It's still going to grow. We haven't reached the end of the road yet."

In fact, despite the anemic economy, last Christmas was a surprisingly good one for online retailers, partly because of the Sept. 11 effect. "The concerns about privacy from the past were overridden by concern about going into large, crowded public spaces and the drop-off in travel," says Rob Enderle, research fellow with the Giga Information Group, Cambridge, Mass.

Interestingly, many of the jewelry sites that are still around are connected to an already-established business. Mondera, diamond.com, and ice.com, for example, are linked to the Mouawad family, sightholder R. Steinmetz, and a Canadian diamond cutter, respectively. The exception is the leader in the field, Blue Nile. The Seattle-based "pure play" site just passed a dot-com milestone: It actually made a profit. The company netted $1.1 million, a 6.5% operating profit in the fourth quarter of 2001. "Normally [posting a gain] would not be a cause for singing hallelujahs," noted Fortune.com, "but what other e-tailers out there are making money?"

Blue Nile, which hopes to be profitable this year as well, has gotten off to a good start. The company had a strong Valentine's Day, with a 68% jump in traffic and an 82% leap in transactions. In 2001, Blue Nile's sales jumped 10%, to $50 million—a nice gain in a year when most jewelers struggled.

Blue Nile may have beaten the odds because it's singularly focused on its target customer: males buying engagement rings. It has an estimated 1% share of the total engagement ring market, its average price point is more than $1,000, and its products have a 30% gross margin. Blue Nile claims access to over $50 million in inventory.

"We are equivalent to about a 50-store chain," says chief financial officer Diane Irvine. "And we're less than three years old."

Blue Nile's main rival in most surveys of visitors is ice.com (formerly buyjewel.com). Selling mass-market product—the average ticket is about $250—the Montreal-based company tops Blue Nile in volume, although not in sales; it expects to do only $10 million this year. Mayer Gniwisch, one of three brothers (all rabbis) who run the site, says sales this Valentine's Day were triple last year's figures. Like Blue Nile, ice.com had a profitable December and hopes to make money this year as well.

And then there's diamond.com, famously owned by sightholder R. Steinmetz and Son. The company reports that sales this Valentine's Day were "double" last year's, although the site had mixed results in 2001: Business was lackluster until the fourth quarter, when jewelry sales jumped 40%. Sales eventually totaled $30 million for the year. All this activity led to a break-even final quarter, says chief operating officer Jeff Kornblum, who hopes to turn a profit in 2002. However, the site has shelved its ambitious plan to open a "clicks-and-bricks" retail outlet.

Even ashford.com, which had flirted perilously with the abyss—at one point it liquidated excess inventory on eBay—seems somewhat steadier these days, although its news remains mixed. The Houston-based company has been bought by sports site developer Global Sports Interactive, and its marketing and technology divisions will relocate to King of Prussia, Pa. Yet, while company officials talk up Christmas sales, according to Forbes.com, Ashford reported a 34% drop in sales to $35.3 million for the last nine months of 2001.

Sites not public. Keep in mind that most of these glowing reports are company-generated, relayed by people who have a vested interest in portraying their companies favorably. With the exception of Ashford, they're not publicly traded, so it's impossible to tell for sure how well they're doing.

However, the generally good news from the Web sites is an indication that dot-coms are not only still out there but also expanding their reach. Jewelers who thought the dot-com threat was over may be surprised. It may have just begun.