Wholesaling

Glenn Espig, a retailer in Santa Barbara, Calif., liked the new wedding rings he?d been stocking from a hot young designer. But he didn?t like the designer?s Web site, which sold the same rings to the public?including, on one occasion, a local consumer.

?This person had seen the rings on the Web,? recalls Espig. ?He came into the store, examined the rings, took up the salesperson?s time, and then went and bought them online. I felt like I was turning into a museum, where people examine the products and then buy them elsewhere.?

Espig complained, and eventually the designer sent out a letter announcing he would discontinue his wholesale business and concentrate on Web retailing. But Espig is still unhappy. He wants the designer to take back his old stock, but so far he?s declined. (The designer couldn?t be reached for comment.) Meanwhile, Espig is considering asking vendors to sign a form pledging they won?t sell direct to the public on the Internet.

Although the designer left the wholesale business, other wholesalers are straddling the worlds of wholesale and retail?and it?s making retailers furious. The barriers to Internet entry are so low that nearly any company can put up a Web site and sell to the public?and quickly establish a profitable sideline. Because of the Internet?s worldwide reach, these sites represent, in theory, competition for every jeweler. And they not only charge true wholesale prices but also avoid adding sales taxes. ?Every retailer is upset about it,? says Al Solomon of Solomon Jewelers in Plainview, N.Y. ?If we found a vendor doing it, we would instantly cut them off.?

Many other retailers feel the same way. Sterling, the nation?s second largest retail chain, recently sent a strongly worded letter to its vendors admonishing them not to become ?competitors.?

And when Diamonddepot.com (now ?Odimo.com?), a consumer Web site recently purchased by Israeli sightholder R. Steinmetz and Son, placed ads in newspapers across the United States, it caused a furor. Retailers angrily called Steinmetz?s Chicago office?which contended it was just a franchise and had nothing to do with the Web site.

The situation also has caused confusion. Jeff Fischer of Fischer Diamonds in New York recently issued a press release after retailers mistakenly complained to him about a similarly named Web site selling to the public. And retailer complaints provoked Canadian company First Jewellery into launching a lawsuit against a sound-alike Web site. (Neither Fischer Diamonds nor First Jewellery sells to consumers.)

What can be done? Jewelers Vigilance Committee executive director Cecilia Gardner notes that, according to Federal Trade Commission regulations, if a company represents itself as a wholesaler to the public, it must charge wholesale?not retail?prices. Anyone who spots a violation is advised to report it to either JVC or FTC. Robert Bridel, executive director of the American Gem Society, notes that any AGS wholesaler who sells retail has to apply for retail membership?and fulfill all the requirements such membership entails.

So far, the associations taking the toughest stand on the issue are industry buying groups, which have both retail and wholesale members. Ralph Weinman, CEO of Continental Buying Group in Fort Lauderdale, Fla., says his group has already excommunicated several wholesalers who were caught dabbling in retail. And Jeff Roberts, president of the Independent Jewelers Organization, Norwalk, Conn., says his group has a similar policy. ?If I found out about it, I?d throw them out in a heartbeat,? he says. ?It?s the retailers that made these companies who they are. How can they expect us to react any other way??

But the new dealer-retailers?some of whom didn?t want to be identified for this article?say they?ve met with a range of reactions. ?Some retailers complained when I put up my Web site, but not anyone I did serious business with,? says one.

They argue that they aren?t dealing with traditional retail customers. ?It?s not like I?m putting a card table in front of their store,? notes New York diamond dealer Bruce Verstandig, who owns Jeweler.com, which sells mostly closeout merchandise. ?These are consumers who have already decided to go online. If they don?t buy from Jeweler.com, they will buy from another dot-com company.?

They also point out that they?re not the first jewelry wholesalers to go into retailing?noted designers like David Yurman already have thriving outlets. But some retailers view those differently?especially since most of those stores are in only a few major cities. ?I have no problem with that,? says Clayton Bromberg of Underwood?s in Jacksonville, Fla. ?It helps get the name out and builds customers for those brands.?

The wholesalers further argue that while retailers complain about being circumvented, they would have no problem buying diamonds or jewelry from a foreign manufacturer?or De Beers?if it meant a discount. Tiffany, for example, recently signed a deal with Canadian mine Diavik to buy diamonds straight out of the ground. ?They go upstream, so we go a little downstream,? says one wholesale-retailer. Still, even the most successful sites don?t want to lose their retail business altogether. One?Diamondregistry.com?offers retailers a share of the profits, with retail referrals for consumers who want to see the stone before they buy. And Jeweler.com soon will spawn Smartjeweler.com, a business-to-business site for jewelers looking for closeouts.

Fundamental change. While most retailers are outraged about the situation, industry analysts look at it as just the latest sign that the traditional distribution pipelines are getting twisted in knots. For years, there have been suspicions that, despite its denials, L.I.D., the Israeli diamond wholesaler, owns part of Gross Diamond Company, the 33-store chain based in Louisville, Ky. (L.I.D. says it?s simply a ?supplier? to the chain.) Even some companies that don?t own Web sites are forming strategic alliances with them?De Beers sightholder Louis Glick, for example, is on the board of Buyjewel.com. And many vendors who don?t have their own Internet sites regularly sell to other sites or to home shopping channels.

Industry analyst Ben Janowski observes that if retailers cut off every supplier perceived as dealing with the enemy, they won?t have many left. ?There?s going to be some radical realignments,? he predicts. Or as one of the new breed of fence-straddlers puts it: ?This is just another way to increase business. You can?t blame us for the Internet.? It?s a new world out there, and the rules have yet to be written.

Hearts on Fire was wrestling with the same problem faced by wholesalers mentioned in the accompanying article?how to branch into e-commerce without alienating its main customers, jewelry retailers?when it hit on a solution: Give retailers a piece of the action.

The company recently added e-commerce to its Web site, Heartsonfire.com. But, in an innovative twist, any Web customer located near a Hearts on Fire retailer will be advised to pick the diamond up at that store. If the customer still wants the diamond shipped by mail, Hearts on Fire will share half the profit with the store. Retailers will be able to audit all transactions involving their local Zip codes.

In addition, the company is giving away equity in the Web site to the 175 retailers it does the most business with (out of a total of 350). ?It will be distributed on a percentage-of-business basis,? says Glenn Rothman, president of the Boston company. ?It?s a way of thanking retailers for building the brand.? Rothman notes that his retailers at first were fearful when they heard the company was going into e-commerce, but he hopes his solution will satisfy them. ?It?s a way for retailers to capture that business that?s migrated to the Web,? he says. ?The off-line distribution channel built our brand. We needed a business model that both the retailers and consumers could embrace.?