Combating Online Challenges to Exclusivity

If anyone anywhere can sell any prestigious product on the Internet without authorization, what happens to traditional ?exclusive? distribution of these brands by brick-and-mortar-retailers?

That?s the question more and more suppliers and retailers of upscale watches and jewelry are asking themselves these days, as increasing numbers of Internet retailers (or e-tailers) sell their merchandise online?without the manufacturer?s okay and flagrantly ignoring local retailers? exclusive distribution rights.

To protect themselves, manufacturers and jewelers are using a variety of weapons?including their own Web sites, detective work, ads, and a unique e-commerce alliance of jewelers and suppliers?to combat unauthorized e-tailers.

Erasing exclusivity. Here?s the issue: Prestigious products are valued because their quality, craftsmanship, and expense make them more exclusive than mass-market products. They?re also highly prized because they?re available only from authorized dealers who know the product and who can provide the manufacturer?s service and warranties.

The ubiquitous Internet is changing that by erasing geographic boundaries. Meanwhile, many upscale e-tailers, especially those selling watches, are bypassing manufacturers and getting their prestigious wares through ?gray market? sources?authorized dealers who sell to them without authorization, or third parties here or overseas. More than 7,000 upscale Web sites, for example, are selling Rolex, Montblanc, and Gucci watches?without authorization.

At the same time, to jewelers? and suppliers? consternation, more consumers are buying luxury wares online. Some 8.6 million U.S. households spent more than $5 billion online between Thanksgiving and Christmas 1999, and almost half of them (48%) were affluent (annual income of $75,000 or more), says Forrester Inc., an Internet analytical service. So many people are willing to buy luxury goods online that they have spawned a new demographic category called ?mass affluents.? And Web sites selling luxury items to accommodate them, such as Zebramart.com or Luxuryfinder.com, are mushrooming, from 20,000 in 1998 to more than 50,000 in late 1999.

Complicating matters are some top-name jewelry designers and suppliers who already sell to online e-tailers. That angers jewelry store owners, who feel that, because they helped build those jewelry firms? reputations and markets, the firms should support them rather than their online competition.

No help. The e-tailers, of course, don?t see a problem. Kenneth Kurtzman, CEO of Ashford.com, one of the largest online retailers of watches and jewelry, tells JCK that Ashford is the exclusive online distributor of only a few dozen of the 300 brands it offers and concedes ?some watches we sell we don?t get from the brands themselves.? But he says they are genuine products, obtained through other sources.

Watch brands have to learn that the Internet is concerned with offering consumers a wide selection of products, not with exclusivity, Kurtzman says.

Jewelers and manufacturers can expect little help from the government or even from retail trade organizations. Although there?s a new federal law against fraudulent misuse of ?dot-com? names, and the Federal Trade Commission checks jewelry Web sites for compliance with its jewelry guidelines, no similar actions are pending to curb unauthorized sales of products online. Neither the National Retail Federation nor the Federation of Independent Businesses is even studying the issue?s effects on traditional stores.

With no one to help them but themselves, therefore, some jewelry and watch manufacturers and retailers have devised strategies to protect their products? exclusivity?and their own. Here?s what they?re doing:

Click and bricks. A new e-commerce strategy called ?click-and-bricks? combines the customer service and specialized products of brick-and-mortar retailers with the convenience of online retailing. In some cases, ?click-and-bricks? are retailers with both a Web site and a store, which support each other. In other cases, e-tailers have their own store or stores. Some luxury click-and-bricks are accessible only to members. (Zebramart.com, for example, limits users to women earning $75,000 or more annually.) Once inside, a user can visit any product site and order online from the manufacturer or store, or go to the listed store to buy or pick up the product. Both the manufacturer and the retailer get their markups.

The jewelry trade?s own click-and-bricks?tentatively called Designer Jewelry On Line (DJOL), the brainchild of a rare alliance of 10 jewelers and six high-quality jewelry suppliers?was under construction at press time. The Web site (open to all interested fine jewelry suppliers and jewelers) will retail brand-name fine jewelry to ?quality-conscious consumers,? says Larry W. Smith, acting chief executive officer of DJOL and president of THCG Inc., the Web site design firm that is developing it. ?It will be the Web site that defines luxury, high-quality brand-name retailing, a position currently unoccupied by any e-commerce jewelry competitor,? Smith says.

DJOL evolved out of meetings last winter between retailers and jewelry manufacturers and designers. Since online retailing ?isn?t going away,? as a participant said, they decided to create a Web site featuring branded jewelry and authorized jewelers selling them.

?By focusing on servicing the online needs of the affluent and the style-conscious?previously untapped online demographics?DJOL will become the defining site in the brand-driven high-end e-tailing sector,? says Joel Schecter, president of Honora and the driving force behind the DJOL concept. ?It will be the premier source online for branded fine jewelry servicing customers,? supported by a national network of ?established retail outlets [and] branded merchandise available via manufacturers,? he says.

Consumers will be able to purchase brand-name jewelry online or be referred to a store in their area. Jewelers and manufacturers will share in the sale, whether online or through authorized retailers. DJOL was scheduled to be fully operational sometime this summer.

Just say no. To maintain their products? exclusivity, many luxury brands (such as Rolex, Raymond Weil, Montblanc, Patek Philippe, Vacheron Constantin, Cartier, Baume & Mercier, and Hermès) and some jewelry suppliers forbid online sales by their authorized dealers. Any who do sell the items online are dropped as authorized dealers. These luxury brands also refuse to provide free warranty services on watches purchased from unauthorized online retailers.

Follow them, Watson! Some luxury watch brands are turning detective. They surreptitiously buy their watches from online sites, then use the serial numbers and code numbers on the watches to track down authorized vendors (usually overseas) who sell to unauthorized e-tailers or to intermediaries, even criminal groups who launder money by buying and selling fine watches. Montblanc, for example, closes 10 to 20 such vendors worldwide each month.

Trust us. More brands are using marketing tools to urge cybershoppers to buy only from their authorized dealers. Montblanc has just introduced an ?authorized dealer seal? for its retailers? Web sites. It helps consumers ?cut through the clutter and know who they can trust,? says Eric Warner, Montblanc?s vice president of marketing.

Baume & Mercier took another approach. In December, it ran a full-page ad in the Wall Street Journal urging consumers not to buy its watches from any online sites, because none is an authorized dealer. Only an authorized brick-and-mortar retailer, the ad said, can provide ?an authentic Baume & Mercier timepiece ? not a counterfeit or second-hand good presented as new merchandise.? The tactic received wide press coverage, spreading Baume & Mercier?s warning even further.

Information, please. More retailers and suppliers use their own Web sites to counter unauthorized e-tailers. The sites include information about brands and direct viewers to authorized brick-and-mortar stores. The official Web sites of TAG Heuer, Baume & Mercier, and Patek Philippe, for example, provide plenty of information about their products and include lists of their dealers. Other brands, such as Cyma or Keepsake, allow their retailers to state on their Web sites that they are authorized dealers, but sales must be made through the stores.

Authorized e-tailers. Some watch brands (though no top luxury ones, yet) deal with the issue by designating a Web site as an authorized online retailer. Watchnetwork.com, for example, promotes itself as ?the Web?s authorized watch dealer? for a dozen brands, including Hugo Boss, Fortis, and Frederique Constant of Geneva.

?Ours is a legitimate site, with no gray-market watches and no price breaks [from the manufacturer?s suggested retail],? says Watchnetwork president and watch collector Scott Hockler. ?So, we have the advantage of having the watch manufacturers advising us and helping us with advertising, and our customers have the advantage of full manufacturer warranties, plus our own.?

Mercata.com also claims to be the authorized online retailer ?for all manufacturers? on its site, including watch brands, ?protecting online shoppers [with] products guaranteed under the manufacturer?s warranty.? (Even so, at least one watch brand?Seiko Corp. of America?disputed that, telling JCK that Mercata isn?t its authorized online retailer.)

Some jewelry designers have also designated authorized online sites. Ashford.com, for example, offers jewelry by Wendy Brigode, Judith Jack, and Robin Rotenier. Adornis.com has the upscale designs of Roberto Coin and Dana Kellenin, while the high-end jewelry and watch creations of Angela Cummings and David Webb are available on Luxuryfinder.com.

E–tailing Stats

According to recent reports:

  • Online retail sales topped $25 billion for 1999, with brand name products doing the best. (Source: Ernst & Young)

  • There are some 20 million online shoppers, as of December 1999. (Source: Jupiter Communications)

  • One in four (26%) Internet users made a purchase online during the 1999 Christmas holidays. (Source: Ernst & Young)

  • 8.6 million U.S. households spent more than $5 billion online between Thanksgiving and Christmas 1999. Almost half (48%) were affluent households (annual income of $75,000 or higher). (Source: Forrester Inc.)

  • Web sites selling luxury goods, including fine jewelry and watches, grew between 1998 and 1999, from 20,000 to more than 50,000. (Source: Cyveillance)

  • At least 4% to 8% of the Rolexes, Guccis, and Montblancs sold by 7,000-plus unauthorized e-tailers are counterfeits. (Source: Cyveillance)