How Much of a Threat is the Internet?

Troy Kelsey was an unhappy diamond shopper. A 29-year-old graduate student, he shopped around his home base of Champaign, Ill., for a diamond for his 25-year-old fiancée, but he couldn’t find anything he liked.

“The size of the city makes the selection of jewelers limited,” he says. Every stone he looked at had something that turned him off – bad cut, no “cert,” low clarity/color, even yellow fluorescence. And so, the self-described Internet junkie booted up his computer and went cyber-shopping, rifling through 10 Web pages before settling at “The Diamond Net” (www.diamondnet.com).

Diamond Net’s Fair Oaks, Calif.-based owner, Rick Fischer, put Kelsey in touch with a cutter in New York, who agreed to send him a stone with no money down. When the stone arrived, Kelsey was impressed, and soon the two were saying the cyberspace equivalent of “Mazal.” The entire process took less than 10 days. “By buying from these gentlemen, I took no risk, made my fiancée incredibly proud of her stone, stayed within my budget, and came away with the peace of mind that I did the best job of shopping that I could have,” he says.

And so Kelsey’s story has a happy ending – for everyone but his local retail jewelers, who lost a $3,000 sale. And while his story is still unusual, it’s far from unique. For a long time, jewelers have wondered whether consumers would buy something as complex and expensive as a diamond over the Internet. Yet, in many ways, the debate is settled. Internet diamond buying isn’t some distant threat. It’s already here.

Consider this: iQVC, the Internet version of home-shopping channel QVC (www.iqvc.com), raked in $5 million in its first month. Big stones are a main attraction on ebay (www.ebay.com), the popular auction site. And staff at some companies selling diamonds over the Web say they have made hundreds of sales – often with price tags of several thousand dollars.

How big a threat the Web is to traditional retail jewelers, though, remains to be seen. People selling diamonds through their Web sites are struggling with fierce competition and low margins, just as jewelers with stores are.

Who is buying? Internet users are similar to consumers of diamond jewelry, particularly engagement rings: They tend to be affluent, college-educated men. Robin Gray of Treasures by R.J. in Orangevale, Calif., which runs a site called www.niceice.com, says her customers are typically young professionals, particularly engineers, software specialists, accountants, doctors, lawyers, and stock analysts.

Some have a surprisingly sophisticated knowledge of diamonds, often picked up from other sources on the Internet. “I have people call, and they tell me about a Sarin report,” Fischer says. Queries come from all over the world; one site just received an e-mail from Iran. “I don’t think there’s a country in the world that’s online that hasn’t contacted me at least once,” notes Fischer.

Web surfers are generally looking for bargains – and tend to “comparison shop” many pages before they buy. “They’re demanding – probably more so because they don’t have you in front of them,” says Barbara Lam, owner of Professional Diamond Services (www.gotampabay.com/diamonds) in Florida. They are also shrewd, tough customers. “By the standards of a retail store, we are giving diamonds away, and yet they still try to stay one step ahead of the guy selling them,” Fischer says.

Of course, the Internet is a far from perfect market. For one, even in this age of grading reports, most people still want to see a stone before they buy. Web-based diamond sellers try to get around this by offering money-back guarantees. Gray, for example, gives customers 10 days to get a refund and still finds that customers will “walk the diamond all over town during that 10-day period.” Lam has even hired three representatives around the country to meet with customers.

Another problem is that the Internet is largely anonymous and can be fertile ground for hucksters. Consumers don’t know if there is a legitimate company behind the Web site, and retailers can never be sure who is contacting them. This last factor has scared many away from Internet commerce. Daniel Kim, owner of Five Star Jewelers in Fairfax, Va., has a Web site that advertises inventory (www.4diamond.com), but so far he hasn’t sold to anyone he didn’t meet face-to-face. “Selling retail is nerve-wracking enough without getting involved with people you can’t see,” he says.

The ones who do sell over the Web say they take precautions, but mistakes happen. Lam has had problems with bounced checks and stolen credit cards. “I’ve taken my lumps,” she says. “Early on, I was too trusting, but I’ve learned.” Fischer takes an even greater risk. After screening customers, he sends them the diamond and lets them have 30 days to cancel the check. “It’s a scary way of doing business, but, knock on wood, so far it’s turned out fine,” he says.

The customers are also wary, given the high price tags involved. Outright fraud so far seems rare, but reports are popping up. Kim had a customer come in, brandishing what he thought was a 1-ct. diamond purchased over the Internet for $800. It turned out to be a cubic zirconia. Jacques Voorhees, president of Polygon, the Internet network for the jewelry industry, says this is only the beginning. “The things we see now on ‘20-20,’ ‘Prime Time Live’ – that is nothing compared to what we’re going to see on the Internet. If I were a retail jeweler, I’d be trying to scare the socks off my customers about buying on the ‘Net.”

Internet proprietors admit it can be a challenge proving they’re legitimate. Many companies put some information about themselves on the Web site. Lam, for example, lists her bank, accountant, and attorney. “They know almost everything about me,” she says. “At first, people were very skeptical about buying over the Internet, but now they are a little more used to it.”

Even so, Web buyers can be exceedingly suspicious. “They investigate your business with zealous, FBI-like tactics,” says Gray. “They call every agency they can imagine – the Federal Trade Commission, Better Business Bureau, Jewelers Vigilance Committee, the Jewelers Board of Trade, and Chamber of Commerce – and they admit it without shame.” In addition to snooping on her company, they double-check everything she says. “We often hear things like ‘I spoke to Peter Yantzer [lab director] at the AGS a few minutes ago, and he verified what you told me earlier today.’ ”

Many also seek out direct contact – ironic for a transaction that started through the impersonal medium of the computer. While e-mail and the Internet are the initial vehicles of communication, most shoppers speak to company proprietors before they buy. “When a person does decide to purchase a diamond online, we talk to them on the phone and via e-mail several times a day,” Gray says. As in traditional retail, the personal chemistry that develops between buyer and seller often makes the difference. Susan Leitner, a 41-year-old in the travel industry, says she decided to buy from www.niceice.com because she “was impressed by the way they answered all my questions, and they were fun.” Notes Paul Gray of niceice.com (Robin Gray’s husband): “It’s the same as selling in a store. You have just broadened your customer base.”

Profit woes. Like other sectors of the industry, Internet diamond sellers have problems with margins, particularly since they’re dealing with a medium that attracts bargain hunters. Lam says her margins are so slim that when someone returns a stone, the shipping costs alone kill her profit. And while the Internet’s growing popularity would seem to help those who sell via the Web, it’s led to another problem: increased competition. “It’s just a flooded market – there are hundreds, if not thousands, of Web sites selling diamonds,” says Fischer.

Web proprietors have one advantage: Without a store, they don’t have as much overhead as traditional retailers. But Web-site proprietors say costs add up regardless. “ ‘If you build it, they’ll come’ doesn’t apply to the Internet,” says Robin Gray. “We’re talking major maintenance and work in the form of updates, additions, revisions, and they all result in additional charges or a massive investment of time.”

Internet selling, she says, isn’t as easy as it looks. “It requires your devoted attention 24 hours a day, seven days a week, including holidays and weekends. People expect an answer immediately upon e-mailing you, [and] canned answers won’t do. Many of our friends – both in and outside of the trade – have dumped their Internet sites despite major financial investments because they couldn’t handle the deluge of e-mail from ‘lookers’ and curious retail competitors in disguise who have no respect for the time it takes to respond to 300 e-mails a day.”

In fact, most say that, despite all the hype over the Internet, for now Web-based diamond selling is more of a sideline than a full-fledged business. Most of the companies running Web sites are connected to another, related business, be it a traditional retail store, “upstairs” operation, or insurance replacement business. Fischer, a retailer for 20 years, is semi-retired and one of the few who does it full time. He says that while his overhead is down, he isn’t making nearly what he did as a jeweler. And he has some welcome words for jewelers who worry they will eventually be replaced by machines. “If I had my old store, I couldn’t compete against me on price,” he says. “But, in the end, it’s not something that is going to replace the hands-on you get in the store.”