Jewelry Dot-Bombs

They said it wouldn’t last—and they were right. It was a little over a year-and-a-half ago that a parade of well-funded, high-profile jewelry Web sites burst onto the scene, hoping to duplicate the popularity of e-commerce sites like Amazon.com. They raised millions of dollars and attracted the best and brightest in the industry. With their low prices and hefty marketing budgets, many wondered how traditional retailers could compete with them.

In the end, traditional retailers proved more resilient than anyone imagined. Investors soon pulled the plug on most of the sites—including Miadora, Adornis, Ijewelry, and Canada’s Denmans—and even the sites that survived are beset with financial woes. (See sidebar, p. 94.)

Despite the reversals, the people behind these sites are proud of what they accomplished. They worked long hours, created brands from scratch, and proved there’s a market for jewelry on the Internet. And while they never reaped their anticipated riches, they gained an invaluable education in business. Many maintain that, if the market hadn’t turned on them, their companies would have been profitable.

“It was a matter of timing more than anything,” says Rich Hall, a Macy’s West veteran who joined Miadora.com. “We had a viable model. Customers really reacted to it. It was incredible how much business we did. We provided a service to the consumer that will not be replaced. It’s really too bad.”

 

When these sites were first hatched back in 1999, they seemed to be riding an unstoppable wave. The NASDAQ had doubled in value and Internet companies were valued at several hundred times earnings. Companies like eToys.com shocked Wall Street by demonstrating that almost anything could be sold on the Internet. Jeff Bezos of Amazon.com, Time‘s 1999 Man of the Year, painted visions of a new economy, where Web sites established brands and let profits take care of themselves. “There was this kind of attitude that we’re not going to die,” says Scott Segal, former head of IJewelry.com. “There was this exuberant market with all this money and a new kind of business valuation [in which it was] okay to lose money indefinitely.”

Amid all this, jewelry seemed to be—and to some still is—an appealing niche. It didn’t cost much to deliver, it had good margins, and the big retail players were on the sidelines. “We all thought the brick-and-mortar people wouldn’t take the time or money to go forward,” says Dave Norman, who left Reeds for IJewelry.com before joining Richmond, Va.-based Schwartzchild Jewelers.

It looked like an unlimited gravy train, and many retail veterans merrily climbed on board, lured by sky-high salaries and the chance of greater rewards to come. “You would read about it every day in the newspaper, how this guy was making $20 million, another, $30 million,” says Richard Caniglia, a former merchandiser at Miadora who now is with New York-based manufacturer Andin. “I remember when they were wining and dining me to make the move out [to Miadora]. I had dinner with the venture capitalists. One of the venture partners tells me this could make $100 million, and he said, ‘100 million. That’s a sports team.’ He talked about $5 million like it was chump change. That really opened my eyes. I thought: How many times does this kind of opportunity come along?”

To outsiders, these sites were bloated white elephants designed to make money on the stock market, not by actually selling product. Insiders don’t deny this but say there was a clash between jewelry people who looked at the sites as a business, and venture capitalists who saw them as a quick buck. “Look what their name is: ‘venture capitalists,’ ” says Caniglia. “They are not business builders. They are in for the very short term. They wanted to spend quickly, go public quickly, and get out quickly.”

The thinking was, establish yourself as the category leader as quickly as possible, and at any cost. “You had a whole venture capital culture sending the wrong message originally,” says Don Palmieri, the well-known “market monitor” who worked briefly at Mondera. “It was all about customer acquisition. Give customers good deals with good merchandise and exceed their expectations. But they never talked about the bottom line.”

All this meant massive spending on advertising—at levels that left even employees feeling unsettled. “The spending was at a rate that was just hard to believe,” says Caniglia. “I remember doing an ad for $250,000. The board members actually said, ‘Don’t leave money on the table.’ ” Still, no one argued—these were major financial backers with impressive track records. “[Miadora backer] Sequoia Capital took Yahoo and eToys public, so we figured they knew what they were doing,” says Caniglia. In the end, Miadora—whose founders included the son of a prominent venture capitalist—burned through $52 million in a little over a year.

 

 

Even early on, there were signs that the party wouldn’t last forever. “The venture capitalist community is used to a 10-times return in a year,” says Hall. “No one who knows retail expected that to happen.” The jewelry people often found their advice going unheeded. “Most of the people at the top spent their time painting a pretty picture of the company, hiring a lot of people with Harvard and Yale degrees,” says Palmieri. “But they didn’t understand simple things, like that you need someone’s ring size to sell them a wedding band. And that led to a vast majority of wedding bands being returned because they were the wrong size.” At Miadora, the jewelry people cringed when the site put out a catalog in February, knowing from experience that it would make a far greater impact at Christmas.

Even with their often-astronomical marketing budgets, these sites were attempting the near-impossible. “People were trying to establish a brand in weeks and months,” says Segal. “It’s like they were trying to repeal the laws of gravity.” Further complicating the matter was the fact that some sites had unusual names that took a while to sink in. “You could put a gun to my head and I couldn’t tell you what ‘adornis’ means,” says Carolyn Kelly, who joined that site after years as merchandise manager for Saks Fifth Avenue. The domains didn’t just confuse consumers—according to one account, Irish newspapers originally printed “adornis.com” as “adonis.com,” a male porn site. A mini-feud even developed between sound-alike sites Mondera and Miadora, with each convinced the other was leeching off its name. At one point, Mondera registered the domain “meadora”—until it was ordered to give it up in an arbitration. (Ironically, the two sites later talked about merging.)

All these chinks in the armor became more serious in March 2000, when the NASDAQ crashed. Once it became clear that investors and Wall Street would no longer support money-losing dot-coms, the venture capitalists decided they wouldn’t either. Suddenly, sites had to become profitable or die. “The rules changed in the middle of the game,” says Cheryl Kremkow, the former editor of Modern Jeweler, who became a vice president of Mondera and is now with Gem.net. “No one expected it would change so quickly. The shock of that transition was too much for some people.” And when the sites couldn’t produce instant profits, the backers lost interest, and the money dried up as quickly as it had appeared. “To us, this was a real business, but to the guys in Silicon Valley, it was all a game,” says Ann Oas, the former merchandise manager at Miadora. “And when they got tired of playing it, it was over.”

 

 

This didn’t happen only to jewelry dot-coms; more than 200 Web businesses failed last year, including more than 100 e-commerce sites, mostly for variations of the reasons listed above. But some of the jewelry sites had problems that were specific to this sector.

“Jewelry has a lot of service demands,” says Kremkow. “You need trade-ins, sizing, 24-hour service, training—and it has to come in a beautiful box. All those things cost money.” In addition, online shopping is about selection—but building a large jewelry inventory doesn’t come cheaply. “Online stores have thousands of SKUs,” Kremkow says. “Multiply thousands of SKUs by the average price of jewelry, and that’s a significant investment in inventory required that’s unusual for a dot-com.” In addition, the two biggest sellers online are watches and loose diamonds, both low-margin items—particularly on the comparison-shopping-friendly Internet.

Independent jewelers also did their best to sabotage the sites. By telling vendors not to sell to their cyber-competition, they limited the number of vendors available to the dot-coms. “At one point, manufacturers who sold their things to Web sites were getting calls from retailers almost daily,” says Segal. “If I’m a manufacturer, and I make 99% of my sales in the brick-and-mortar world, I’m not going to disrupt that.” Vendors who sold to the Web often did so with significant provisos. “You had to make financial commitments to inventory that were huge,” says Kelly. “We would have commitments that canceled on us, just because the industry was against the concept. It became unpleasant to do business.”

Despite recent history, many dot-com vets believe the concept of selling jewelry online is still valid. “You have to remember, there was no jewelry sold on the Internet two years ago,” says Kenny Kurtzman, head of still-operating Ashford.com. “Today, it has to be $50 million to $100 million. From zero to $50 million to $100 million in two years is pretty fast.”

And with so many sites closing up shop, many feel there’s a market waiting to be captured by the right business. “If the Internet boom was created by an overreaction on the positive side, now there’s an overreaction the other way,” says Scott Segal. “There’s a ton of potential there.” Kelly thinks the stock market will eventually wake up to this potential. “In the next 24 to 30 months, you’ll see it rekindled,” says Kelly. “There’s a whole big country that doesn’t live in a metropolitan area and doesn’t have access to a lot of this jewelry. If people bank online and do everything else online, they will shop there, too. And the jewelry retail experience today is just too intimidating for people.”

Still, there’s also a sense that “clicks-and-bricks” businesses have a greater advantage in the Internet area than the “pure-play” (online-only) folks originally thought. “It’s the brick-and-mortar people that can make it happen,” says Norman. “They have the name, the ability to do the marketing.”

Many feel that the off-line sector should not look at dot-coms negatively but rather as a potential positive. “The Internet was a huge shot in the arm for the industry,” says Hall. “Christmas 1999 was very good for the industry, partly because there was all this increased advertising from the dot-coms. At Christmas 2000, it wasn’t there anymore. The dot-coms created a bigger pie for everyone, and when they went away, the pie got smaller.”

In the end, most dot-com refugees say they’d consider going back to a dot-com if the right opportunity presented itself—although they’d do things differently this time around. “I learned that if you know the industry and you know your business, stick to your guns and do what you think is right,” says Oas. But even the heartiest optimists aren’t predicting a return to the “irrational exuberance” of 1999. “It was just a crazy time, and when I think about the mentality of that period, it was insanity,” Segal says. “Now it’s back to the basics, to the fundamentals, to real profits. Frankly, I like it better.”