Return to Sanity

The rise and fall of e-commerce business-to-consumer (B2C) sites has been swift and brutal. These sites were born of the belief that “if you build it, they will come.” But in less than two years, the lottery-like riches that B2C business models initially earned for venture capitalists, entrepreneurs, and technophiles has been reduced to fool’s gold. And there isn’t an industry that has escaped the purge of the online markets. Even Amazon.com, the company that put the “e” in e-commerce, is faced with grim uncertainty.

The recent demise of “pure-play” jewelry sites (businesses that sell only on the Internet) such as Miadora.com and Adornis.com has sparked both fear and relief in the jewelry industry. The feeling of relief is summed up by Bev Hori Uyeda, Jewelers of America (JA) vice president of professional development: “Thank goodness we are returning to sanity.” Uyeda, who is also involved with Jnet, a Web site created by JA and the Manufacturing Jewelers and Suppliers of America (MJSA), adds, “[It’s] the end of crazy money, the tens of millions of dollars invested in companies that have no profit. I was very happy with the market correction.”

Growing pains. Liz Chatelain, CEO of MVI Marketing Ltd., Paso Robles, Calif., a market intelligence and strategic consulting firm for the gem and jewelry industries, agrees. She says the high failure rate of online companies is the result of knowing too little about how consumers interact with the new medium.

“We are in our infancy,” she says. “We haven’t figured out yet what it will take for people to hit the buy button. It’s the biggest mistake people are making.”

Pure-play sites and the investors who poured money into them are the biggest losers. The sites had to spend large sums on national marketing and advertising campaigns before they made their first sale.

“There is no other business model in history that makes you market on a national scale first,” Chatelain says. ” USA Today launched nationally. But it struggled for the first six to eight years.”

For jewelry retailers, Chatelain says the idea is to educate and inform consumers-in other words, to make them feel comfortable and empowered. It’s the retailer’s job to learn what makes consumers hit the buy button, then help them do it. In many ways, brick-and-mortar operations have an advantage, because they already have brand names. Stores with national operations will certainly benefit from such name recognition, but even a regional retailer can use the company name to its advantage on the Web.

Retail jewelers sell more than jewelry-they sell a combination of knowledge, skills, and service. Retailers develop symbiotic relationships with consumers: Each depends upon the other. According to Chatelain, retailers need to earn the same trust online that they do in the store. She says one way to use the Web to nurture consumer trust is to provide consumer information from reputable sources. Among other features, a site should include information on diamonds, gemstones, precious metals, and the elements of good design.

Another feature that Chatelain says will encourage consumers to hit the buy button is showing “authenticity.” That can be done by providing a certification-similar to the “Good Housekeeping Seal of Approval”-for stones and mountings.

Who’s buying what on the Web? “I’m excited about pieces of the jewelry industry [on the Internet],” says Al Kelman, president of the retail consulting firm Alan P. Kelman & Associates, Philadelphia. Kelman has spent the past few years watching in disbelief as unproven dot-com companies scored huge amounts of funding from venture capitalists. Many of these companies were launched with neither sound business models nor the knowledge of which products would move in the new medium.

The ability to sell products over the Internet is mostly limited to two types of businesses, he says: those that supply rare items to consumers who know the value of the product, and those that supply price-driven commodities.

As an example of items in demand (what he calls a “narrow and deep” business model), Kelman cites products designed by silversmith Georg Jensen. Throughout the world, serious buyers of high-quality items know Jensen’s work, and it’s in demand. “When eBay gets a Georg Jensen item, it sells so fast it gives me a headache. It’s a no-brainer,” he says. “It’s the same with rare coins or rare stamps. It’s so hard to find that [buyers are] thrilled to find it on the Internet. The game’s over.”

But Kelman believes that’s where the high-design, high-quality part of the market ends. Most people with cultivated tastes would prefer seeing jewelry in person, so they can feel it and see for themselves how it looks on the wearer. He says the same principal applies to gemstones: “How do you look at the refraction on the ‘Net?” he asks. “I want to see what it looks like. Jewelry is decoration by definition. It’s adornment. For the kind of money we’re talking about, I want to see these things. The risk is just too great.”

In contrast, the commodity approach (or the “broad and shallow” business model) provides products for consumers who are mostly shopping based on price, Kelman says. “There are a lot of blue-collar people who shop price and buy by weight,” he says. “It’s easy to sell these items online, but not easy to make money. There’s a lot of competition.”

But whatever approach retailers may take to sell product online, they must use “fundamental retail models,” Kelman says. The model must include inventory management control, productivity, gross margins, and real-live-activity base costs.

“You can’t spend 60 bucks per customer to build a customer list. You’ll go broke,” he insists. “And you must have a handle on all of the service issues. In jewelry, service and reputation is a critical component. Who knows what you’re buying when you’re buying jewelry? It’s a real issue of trust.”

Manufacturers and jewelers unite. One new Internet model that’s being supported by the jewelry industry uses a business-to-business-to-consumer (B2B2C) approach. Two companies recently launched Web sites using this method-Enjewel (www.enjewel.com) and Jnet (www.jnet.com).

Jewelry retailers and manufacturers founded and are funding both sites. The companies are using their subscriber bases to get the word out about the sites, thus limiting the need for massive and costly advertising and marketing campaigns. There’s no pressure to raise massive amounts of funding while trying to quickly show profit to investors.

Enjewel is a growing, industry-wide Internet community that represents more than 200 retail jewelers and more than 100 manufacturers, designers, and watch companies. Its founders include some of the best-known and largest jewelry retailers and manufacturers.

Sheldon Ginsberg, Enjewel CEO, says the site provides three important elements for consumers: brand-name recognition (consumers are more likely to buy products they can’t touch if they recognize the brand name), free after-purchase support of the service or product, and discounts up to 30%.

Retailers and manufacturers are required to have an e-commerce-enabled Web site, Ginsberg explains. For a fee, Enjewel will build the site. And retailers and manufacturers must feature the Enjewel Web site address on all their promotional material. In addition, the Web sites’ home pages and 75% of their other pages must contain a link to the Enjewel site. This saves Enjewel a great deal of money in advertising costs.

Consumers can buy products directly from Enjewel. They can access the Enjewel Web site directly or through the site of a member retailer or manufacturer.

After the sale is made, Enjewel provides a list of retailers in the customer’s area that will provide free follow-up service (a “personal service provider”) for the product. If the consumer came to Enjewel from a retail jeweler’s Web site, that retailer automatically becomes the personal jeweler.

How do retailers benefit? According to Ginsberg, the retailer gets 30%-50% of the gross margin on commission of the sale, depending on how the product was sold. The retailer also gains a new customer. “It’s an opportunity to build their customer base,” he says.

Manufacturers also can sell directly to consumers. But member retailers aren’t upset over this arrangement, Ginsberg says, because the customer’s local retailer will share in the profit and will have the opportunity to service the product and gain new business.

“For the manufacturers, its another channel of distribution,” he says. “All the concerns that brands have in selling directly to the consumer are not an issue. The Enjewel model eliminates that.”

The B2B approach. Jnet was founded by JA and MJSA. Members of both associations wanted an e-commerce presence at a reasonable price, explains Steven Kravit, CEO of Jnet. The company has since split from the two groups and formed a for-profit company that serves the organizations.

For $1,000, Jnet will build an e-commerce-enabled Web site for a retailer and provide the tools to maintain it. Retailers or manufacturers can choose any of six templates for their sites. In addition, manufacturers will be able to host an e-commerce-enabled catalog of their supplies and make it available to retailers for ordering. There are no transaction fees. “We’re not getting involved in transaction fees,” Kravit says. “I don’t believe manufacturers or retailers want people in their pockets.”

For now, manufacturers will not be able to sell directly to consumers, Kravit says. About 12 manufacturers and 12 retailers subscribe to the Web site. While there is a consumer element to the site, Kravit says the B2B component is the one that JA and MJSA want and is what the company is focusing on.

“It’s a way for people in the industry to use their inventory better. We are not measuring consumers,” Kravit says. “It provides the ability for EDI [electronic data interchange] and collaboration on sales information. For the retailer and manufacturer, it’s primarily a B2B exchange with B2B applications.”

He adds, “Our goal is to support retailers and manufacturers [and] provide whatever they need to be successful on the Internet. We will work with the industry to provide a support mechanism on the Internet for B2C and B2B applications.”

Kelman agrees with JA and MJSA members that focusing on a B2B approach may be the best way to take advantage of the efficiencies of the Internet.

“B2B is interesting, and it’s where jewelry is moving forward,” Kelman says. “First, it creates a timely and cost-effective way for manufacturers to balance inventories. Second, with a balanced inventory, guys are basically auctioning stuff off. Nothing prevents someone from Thailand [from giving] you an offer you can’t resist. It brings together makers and sellers. It helps to find artisans who provide unique crafts. The world is too big to do this on foot.”

But even though Jnet’s main focus is to service the B2B community, Kravit says it’s important for jewelers to be able to take advantage of the Web to reach and sell to consumers.

“I don’t think any retailer is counting on [online sales] being more than five or 10 percent of the business,” he says. “But that’s a huge number. And it’s going to take time. It’s really important that consumers have access to their store on a 24-hour, seven-day basis.”