The New York Times recently ran a front-page story in its Sunday edition reporting that the growth of online commerce is slowing. The story was titled “Some Buyers Grow Web-Weary, And Online Sales Lose Steam.” The first sentence of the story asks, “Has online retailing entered the Dot Calm era?” The fact that the story ran on the front page – A-1 – of the New York Times meant it was very important news, as in “earth-shaking news,” a “surprise,” or “something totally unexpected.”

 

In our opinion, that’s one of those “well… duh…” articles. We all knew that eventually the growth rate of online commerce would slow. What we didn’t know was when the growth rate would slow down. The answer, based on the New York Times article, is “right now.” That news probably justified the story’s placement on the front page of the newspaper.

 

We’re guessing that many of you are now saying to yourself, “Whew, thank goodness online commerce growth is stalling. Now I can get back to running my store.” Further, some of you are also chuckling to yourselves, thinking that this proves that our forecasts about online jewelry sales growth are hooey.

 

Before you gloat, look at the big picture with us for a few moments.

 

As IDEX Online’s research director, perhaps we have an unfair advantage. We have a forum for publishing our research, our outlook and our forecasts: the IDEX Online news pages. If people disagree with us, they are relegated to our forum or to sending a letter to our editor that might be published. (Enterprising merchants are also welcome to write a rebuttal.)

 

Thus, when we heard from several folks that an executive panel discussion at the recent JCK show disagreed with our outlook on jewelry online commerce, we were distressed. We weren’t distressed that someone took a different point of view. In fact, it really wasn’t a different point of view; we agreed with most of what was reportedly said. Rather, we were distressed that our articles on the future of jewelry online commerce were not clear enough to make our position understandable.

 

Here, point-by-point, is our outlook – the pro and the con – for jewelry online commerce:

 

1. The internet is only a channel of distribution. It does not create new consumers (the birth rate isn’t up since the internet has become mainstream), and it doesn’t create new money (the printing presses at the U.S. mint aren’t spinning any faster these days).

2. Retailing is basically a sum-zero game. As an economist, we understand the theory about the velocity of money. But our grandmother said it best: “You can only spend that dollar once.”

3. Online sales will continue to grow, fueled by many factors.
   1. Demographics are favorable to fuel online sales longer term. The largest of group of online consumers are the young twenty-and-thirty somethings. Youngsters today are exposed to computers as soon as they go to school (as young as three years old). So, there is a great likelihood that more and more consumers will gravitate to shopping via computers, especially if they have grown up with them.
   2. Online commerce is still an immature channel of distribution. Only about two-thirds of all American homes are hooked up to the internet, many of them still have slow dial-up connections that make surfing and shopping frustrating. As more homes sign up for internet service, and as more consumers opt for faster internet service, online commerce will grow. 
   3. As one economist cited in the New York Times article said, online commerce represents less than one percent of total GDP, and “there is still a lot of head room” for growth.
   4. The graph below summarizes our range of growth prospects for jewelry online sales.

Internet Jewelry Sales Projections Percent of Total U.S. Jewelry Sales Source: U.S. Dept. of Commerce & IDEX Online Research

3. A key reason that online jewelry sales have grown so rapidly is because mostly diamonds and diamond jewelry – inherently large ticket items – are being sold over the internet. The average ticket for diamond jewelry in the U.S. is around $600-$700; the average of all other jewelry is in the $150-$200 range, yielding an overall average ticket for mass market jewelers in the $300-$350 range.
   
   Why have diamonds – traditionally a highly emotional purchase – sold so well online? Diamonds are a commodity. Using the four Cs, consumers can easily compare diamonds and search for the best value. Because of the commodization of diamonds, jewelers’ margins have been pushed lower and lower. Online merchants have taken advantage of both the commodization of diamonds and tumbling diamond margins, and by cutting diamond prices further, they have added to the margin pressure woes of store-based merchants. 

5. Online sales growth will slow. Our forecast calls for slowing growth of online jewelry sales. Growth will slow for some practical reasons:
   1. Mathematics – Percentage gains diminish as the numbers get larger.
   2. Maturity – Like every other channel of distribution, as the online distribution channel begins to reach maturity (defined as fewer and fewer new customers opting to purchase online), growth will slow. The “early adapters” (that’s a term demographers use to distinguish a subset of consumers who want to be first to use anything new, like new technology or the iPhone) have already logged on and are shopping at their favorite online merchants. Thus, the low-hanging fruit has been picked. The next group of consumers won’t sign up for online commerce at the same rate as the early adapters.
   3. Assuming that other jewelry categories will begin to sell online (there is some question about the validity of that assumption), the lower average ticket of most of those jewelry categories will slow the pace of online jewelry sales growth.
   4. The graph below illustrates our forecast growth rates for the mid-point forecast (black line on graph above) and the lower-range forecast (green line on graph above).
      
6. Online sales growth will slow for other reasons, including the following:
   1. Store-based retailers are fighting back. The New York Times article cited merchants who have livened up their stores to be more alluring. In addition, traditional stores are creating a more interactive shopping experience. And, stores like Apple and Starbucks make the shopping experience much more compelling.
   2. Online shopping, because it involves a computer, feels like work; online shopping is more of a “chore” than an escape.
   3. Online sellers no longer have as much of a price advantage. Higher shipping fees and sales taxes have tended to level the retail playing field between online merchants and store-based retailers.

Online Jewelry Sales Growth Rates Source: U.S. Dept. of Commerce & IDEX Online Research

 

7. There is a theoretical maximum for online sales versus in-store sales. Some online trade magazines tend to suggest that 10 percent of all U.S. retail sales is the theoretical maximum level for online retailing. Others scoff at this number, suggesting that it is too low. Either way, we are in virgin territory, and no one really knows the answer. Catalog sales reached about 3 percent of retail sales at their zenith before leveling off and then declining, despite the dominance of Sears, Montgomery Ward, Lillian Vernon, Lands’ End and others. Online retail sales, including jewelry sales, have already exceeded that level.
   
   Assuming that online jewelry sales top out at 10 percent of total industry sales, this means that 90 percent of total jewelry industry sales will still be made via traditional store-based channels. This fact seems to be lost on too many merchants. Online commerce isn’t going to put store-based jewelers out of business, other than the weakest merchants, and they are already on Death Road.
   
8. As a shopping concept, it is difficult to pinpoint exactly why online retailing has been so successful. Experts cite convenience, low prices, variety and other enticing factors as boosting online commerce success. But most Americans are tactile, tire-kicking shoppers; they like to touch and feel the merchandise – especially jewelry – prior to buying. The Myers-Briggs personality test says that about 75 percent of all Americans are extroverts; those extroverts don’t get their shopping jollies by sitting in front of a computer screen. They shop for social, recreational and tactile reasons. In particular, jewelry is an emotional purchase; we can’t seem to forge an emotional relationship with our computer screen.  

9. Consumers are not committed to one form of buying versus another; they will switch back and forth. Thus, the New York Times says that it is no surprise that a clicks-and-bricks hybrid model seems to be emerging. Some retailers offer in-store pickup of items purchased on line; this tends to raise the average ticket since shoppers buy additional merchandise when they come to pick up their items. This is the opportunity for store-based jewelers.

10. The business model for online jewelers is just plain scary for the traditional jewelry industry. This may be the most important point. The business model for online jewelers such as Blue Nile and others is turning the jewelry industry on its head (see table below). It seems that almost everyone in the “traditional” jewelry industry is in denial. Folks: the online business model is real, and it will cause the industry to change. Get accustomed to the idea. The online business model, while it may never need to be fully embraced by store-based jewelers, will accelerate the consolidation of the jewelry industry; it will accelerate vertical integration of suppliers; and, it will change how store-based retailers do their business.
    
    The online jewelry business model is readily bankable: witness the investors and banks willing to fund operations such as Blue Nile. The traditional jewelry business is not readily bankable: Wall Street bankers aren’t bringing deals to the market (based on our twenty years on Wall Street, believe me, if someone thought there was even a slight chance to do business with jewelers, bankers would be lined up at your front door). The online business model will cause the store-based business model to change enough to make the jewelry industry easily bankable, in our opinion. In the future, stores will increase their inventory turns, reduce their owned inventory levels and generate more cash flow than ever before; those factors will delight commercial bankers and investors.
    
    The online jewelry business model and the traditional store-based business model are compared on the table below.

Online vs. Store-Based Retailers - Financial Comparison 2006 Source:  Company reports

 

We recently made a presentation on the future of online commerce, “Online Commerce: Be There or Be Square”, at the AGS Conclave in Denver. That presentation is available at no charge from IDEX Online (email research at idexonline dot com). In our presentation, we also referenced comments made by Jacques Voorhees, chairman of Polygon. Voorhees has some very practical suggestions for jewelers who want to compete on online. While we can’t offer Voorhees’ PowerPoint presentation (we saw it in Dubai earlier this year), it may be worth your time to contact him at Polygon and request a copy of that presentation.

 

Here are some of salient points from our AGS presentation:

1. If you as a store-based jeweler don’t have an online presence, you are very late to the party. You’ll have a difficult time catching up.
2. Unless you have millions of dollars available for marketing, you don’t stand a chance of replicating Blue Nile’s success. Jacques Voorhees, chairman of Polygon, reiterated this point in his speech in Dubai.
3. You need to have some online presence – at the very least, an electronic calling card.
4. If you aren’t online, though, you didn’t miss much last year. Online jewelry sales were 3.9 percent of total industry sales. If you are the typical JA jeweler, your annual sales were about $1 million in 2006; you may have missed $39,000 in sales – that’s 3.9 percent of $1 million, your fair share of online sales.
5. While 75 percent of U.S. jewelers have an online presence, only 25 percent engage in online commerce, according to InStore magazine (April 2007). Most jewelers update their website one to four times per year.
6. Store branding is best for your website. That reinforces one single name. Think Zale’s Diamond, not the Leo Diamond (who sells that?).
7. The average online ticket appears to be just over $200 for most specialty jewelers. Despite the dominance of diamond sales online, this is below the average ticket for a mass market jeweler of $300-350 and a guild jeweler of $850-900. Even Tiffany’s average ticket for online sales is $231.
8. Your online price and your store price should be the same. More jewelers have found success with this formula versus a two-tier pricing system.
9. Creating a website is not a do-it-yourself project. Your niece Sally, who is studying graphic arts in college, can’t do the job.
10. Despite claims to the contrary, no one has successfully rolled out internet “kiosks” in jewelry stores. There’s a cultural barrier with your current sales force.
11. Don’t put your whole store online. Tease shoppers with enticing merchandise, and try to get them into your bricks-and-mortar store. That’s Tiffany’s strategy.
12. Tiffany has used online commerce to move customers away from its catalog. The company has been mailing fewer and fewer catalogs; now, 80 percent of their “direct” business comes via the internet.
13. Get a marketing professional to help you understand the internet. Think outside of the box. We’ve seen excellent jewelry websites on myspace.com and other places that young consumers shop.
14. Set your expectations at a reasonable level. Your fair share of U.S. online jewelry sales in 2006 was $39,000 per store. It won’t double your business. And, at only $39,000 per year per store, can you really afford the infrastructure needed to support that level of sales?
15. Make sure you have a unique proposition. A half-carat diamond pendant at any price is not a unique proposition.
16. Lean on your suppliers to help you build your website.
17. Make sure you sell jewelry online, in addition to diamonds. The margin is in jewelry, not diamonds.

What’s the future going to look like?

 

• While the hybrid business model – a combination of strong store-based sales and online sales – appears to be working in other retail categories, we haven’t seen it implemented successfully in the jewelry industry, yet. Someone will figure out the proper hybrid business model at some point . . . look for it.
• Diamond suppliers have the greatest opportunity to exploit the power of online commerce. Why? They own the diamonds. Look for your friendly diamond supplier to open a web store.
• The mine-to-market model is still the most profitable. Look at Aber and Leviev, if you don’t believe it. These folks also have the best opportunity to leverage online commerce.

The internet and online commerce are here to stay. As the title of our AGS presentation said: “Online Commerce: Be There or Be Square.”