Online jewelry retailing is an entirely different business from store-based jewelry retailing. Unfortunately, many jewelers do not understand this concept. They simply try to take the merchandise in their store and put it on line. It’s not that simple, and it usually results in failure.  

 

The economic business model for online retailing – and specifically online jewelry retailing – is vastly dissimilar traditional store-based business models as well as other non-store retailing models such as catalog merchants, television shopping, and others.

 

Online retailing requires a new mindset – merchants must be able to look at retailing in a new, out-of-the-box way. For example, the online retailing business model operates with gross margins so low that the resulting gross profit dollars would not cover the operating expenses of the traditional store-based jeweler. Retailers who think they can sell jewelry online for the same prices that they charge in their stores will find quickly that their customers have become ex-customers.

 

Further, most online retailers don’t own their inventory; in contrast, store-based retailers own their inventory for about a year before they sell it. Online retailers need little working capital; store-based jewelers are heavy users of working capital and short term debt.

 

Beyond the differences in the financial model, the business model for selling online is also different. Rather than romancing a beautiful diamond eye-to-eye with a customer standing only eighteen inches away, an online retailer must create the same mystique with a customer who might be a world away. There is no way online sales people can read a customer’s body language. In short, the sales process is entirely different.

 

U.S. Online Jewelry Sales

In the past, jewelers were slow to embrace the internet. Today, most jewelers have a website, but most do not engage in online commerce.

 

Online jewelry sales represent about 4 percent of total industry sales, based on 2008 data (the latest available); industry sales were about $60 billion in 2008. About three-fourths of online jewelry sales are comprised of diamonds and diamond jewelry. Because diamonds have been reduced to a commodity, it is very easy to sell them online. In contrast, other types of jewelry have not been commoditized, so selling those goods online is much more difficult.

 

Online Sales for Chain Jewelers Modest

So far, online retailing has not been an important source of revenue for chain jewelers. For example, Zale generated about $56 million of online sales for its fiscal year ended July 2009, or just over 3 percent of sales. Sterling has not disclosed its online sales; it began offering goods online in late 2008. Tiffany generated about $143 million in online and catalog sales in 2008 (the latest data available), or about 5 percent of total corporate sales; we estimate that online sales are roughly half (or slightly more) of this total figure. Tiffany customers browse its catalog, and then order goods online. However, it is worth noting that Tiffany’s non-store – online and catalog – sales have been declining as a percentage of total corporate sales over the past three years.

 

Online Jewelry Business Model Difficult to Forge

There have been many attempts to sell jewelry online, but most have failed. Names that litter the retail road to failure include Odimo, BodyFlash, Adornis, EnJewel, ValueAmerica, Miadora, and others (we note that some of these names are still registered, but generally redirect viewers to other jewelry and non-jewelry sites).

 

Who’s Selling Jewelry Online?

The magazine Internet Retailer conducts an annual census of online retailers by product category. While they don’t break out individual sales by merchandise line, they do provide aggregate sales levels by company.

 

The following table summarizes online jewelry merchants rankings for 2008, the latest data available. Interestingly, e-Bay was not listed on the Internet Retailer rankings for jewelry, despite it being a major retail jewelry distributor. We listed e-Bay at the bottom of the table, along with another couple of omissions.

 

Source: Internet Retailer

 

Blue Nile Financial Model

There is only one viable public jewelry company which generates all of its revenues from online commerce: Blue Nile. Blue Nile’s revenues of $302 million for 2009 make it the largest “pure” online jeweler in the U.S. Its revenues represent the equivalent of about 275 traditional jewelry stores, based on the latest data from Jewelers of America which says the typical independent specialty jeweler in the U.S. generates about $1.1 million in annual sales per store.

 

The following table compares key financial measures of Blue Nile versus the typical specialty jewelry in America. Blue Nile’s financial statistics can be found in its legal filings; IDEX Online Research relies on financial statistics for specialty jewelers primarily from the Jewelers of America Cost of Doing Business Survey as well as legal filings by other publicly held jewelers.

 

Source: Blue Nile, Jewelers of America & Other

  

Here are comments about the key financial ratios shown on the table above:

 

·        Gross Margin – Online jewelry retailers like Blue Nile sell jewelry for significantly less. Based on publicly available documents, most store-based jewelers buy merchandise for $1 and sell it for $2, yielding a 50 percent gross margin. Blue Nile buys merchandise for $1 and sells it for about $1.25, yielding a 20 percent gross margin.

 

·        Pre-Tax Margin – Because online jewelers have a much lower operating cost structure – no store rent, no ambiance – their operating costs are much lower than store-based merchants. Thus, online retailers are able to generate a much larger pre-tax profit – roughly double the level of a store-based jeweler.

 

·        Inventory Turn – There is a dramatic difference in the inventory turn of an online merchant like Blue Nile versus a store-based jeweler. This is one of the defining differences that substantially boosts profits for online retailers. Most of Blue Nile’s goods are “memo” or consignment merchandise; the company does not pay the vendor until 30-60 days after the goods are sold, even though Blue Nile collects customer payments within a few days after the sale. Store-based merchants typically own most of their inventory; unfortunately, it usually sits in their showcase for a year or more before it sells. The slow inventory turn for store-based jewelers is the primary stumbling block with bankers who might otherwise provide working capital for jewelers.

Many jewelers believe that their high margin – 50 percent or so – makes up for the slow inventory turn. In reality, it doesn’t. There are several accounting methods of illustrating the fallacy that high margins will yield high profits, even if inventory turns very slowly. The most-used measure is GMROI or Gross Margin Return on Investment. Without going into a long dissertation about GMROI and how it works, the bottom line is that jewelers should aim for faster inventory turn with smaller margins to maximize profits.

 

·        Advertising Expense – Advertising costs, as a percentage of sales, are similar for both online and store-based merchants.

 

·        Debt-to-Capital – Because of their heavy investment in inventory, store-based jewelers rely on high debt levels. Blue Nile has negligible debt on its balance sheet, and operates with negative working capital.

 

·        Vendor Float – This is calculated by dividing “Accounts Payable” by “Inventory.” Retail jewelers typically pay their vendors on extended terms, so their vendor float is about four months. Because Blue Nile owns its inventory for just a few days, but pays for it in a few weeks, its vendor float is an astonishing 400 percent (if Blue Nile paid for the inventory as it sold it, the vendor float would be 100 percent; this calculation illustrates the power of negative working capital).

 

·        Average Ticket – The typical mass market jeweler such as Kay or Zale generates an average ticket near $350. Higher-end guild jewelers generate an average ticket close to $1,200. Blue Nile’s average ticket is above average – about $1,500 – because it sells a large mix of expensive diamond engagement rings.

 

·        Average Ticket DER (Diamond Engagement Ring) – Just under 70 percent of Blue Nile’s sales are diamond engagement rings, with an average ticket of about $5,900 in 2009 (this is down from a high of $6,200 in 2007, and reflects the recessionary environment). The typical independent specialty jeweler generates an average DER ticket of $4,500 or so, while chain jewelers generate an average DER ticket near $2,500. The demographic profile of the Blue Nile customer tends to include a greater percentage of higher income young shoppers who are well-educated and internet savvy. Lower-income, less well-educated consumers are less likely to shop online.

 

·        Sales Per FT (Full-Time) Employee – A sales associate in a typical specialty jewelry store can generate just under $250,000 in annual sales, based on the average of about 5 full-time equivalent employees in the typical independent jewelry store. At Blue Nile, the calculation of “sales per employee” includes all company employees; Blue Nile generates over $1.75 million per employee.

 

·        Sales Per Square Foot – The typical store-based jeweler utilizes a footprint of about 1,800 square feet (total including back room), and generates about $600 per square foot in annual sales. Blue Nile generates almost $5,000 in sales per square foot, including its corporate headquarters, its U.S. distribution facility, and its overseas distribution facility.

 

Assets Required to Generate $1 Million in Sales

There’s another way to compare the financial productivity of online jewelers such as Blue Nile with store-based jewelers: how much square footage and how many people does it take to produce the annual sales of a typical store-based specialty jeweler?

 

According to Jewelers of America, the typical specialty jeweler has about five full-time people and generates sales of $1.1 million. Further, the typical store size is 1,800 square feet. Online jeweler Blue Nile has just over 170 employees and a total of about 61,000 square feet of corporate and distribution space, based on the latest data available. In 2009, Blue Nile generated $302 million in sales. The following table utilizes this information to determine the assets – people and space – needed to generate $1 million in annual revenues.

  

Source: Blue Nile, Jewelers of America & Other

 

Here’s what is important about this table:

 

·        Personnel costs – Blue Nile can generate $1 million in annual revenues with just over a half of a person. In contrast, it takes a store-based jeweler about 4.5 people to generate $1 million in revenues. Labor costs are one of the largest expenses for retailers; Blue Nile has a distinct competitive advantage with its minimal labor force.

 

·        Space costs – A store-based retail must spend heavily on a good retail location, so rent costs are high per square foot. On the other hand, Blue Nile needs only inexpensive warehouse space for its operations. Further, Blue Nile can generate about $1 million in revenues from just 200 square feet, while it takes a typical store-based specialty jeweler more than 1,600 square feet of very expensive space to generate the same level of revenues.

 

Because Blue Nile and other online jewelers have dramatically lower operating costs, they can sell for less and make a greater profit than store-based jewelers. It is important for store-based retailers to understand how their online competition operates, especially if they expect to participate in this market.