The Industry Vs. The Internet
December 23, 04Three tales in two days. First an e-mail asking whether we sell directly to the United States. We advised the writer, Nate K., that we are a service provider and neither sell nor buy diamonds. His reply: “I'm about to get engaged and was looking for someone in Israel that might sell direct to consumers. Do you know of someone you would recommend?” Second tale: an Antwerp dealer offered a dealer in New York a certified 5 carater at Rap minus 26. The New York dealer was contemplating the purchase and then, by pure chance, noticed the very same stone for sale on Blue Nile for Rap minus 21, with the difference probably accounting for fees. The Antwerp dealer (and that also might have been an Israeli or Indian dealer) basically offered the stone to the consumer at the very same price offered to the trade. Third tale: the sister-in-law of a diamond industry banking executive asked for help in finding a certain stone. The executive used his good contacts around the Hovenierstraat and came back with a few offers. Said sissy-in-law: “Thanks, I don’t need this any more, I have found these stones far cheaper on the Internet.”
How many stones are sold on the Internet directly to the consumer and at what price? How long will it take for the consumer to end up paying the ex-cutting center wholesale price for polished? The jewelry and watch category is the single fastest growing Internet purchase product in 2004, notes comScore, reporting jewelry sales of $1.35 billion for the year up to December 12, an increase of 58% over the same period in 2003. “Visits to jewelry, luxury goods and accessory sites rose 40% from October to November, with 13 million Americans visiting sites in these categories.”
The research organization notes that in November some 128 million consumers, or 80% of the U.S. population that uses the Internet, visited retail websites in November. ComScore’s president expects that consumers will spend more than $15 billion online this holiday season, noting that “the web’s impact on retail extends far beyond its application as a direct selling medium. Many consumers use the web to research products and compare prices for items they ultimately buy offline.”
If the U.S. diamond jewelry retail market is estimated to be around $29 billion, online sales represent only some 2%, says the Jewelry Industry Research Institute. Other research, conducted by the faculty of Boston College, says that “in roughly four years, online diamond sales have taken 4%-5% of the total U.S. business.” That’s enormous growth.
Total online jewelry sales (including items without diamonds) will hit $2.8 billion, notes sales tracker Forrester Research. The U.S. Bureau of the Census forecast on consumer spending is more upbeat, estimating 2004 online jewelry sales at $3.1 billion. The U.S. Department of Commerce estimates (2003) fine jewelry sales on the Internet at $6 billion. Different measuring methods and product definition may account for the differences. It is hard to get total statistics on Internet loose diamond sales or of diamond jewelry purchases, but indications are that they are skyrocketing. Notes Boston College professor John Gallaugher: “Blue Nile now sells more engagement rings than 54-store Tiffany, yet has better margins than the #1 jeweler, Zales.”
Regular readers of this column are aware of my view that diamond jewelry sales have basically been stagnating in recent years, that we have witnessed a redistribution of profits through the pipeline, that the gross margins of the retailer (on loose diamonds and diamond jewelry) have declined by some 15% and that, basically, the consumer doesn’t pay more for a diamond than he/she paid three years ago. The increases in polished prices the trade press enthusiastically writes about from time to time refer to wholesale polished prices, and do not reflect the actually consumer purchase price.
Will a combination of the Internet and the commodization of the diamond product eventually wipe out the wholesale business – simply because wholesale buying prices may equal Internet selling prices? I posed this simple question to a number of colleagues and industry players. One of my more astute American friends, and renowned industry expert, jotted some thoughts in an e-mail message. “There is NO QUESTION that Blue Nile's business model is revolutionary and it is the wave of the future. I've been saying for years that diamond/jewelry wholesalers have virtually no future in our business, unless they add value.”
“More and more U.S. jewelry retailers (look at Zale and Kay) are bypassing wholesalers and going directly to suppliers,” continues the expert. “If you need more evidence, just take a look at other retail categories -- consumer electronics, office supplies, pet supplies, home centers, any of the big box retailers. They cut out the wholesalers years ago. Yes, the jewelry/diamond industry isn't the same, but here's another blockbuster thought: when we began certifying diamonds, we commoditized them - made them just like 2x4s, just like the Home Centers sell,” says the expert.
“The bottom line of this whole scenario - elimination of much of the middle of the diamond pipeline - is that it will happen quickly [emphasis added], and it will make the industry much more profitable for the remaining players. If you eliminate all of those folks whose margin is only 10-15%, that's 10-15 points of profit that will accrue to the consumer (a few points), the retailer (a few points), and the supplier (a few points). In short, everyone will ‘profit’ from this evolution (or perhaps revolution).”
That “everyone will profit” is not really true – it implies the disappearance of a whole level in the diamond distribution chain, something which has been suggested already by the Supplier of Choice model and the famous “spaghetti chart” that stresses the inefficiencies of the diamond distribution system. There will be “pain” and lots of it. Moreover, in the transition process, the retailer hasn’t made more profits nor does the consumer pay more.
Wholesale distributors do add value (service, credit, etc.) and the fact that there is such a vibrant wholesale sector in New York and elsewhere underscores this fact. However, and this gets me back to the three tales of the week, do we see a profound shift in thinking – are hitherto treasured taboos being made redundant – with more and more cutting center sales going directly to jewelry manufacturers and retailer, or, through the Internet, directly to the consumer?
Back to the aforementioned three tales of the week. Looking at the Blue Nile phenomenon, Professor Gallaugher says: “The rocks (he means diamonds - cez) are provided by the same wholesalers who deal with Tiffany and Zale, although none will reveal their identity for fear of reprisals.” The New York dealer seeing that his supplier in Antwerp was selling at the same price to the Internet consumer was rather upset. What are his choices? Dropping that supplier? The “bypassing” of time-honored business channels is now so widely practiced that wholesalers don’t have too many options but rather try to do their utmost to protect their market niche through the provision of superior added value. It may be a lost battle, as my U.S. expert friend has suggested. Any Internet diamond trading floor provider will confirm that many suppliers are reluctant to have their names disclosed as selling through the Internet to the whole world, including consumers (although these are not always specifically targeted) as this greatly upsets their own clients. There is still a stigma attached to these practices.
My New York expert friend has a very unconventional view – and I provide it mostly for the food for thought it may give us when thinking about the next year.
“As far as the diamantaires of India, Antwerp, Israel et al putting their goods for sale on Blue Nile at the same price as they sell to NY dealers ... why not? This is capitalism at its best. It will put the U.S. dealers on notice ... if they don't offer added value, they're gone! My only problem is with the Indian dealers ... they could get a few more points of profit if they priced their diamonds slightly higher on Blue Nile ... and they could still get the business from Nile's customers, because the U.S. dealers can't make a profit trying to compete with Blue Nile at almost any price.”
They cannot? They might have to – there aren’t really too many choices. Happy New Year to you all.