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Millennials Spurring Online Diamond Sales Growth

Q&A with Oded Edelman, CEO and Co-founder of R2Net

Jan 16, 2015 8:00 AM   By Ronen Shnidman
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RAPAPORT... R2Net is a company that has created an ecommerce platform dedicated to diamond jewelry, with a focus on selling to the U.S. market through its branded website James Allen. The company recently received its first external investment of $25 million from the venture capital company Israel Growth Partners in return for a 20 percent stake in the firm. Oded Edelman, the co-founder and CEO of R2Net, recently spoke with Rapaport News about the prospects for online retail in the diamond industry and what distinguishes James Allen from its competitors:

Rapaport News: What is your background in the diamond industry and how did you come to establish R2Net?

OE: I'm a proud third-generation diamantaire. I started in the trade as a diamond manufacturer and wholesaler and worked in that for many years. After some time I saw profit margins in manufacturing were shrinking, so I decided to move to a more profitable part of the business.

I tried to start mining in Africa, but realized that you need deep pockets and my expertise is not in the upstream. Consequently, I decided to go downstream to retail. My choices where either to open brick-and-mortar stores or to go online. I had already founded a website-building company in Israel called Daronet in 1998. Back then, there was less competition in online retail and I had the right experience, so online retail was the natural choice.

I started R2Net with James Allen as its retail brand name. R2Net also has a technology division called Segoma that is focused on developing our diamond visualization technology. We have offices in New York, Maryland, India and Israel. All the research and development work for James Allen and Segoma is done from our office in Herzliya, Israel, where I am based.

RN: Is it true that the original name of the company was

OE: No, I joined up with my friends James Schultz and Dean Lederman to form James Allen in 2006. Both of them are from the U.S. Dean is a diamantaire and James was actually a computer programmer before he went into online retail.

James had previously set up a website called before I came on board. It may have been a good name at the time when the idea was just starting out, but I would never call my company dirt cheap diamonds.

James Allen sells very high-end jewelry and was incorporated as a different entity. I wanted to call the website but we didn't think it was very American, so we called it James Allen, which are James Schultz’s first and middle names.

RN: What distinguishes James Allen from the U.S. online retailer Blue Nile?

OE: Both Blue Nile and James Allen sell diamonds, but the similarity ends there. While we are an online retailer, we pride ourselves on being a luxury brand. That begins with our product and our proprietary visualization technology that allows clients to accurately view what they are buying. I think our technology sets the standard for the online shopping experience in general. As a diamond dealer, I would never buy a diamond unseen so why should I expect my customers to do otherwise?

Our luxury brand approach includes our customer service, packaging and our after-sales support. I like to think of our customer service people as consultants more than anything else. Our business model enables them to really help customers figure out what is best for them and not necessarily what is best for our company. I don't care if I sell this diamond or that diamond, as long as I get the better diamond to my customer. People care about this and it is important to those who shop with us. When we ship orders to our customers, we use an expensive box so they can see that they bought something from a company that cares about its product.

We also have a demanding quality control department. Our quality control manager aims to be like Cartier, which frustrates some of our suppliers because they don’t associate that with online buying. Just because we’re selling online doesn’t mean that we don’t need to be as good as everybody else. Maybe we need to be even better.

As a diamantaire myself I can understand their attitude, but if I wanted to buy a diamond ring, I would want to buy it from a company with strict quality control.

RN: Is your business threatened by eBay’s recent efforts to enter online diamond retail?

OE: James Allen does not consider eBay a competitor in the luxury space. Would you tell your girlfriend that you bought her diamond ring on eBay?

I don't think there is any substance to eBay’s push to become a real player in the diamond market. Our main competitors are the mid-to-high range brick-and-mortar jewelers and maybe Blue Nile, although they have a different business model than us.

RN: How do you compare to the major brick-and-mortar retailers in terms of price and selection?

OE: As an online retailer, we have low overhead costs. We can afford to sell high-quality products at lower prices, while displaying them to every viewer in greater detail than they can see in a physical store.

If you are not a jeweler or diamond dealer and went to a store and tried to view a diamond through a jeweler’s loupe it would be very difficult for you to see anything. But on James Allen, you can look at the diamond from every angle and within five minutes you will know the difference between a G-color diamond and an H-color diamond, without needing anyone to explain it to you.

We have a bigger in-store selection than the major retailers because they spread their inventory across thousands of stores. We have just one store where we can show our entire inventory to every customer.

We offer quality products at prices that are definitely lower than those of brick-and-mortar retailers. We don't have to rent space for store locations or pay salaries for salespeople in every store, which means we can charge lower prices. Everyone knows how to use a mouse and using our technology you can turn and view a diamond very quickly. You don’t need a salesperson to show you how.

Obviously, because we charge lower prices, James Allen has lower profit margins than the brick-and-mortar retailers. However, we make higher margins than any other online retailer because our customers are buying based on visuals and not just based on some listing.

When you buy a diamond on James Allen you can see the shape, cut, color and clarity better than you can see it in a store. The grading certificate from the laboratory is secondary. It’s like if you buy a car, first you look for the car with a shape and color that you like. Then you check the power of the engine and how it drives.

RN: What advice would you give to a consumer considering buying a diamond online?

OE: First, do your research. It's a big purchase for a young couple so don't just buy it without understanding what you are getting.

Secondly, never overpay. If you have done your research, don’t overpay or buy a diamond unseen.

You should also make sure you can trust the retailer you are buying from. Make sure they have at least a 30-day return policy, so you can return the product if you don’t like it. You should read retailer reviews to make sure that even if they have a 30-day return policy that you can actually return the product with minimal hassle. There are definitely sites out there that claim to have a 30-day return policy but actually returning something to them is the most difficult thing to do. Research, prices and reviews. It's all available on the Internet.

RN: How were James Allen sales during the recent Christmas season?

OE: Overall, the holiday season sales were fantastic and definitely driven by engagement rings, especially in December. We primarily sell engagement rings, and the rings we sell are higher-end than what the average American consumer would buy.

I haven’t had a chance yet to look at the final figures and analyze the trends because it is too early after the season, but we definitely had our best December ever by far. I would like to think this will continue through 2015.

RN: Do you have any plans to expand to markets outside the U.S.?

OE: Yes. Already a quarter of our sales are international, mostly to other English-speaking countries. We are also looking to expand to other territories this year, including non-English speaking markets. The two major markets we think have a lot of potential are South America and China.

RN: Do you think you are growing the diamond consumer market or are you taking a larger share of the existing market?

OE: The growth will be from younger consumers. The younger, millennial generation is increasingly shifting from buying in stores to buying online. Over the next few years you will see a lot of people who will go into a store and see something they like, then will take a photo of it or the GIA certificate and the price with their smartphone. They will then look online and quickly find that they can get it between 20 percent and 30 percent cheaper somewhere else.

The difference between buying a diamond engagement ring online and buying an engagement ring in a store can be the cost of your honeymoon. With that kind of price difference, I don't think the current retail paradigm will hold for very long among the younger generations.

I agree that not everyone will buy online because some people will still want a place where they can go to take their ring for a free cleaning or to be refitted. But even if 50 percent of younger consumers shift to buying online that’s a lot of people.

At James Allen for example, our average ticket item is around $6,000. The difference between spending $6,000 and $7,500 on a ring is a whole lot of cleaning. For that kind of money you could buy a cleaning machine. Most people will realize that you don't need to pay $1,500 for a yearly ring cleaning.
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Tags: Dean Lederman, diamonds online, James Allen, James Allen Schultz, Oded Edelman, online retail, r2net, Ronen Shnidman
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