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Online Jewelry’s Growth Restraint

U.S. Jewelers Adapt to Online Challenges

Feb 27, 2015 9:18 AM   By Ronen Shnidman
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RAPAPORT... U.S. online jewelry sales have increased rapidly in recent years, but observers note that thin profit margins and consumers’ reluctance to buy jewelry online have prevented the Internet from becoming a major sales channel for jewelers.

"Many customers still need to see, feel and fall in love with the stone, instead of just focusing on a diamond's specifications,” explained Susan Posnock, the director of public affairs and education at Jewelers of America (JA).  “They want to go to a retailer who can help them feel confident that they are making the right purchase."

Much of the excitement about online diamond jewelry sales is due to the dramatic growth witnessed in recent years. De Beers estimates that 13 percent of women’s diamond jewelry purchases in the U.S. were made online in 2013, compared with an estimated 5 percent bought online in 2006.

Posnock noted that Internet sales are not only growing for pure-play online jewelers, but also among traditional brick-and-mortar jewelry retailers. Brick-and-mortar retailers are going online in order to meet the expectations of their customers and remain competitive regardless of the specific channel that customers use to shop, she said.

However, McKinsey & Company cautions that despite this growth, ecommerce will remain a small fraction of total jewelry sales during this decade. In a survey of 20 leading jewelry executives, the consulting company concluded that ecommerce would constitute no more than 10 percent of fine jewelry sales and 15 percent of fashion jewelry sales worldwide by 2020.

While the major U.S. jewelers are all selling online, Simeon Siegel, an analyst at Nomura Securities, suggested that they are aware of these limitations as online sales account for a very small portion of their total revenue. Signet Jewelers, the largest specialty jeweler in the U.S., reported that its online sales accounted for less than 4 percent of its $3.52 billion total country sales in 2014. Moreover, Siegel points out that between 30 percent and 40 percent of those online customers chose to pick up their purchases in the store.

“What that tells you is that even many Internet-savvy customers view part of the jewelry purchasing experience as something that cannot be done entirely online,” he said.

Low-Profit Online Model

Siegel stressed that the growth of online jewelry sales is also limited by the nature of the ecommerce business.

He explained that the main benefit of Internet-based sales is that a startup company can sell to customers while avoiding the large expenses needed to operate a physical store location. However, while an etailer – a retailer that sells solely online – can avoid such high fixed costs,  they typically have higher variable costs, including expenses such as shipping and online advertising. As a result, Siegel noted that the profit per unit sold through ecommerce stays relatively flat regardless of the number of pieces of jewelry sold. In contrast, once brick-and-mortar jewelers have covered their fixed costs, every additional jewelry sale made in the store becomes more profitable.

Therefore, while jewelry etailers can maintain small profit margins by selling exclusively online, Siegel noted that selling jewelry both in-store and online presents a problem for jewelers. He explains that by selling online, these jewelers, referred to as omnichannel retailers, are paying the fixed costs of running a store and their profit margin from selling online will not increase with the volume of sales.

“Omnichannel retailers would rather get every dollar in sales from their stores because every additional store sale becomes more profitable to them,” said Siegel. “Unfortunately, they don't have a choice. They need to be wherever people want to buy their goods and that means also on the Internet.”

As a result, some of the big players in jewelry ecommerce are actually major brick-and-mortar jewelers that use the Internet as an extension of their store sales.

For example, ecommerce sales at Signet grew between 20 percent and 48 percent each year from 2011 to reach $129 million in 2014. In the same year, Signet had a profit margin of 9 percent on a total sales figure of $4.2 billion.

In contrast, U.S. sales growth at Blue Nile, considered the largest jewelry etailer, ranged between 1 percent and 16 percent each year from 2011 to 2014. Blue Nile had a 2 percent profit margin for the third consecutive year on total sales of $473.5 million in 2014.

Consequently, Siegel explained that most major jewelry retailers use the omnichannel approach as a defensive strategy to prevent losing sales to online competitors. As a side benefit, they may attract new customers through their online presence. Omnichannel retailers are prepared to sacrifice part of their profit margin to protect their sales revenue, but they do not use ecommerce to drive profit growth.

Bringing Online In-Store

While brick-and-mortar jewelers have moved online, etail jewelers have adapted their business models to compete for the large majority of customers that want an in-store experience.

This month, Blue Nile announced it would open a standalone jewelry showroom on a trial basis. Harvey Kanter, Blue Nile’s CEO, said that the showroom would allow customers who are hesitant to buy online to see and touch the jewelry before placing their order via the Internet.

James Allen, an online retail brand operated by R2Net, presents its own solution by using advanced imaging technology to deliver what it calls “a better than in-store view” of its diamond jewelry products. Oded Edelman, R2Net’s CEO, said that the beauty of James Allen’s website is that the buyer can use it without needing the assistance of a trained jeweler. “You can rotate a 3D image of the diamond to view it from different angles and in five minutes you know the difference between a G and an H color,” he explained.

Adopting a different approach, Ritani, which is primarily based online, has grown rapidly using a hybrid business model. Ritani achieved $13 million in revenue in 2013 after launching its ecommerce website just one year earlier, according to Forbes. The company uses an online sales platform and forges partnerships with independent jewelers to retrain the traditional in-store element of jewelry retail.

Brian Watkins, Ritani’s CEO, explained that the company has exclusive partnerships with over 200 independent local jewelers in different regions to provide customers with physical locations to pick up, try on and return jewelry. Ritani’s partners take a share of the profits in return.

Leveling the Playing Field

While etailers are trying to appeal to customers looking for an in-store experience, Posnock pointed out that their online sales may be diminished  by a bill working its way through Congress called the Marketplace Fairness Act.

Until now, many etailers in the U.S. have benefited from a legal loophole that allows them to avoid charging their customers state and local sales taxes if the company lacks a physical location in the jurisdiction. This provides etailers such as Blue Nile and James Allen with a sizable competitive price advantage.

“The proposed legislation gives states the option to require out-of-state businesses to collect sales taxes that are already owed under state law but are not currently being collected by online retailers,” explained Posnock. Should the tax be implemented, consumers will have to pay higher prices for diamond jewelry they buy online.

JA, she said, believes it is only a matter of time before the law is passed and that it will level the playing field between brick-and-mortar and online businesses.

With the looming tax issue, low profit margins and consumer hesitance to buy jewelry online, it seems that growth will slow in the coming years and the excitement may subside.

“There is a reason why jewelry, and bridal jewelry in particular, has a very low rate of Internet penetration and what I have seen to date makes me think that will endure,” Siegel said. “It’s not like the Internet is a new thing anymore. There are certain retail categories that you might think people are willing to buy online, but history has proven otherwise.”

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Tags: Blue Nile, ecommerce, e-commerce, feature, James Allen, online sales, ritani, Ronen Shnidman
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