Luxury goods sellers are dipping toes into the Web, but the waters are treacherous

With $25,000 to spend, Alexander Wolfe is eyeing a diamond engagement ring in the window of Cartier's gilded boutique on New York's Fifth Avenue. But the 34-year-old Mexican interior designer isn't sure he wants to lay out so much cash for the Cartier cachet. For the same price, online jewelers such as Mondera.com Inc. and Blue Nile Inc. will sell him gems one-third larger. "If I can get a better deal on the Internet, I'm going to try it," Wolfe says.

Look out, swanky shops, here comes the Net. Luxury goods are fast going online--and revolutionizing the exclusive business of selling high style. Now that dot-com upstarts have staked out the available Web turf for peddling discounted books and CDs, they're trying to lure customers out of boutiques from the Right Bank to Rodeo Drive. In response, luxury giants such as France's LVMH Moet Hennessy Louis Vuitton and Switzerland-based Richemont are dabbling in Internet sales. "If people are ready to spend $150,000 for a painting on eBay, we can't ignore this channel," says Myron Ullman, LVMH's managing director.

Where luxury goes, money follows. Investments are pouring into fancy e-tailers. Amazon.com bought 16.6% of online luxury store Ashford.com last December for $10 million. Mondera got $25 million in funding in January from Net incubator CMGI and others. And Sequoia Capital is backing an aggressive expansion plan for upscale online jeweler Miadora.com.

Still, getting people to choose virtual luxury shopping over the real thing won't be a snap. Books and CDs ship easily and don't require comparison shopping. But luxury isn't just about acquiring things. It's tough to buy expensive clothes without trying them on--look at the demise on May 18 of upscale clothing retailer Boo.com after losses totalling more than $100 million. "When you enter a shop on Fifth Avenue or Rodeo Drive, you get a variety of emotions by touching the product," says Armando Branchini, president of Milan luxury-business consultancy Intercorporate.

Despite those prejudices, luxury e-tailers smell opportunity. U.S. sales of diamond jewelry alone topped $30 billion last year--but only $30 million was sold online. Luxury accessories such as scarves, watches, and diamonds are small, making them easy to stock and transport. Ashford.com, for example, needs only one U.S. warehouse.

And snob appeal has its limits. While posh stores are inviting to some, many find them stuffy. Ex-Compaq Computer Corp. exec Kenneth E. Kurzman joined Ashford.com after being snubbed in a Houston luxury boutique. Clad in shorts and sneakers, Kurzman wanted to buy a $300 scarf for his wife. "The salesperson took one look at me and walked away," says Kurzman, now Ashford's CEO. Moreover, wealthy shoppers are dedicated Netheads. Forrester Research Inc. says 68% of households worth more than $1 million have bought online, vs. 17% of all Americans.

Resistance. There's a danger for luxury goods makers: Selling online risks spoiling the image that distinguishes high style from expensive stuff. Many recall licensing binges in the 1980s that tarnished brands. Gucci trotted out T-shirts, coffee mugs, and other offerings. Cartier made inexpensive watches and trinkets. In the '90s, both companies dropped stores that discounted their products, restricting sales to their own boutiques. "European brands have spent years protecting their distribution, so the Web presents a huge cultural change," says Sharen J. Turney, president of NeimanMarcus Online in Irving, Tex.

Not surprisingly, the most exclusive luxury brands have resisted the rise of the Internet. Gucci, Cartier, and Swiss watchmaker Patek Philippe still don't sell online. "Luxury producers are scared that the Internet will erode their margins," says Frederick Hasslauer, an analyst at Bank Sal Oppenheim in Zurich. They're probably right: Luxury producers and retailers enjoy margins of 40% or more. Ashford.com settles for 18%.

Shut out of the top tier, luxury e-tailers have lowered their sights to the second level. Mondera offers Swiss watches by Roberge. "It's not a Rolex, but it's a damned good product," says Peter Panagos, Mondera's watch-marketing manager. Both Ashford and Mondera sell private-label goods online and both have solicited celebrities such as Britney Spears to wear their jewelry.

Under this pressure, luxury companies are waking up. L'Oreal Groupe started selling its Lancome cosmetics online in December. Richemont, which owns Cartier, Piaget, and other prime brands, invested last year in online jeweler Adornis.com. In June, LVMH plans to launch its eLuxury site, which will sell many of the conglomerate's best brands. "The major players know they must at least experiment with the Web," says consultant Branchini. Will e-diamonds ever supplant the Cartier variety as a girl's best friend? Perhaps not, but as shoppers buy more big-ticket items over the Web, expect top brands to be available far beyond the store windows that dot jet set hangouts from Palm Beach to St. Tropez.

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