Amy Smith is what happens when true love meets the Internet. The 31-year-old admits she oohed and aahed over engagement rings at the Tiffany & Co. (TIF ) store near her Potomac Falls (Va.) home. But when she got engaged last October, Smith checked out other stores, including online jeweler Blue Nile Inc. After using Blue Nile's guides to master the Four Cs of diamonds (color, cut, clarity, and carats) and picking out a $10,000 ring there, Smith had one question left. "Blue Nile beat them by almost $6,000," she says. "I thought, 'Why are these so much more expensive?"'
Jewelry e-tailers are the leading players in the Web's second act. Selling diamonds, double-strand pearl necklaces, sterling silver bangle bracelets, and more, online jewelers made up about $2 billion of the industry's $45 billion in U.S. revenues last year. Startups such as Blue Nile, Ice.com, Diamond.com, and now Amazon.com, which opened its jewelry store on Apr. 22, are textbook cases of how the Web fundamentally undercuts traditional ways of doing business. The secret? Knock out the middlemen and expensive stores to lower costs, then slash prices. Amazon.com Inc. (AMZN ), for example, is betting it can make money on 15% markups instead of the industry's usual 60% to 100%. Amazon charges $1,000 for a pair of oval emerald and diamond earrings that it gets from a supplier for $850. Traditional jewelers typically charge $1,700. "We believe over time customers figure these things out," says Thomas J. Szkutak, Amazon's chief financial officer.
The diamond market is where changes are happening first, and Blue Nile is the leader there. The five-year-old Seattle company, which has filed to go public, has become the eighth-largest specialty jeweler in the U.S. Last year, sales jumped 79%, to $128.9 million, and net income hit $27 million. Selling diamonds for up to 35% less than rivals, Blue Nile is not just profitable -- it has higher margins than No. 1 chain Zale Corp. (ZLC ).
Blue Nile packs a punch by streamlining a famously byzantine business. It has just 115 full-time staffers and a 10,000-square-foot warehouse. To sell $129 million worth of jewelry, a chain would need 116 stores and more than 900 workers, estimates analyst Ken Gassman of Rapaport Research. Blue Nile also bypasses the industry's tangled supply chain, where a stone can pass through five or more middlemen before reaching a retailer. Instead, Blue Nile deals directly with major suppliers through its own network online.
To get to where they are, the Net upstarts had to defy conventional wisdom that diamonds couldn't be sold online. The companies solved this problem by giving people the same information a jewelry expert would give them. They dish up educational guides in plain English and independent quality ratings for every stone. For example, a customer at Diamond.com can pore over the rating scales for cut, clarity, and color, pick out a one-carat stone with the preferred criteria -- and then shop around for a better price. These resources are now standard practice, as is a 30-day money-back guarantee. "The comfort level came from that guarantee," says Pat Grobelny, a California college student who bought his girlfriend a Valentine's Day ring at Ice.com.
This commoditization of diamond selling is making it progressively harder for small jewelers to make money. That's one reason some 465 jewelry stores closed last year. Even among survivors, profits are lean, and many small fry, such as Roger Thompson, a jeweler in Lambertville N.J., say they're specializing in custom-crafted pieces that don't include diamonds. "Anyone with half a brain who wants a diamond engagement ring will go to the Internet," he says.
Larger rivals have more options. Although Zale declined comment, analysts say the chain is reducing costs through more efficient purchasing. Helzberg Diamonds emphasizes the customer service it can deliver in its 265 stores. "Our kind of customer really wants our kind of service levels. E-commerce does not do that," says Helzberg CEO Jeffrey W. Comment. Of all the major jewelers, Tiffany may be the most insulated from the Web threat thanks to the cachet of its coveted blue box and a flagship Fifth Avenue store that provides 9% of sales amid an ineffable whiff of Audrey Hepburn.
Still, for a growing number of people, a Web-purchased ring can replace the idyll of taking your girl to Tiffany's. Just ask Pete Dignan of Littleton, Colo. When he was planning to give Kelly Gilmore a Blue Nile ring, Dignan had a limo whisk them to a park where he proposed over an outdoor dinner overlooking the Rockies. "It was a really romantic proposal, and that was more important," he says. He saved about $4,000, and the experience was priceless.
By Timothy J. Mullaney