Friday, July 13, 2012

Destination Mars

I still hear about retailers who think they can bully and threaten suppliers who dare to post their products, in one way or another, on the Internet.  Not only is that a teaspoon against the tide, but it is an astounding failure to understand retail dynamics and the remarkable transition we are seeing.

Looked at narrowly - only in respect to the so-called battle between bricks and clicks - the issue is plain to see.  Even if a supplier does not open their own web site, their customers will post images and information about the products on their sites.  It does not matter if the web site is a pure play web retailer or another traditional jeweler.  The effect is the same - another retailer is "invading" the threatening retailer's territory.  Moreover, every evidence indicates that the more a brand or product is shown, the more everyone selling the brand benefits. 

That, as I said, is looking at the issue narrowly.  But traditional jewelers are dealing with many more issues in today's market.  These days, as I noted in my last post, anyone dealing in true luxury can only view the Internet as a very helpful tool, not a competitor.  I was referring to specialists in creating expensive home theater installations, or expensive jewelry.  In our industry, some great examples are some New York-based diamond dealers.  New York dealers have transitioned over decades from manufacturing and importing a full range of diamonds, to increasingly specializing in large, fine stones (some in special cuts) catering to wealthy individuals and stores dealing with wealthy individuals. 

This sort of specialization makes sense because demanding consumers want to deal one-on-one with competent and well-connected people.  That cannot be out-sourced or even imported.  Or managed on a web site.

It comes down to market position.  Woody Allen's famous line is "80% of success is showing up."  I would add, showing up in the right place.  One of the more extreme, and amusing, examples of that was in Dubai.  I was there working on a project, and the people I was with wanted to get some alcohol for the evening, alcohol of course being forbidden in a Muslim country.  We drove out to a fairly undeveloped area to an unmarked, gated warehouse.  We parked inside a walled lot, and then entered a huge, very busy liquor store that carried every label imaginable.  This was a destination that everyone "in the know" in Dubai apparently knew about, and it could just as well have been on Mars.

In a similar way, all jewelers (on-line or not) need to become destinations, recognized by their community for delivering a service and product that makes them special.  A brick and mortar store could be a diamond destination; or known for creating custom pieces; or known for carrying leading edge fashion; or even for throwing great parties.  Such stores can negotiate on price, search for unusual stones, and quietly answer all the questions that a nervous customer might have.  None of those aspects are particularly suitable to an Internet retailer.

Remember that the Internet has a key characteristic - it makes plucking low-hanging fruit easy.  Amazon did it in books, and eBay replaced the yard sale.  In our industry, Blue Nile had retailers screaming threats at suppliers.  But what happened is instructive.  Blue Nile, in a few years, built a $300 million plus business selling loose goods - a truly remarkable and unique feat for our industry.  And it happened because diamond grading essentially turned diamonds into commodities, much as Amazon did with books.  It combined that with a very low-cost business model that effectively picked much of the low-hanging fruit by being well-organized, informative and massively inventoried with other people's diamonds.

Many good retailers understood that Blue Nile, and the multitude of sites copying their technique, was a game changer.  Diamonds above a certain size and quality - and below very large sizes - would no longer be the business it was.  They began competing with Blue Nile on price for centers but still made better margins on mountings and smaller diamonds.  But more importantly, they treated center diamonds as "naked."  That is a term I have used for many years to describe any jewelry item that a consumer can easily price shop.  It used to be gold chain, as an example.  GIA-graded diamonds now fell into that category.  Priced too high, and the consumer now believes that everything in the store is over-priced.  And the reverse is just as true - priced competitively and the retailer has a customer.

And now the worm has turned.  Retailers have adapted to the age of Blue Nile, and Blue Nile has now seen flattened sales.  They have made some price cuts, and expanded further into jewelry, in an effort to grow their business further.  A balance has been reached.

Much more can be said on the subject (and I am always happy to get your comments!).  No doubt that where a store is located; how well it is merchandised; how effectively it reaches the right target market and brands itself; how owners connect with their community; and how thoroughly they service their customers can all spell the difference between success and irrelevance.   Oh, and by the way, the Internet has a role in all of that.

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