Jewelry Heist

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. store
near her Potomac Falls 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, 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 US 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.

Commoditization

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 in BusinessWeek. Copyright 2004 by The McGraw-Hill Companies, Inc