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Net stalwarts eye luxury goods niche

A host of Internet veterans are hoping to strike gold by teaming up with several start-ups to sell luxury goods online.

    A host of Internet veterans are hoping to strike gold by teaming up with several start-ups to sell luxury goods online.

    Offering everything from diamond engagement rings to elegant fountain pens, luxury goods sites hope to capitalize on the growing adoption of electronic commerce. And these sites offer their investors something that e-tailers of books and CDs can only dream of: the potential for a highly profitable, low volume business.

    "This space is just starting to heat up," Gomez Advisors e-commerce analyst Jill Frankle said.

    Among the recent developments:

  • Sequoia Capital-backed online jeweler Miadora.com today announced that it bought Jewelry.com. Jewelry.com will continue to operate as a separate brand, focusing on moderately priced items, while Miadora will target the upscale market.

  • Idealab announced today that it has taken an equity stake in BuyJewel.com. As part of the deal, Ann Arbor, Mich.-based BuyJewel.com will open an office at Idealab's headquarters in Pasadena, Calif.

  • New York-based Mondera.com received $25 million in funding in January from Sprout Group, the venture capital arm of Donaldson, Lufkin & Jenrette and CMGI's @Ventures, among other investors.

    The latest moves follow Amazon.com's $10 million investment in luxury retailer Ashford.com last December. Amazon's investment, which gave it a 16.6 percent stake in the Houston-based company, turned investor attention onto what was previously a nascent industry.

    The investments also come as e-commerce continues to grow rapidly. Forrester Research projects that consumer spending online will grow from $20.2 billion last year to $184.5 billion in 2004.

    While few e-tailers have managed to turn all that spending into actual profits, luxury goods could represent an opportunity to do just that.

    Industry observers estimate that the diamond jewelry market alone is about $30 billion in the United States, significantly larger than the entire books or music markets. And the potential consumers for such goods online coincides with the demographic of the most experienced online shoppers: young and affluent.

    Unlike the books or music markets, which are often marked by deep discounts, luxury goods retailers can typically sell diamond necklaces and Rolex watches for much higher than their actual cost. Because such items typically cost consumers much more than a book or DVD, e-tailers don't have to sell as many of them to earn significant revenues.

    Advantages aside, luxury goods sites have significant hurdles to overcome to win consumers.

    Toys, DVDs or even automobiles are all standardized: A new Ford Taurus is going to be the same car whether you buy it online or at your local dealer. In contrast, jewelry, diamonds and even silk ties can differ from store to store. Many consumers will want to see the goods before they pay several hundred or thousand dollars, analysts say.

    "There are some people for whom this will be too high a risk," said James Vogtle, e-commerce research director for the Boston Consulting Group. "They are going to want to see the whites of someone's eyes before they make that transaction."

    To be sure, many of the luxury goods sites hope to overcome consumer's fears by offering certificates for their diamonds and liberal return policies. BuyJewel.com, for instance, allows customers to return items within 30 days for a free refund, and they pay for shipping of such returns.

    But it's just those returns that could prove to be a thorn in e-tailers' sides, holding down profits. "The challenge for the luxury goods sites is to keep the level of returns down," said Gomez's Frankle.

    Luxury goods must also be cautious about how they position themselves. Part of what these sites offer consumers is lower costs than traditional fine goods stores such as Tiffany's. They can lower prices by cutting some of the costs associated with running a physical store. But the sites may be hard pressed to tout their discount prices for fear of being associated with "cheap" merchandise.

    "They don't want to be seen in any way as discounting their goods and services--but that's their value proposition," Frankle said.

    Despite the problems, the luxury goods sites do seem to be taking off. Ashford.com saw its fourth-quarter sales jump from $2.4 million in 1998 to $20.1 million in 1999. In addition, since BuyJewel.com launched in September, some 50,000 customers have bought from the site, said Pinny Gniwisch, the company's executive vice president of marketing.

    Pascal Mouawad, co-founder of Mondera.com, expects that up to 10 percent of the diamond jewelry market could move online.

    "There's a lot of room for a lot of players to participate in this (business)," Mouawad said.