16.11.2016

Online market becoming key element in driving growth of diamond sales

400On November 7, one of Israel’s leading diamond corporations, the Dalumi Group, announced that it had purchased a company called Zoara.com, an online luxury jewelry retailer that is active in more than 40 countries, selling loose diamonds, diamond engagement rings and diamond jewelry.   Founded in 2008, Zoara.com is an e-commerce platform devoted to the exclusive sale of loose diamonds, luxury jewelry and precious gemstones. Operating on a multilingual and multi-currency digital platform, local versions of its website are available the United States, Canada, the United Kingdom, Australia, New Zealand, Argentina, Valenzuela, Peru, Mexico, Spain, France, Germany, Hong Kong, Taiwan and China.   According to the announcement put out by the two companies, Zoara.com will now enjoy direct access to wholesale suppliers within the diamond industry, enabling it to present an updated online product catalog of luxury jewelry and more than 200,000 loose diamonds, which the companies said is unprecedented in terms of its volume and variety in the market.   The same day that the Dalumi-Zoara deal was announced, the world’s largest diamond jewelry e-commerce operation, Blue Nile, announced it is going private in a $500 million buyout by investment funds controlled by Bain Capital and Bow Street. Shareholders of the NASDAQ-listed company will receive $40.75 a share in cash, which represents a 34 percent premium over the closing price of Blue Nile’s stock on November 4.    

 

Online sales looking to become luxury’s third largest market  

As it is the case in other business sectors, online sales are precipitating massive change in the diamond and jewelry industries, altering consumer behavior and introducing new operating models. Geographic barriers are falling away and data is being used intelligently to identify individual consumer preferences and predict consumer behavior. Much of this is being fueled by new smartphone applications.   Overall in the luxury sector, online sales already had taken a 6 percent share by the end of 2014, and it was estimated then that “research online, purchase offline” accounted for about 60 percent of sales for international brands.   But, according to the Altagamma-McKinsey Digital Luxury Experience Observatory, luxury’s share of online sales will double to 12 percent by 2020. By 2025, organization expects the online share of total luxury sales to be 18 percent, effectively making e-commerce the world’s third largest luxury market, after China and the United States.      

 

Online sales growing, but trailing other luxury sectors  

But not all categories are equal. More than a year ago Altagamma-McKinsey reported that the most active e-commerce luxury sectors are those of beauty products and ready-to-wear apparel, where 7.2 percent of sales occur online. This was followed closely by accessories at 6.2 percent. Watches and jewelry trailed at 4.1 percent.   The differences between the different product categories are certainly caused by price differentials but also by the extent to which there have been rich and compelling e-commerce offerings developed in the category. What that essentially means is that the purveyors of certain luxury products have invested more and are doing a better job in providing their customers with a compelling and persuasive online experience.   According to Research and Markets, the global jewelry sales will grow at a rate of 5 percent per year over the next five years. Currently, the online fine jewelry market accounts for only 4 percent to 5 percent of that market – fully 1 percentage point lower than online sales’ share of luxury purchases in general – but it is expected to reach 10 percent of the market by 2020.   The online jewelry market is growing at a particularly rapid rate in Asia, in particular, where it saw a compound annual growth rate of 62.2 percent from 2011 to 2014.      

 

A new type of luxury marketing giant  

The online market is creating a new set of market giants. Net-A-Porter, is an online fashion retailer which launched its fine jewelry category in 2012. The company sells in 188 countries and caters to self-purchasing women.   Net-A-Porter stocks 44 different jewelry brands with price tags ranging from $100 to more than$50,000. From its launch in February 2012 to March 2016, Net-A-Porter’s fine jewelry category grew by about 350 percent.   In April, luxury jeweler Tiffany & Co. announced that it has chosen Net-A-Porter as its exclusive e-commerce partner, with the online retailer offering pieces from the Tiffany T Collection for a limited time.   The collaboration will bring Tiffany to more than 170 countries, which is particularly significant, given that Tiffany’s e-commerce presence was limited to only 13 countries.      

 

The pioneer of online sales of diamond and diamond jewelry  

In the diamond sector, Blue Nile is most probably the most well-known of the online firms, and has the distinction of have started out essentially as an Internet venture.   In 1998, during the early days of the e-commerce revolution, a small website selling diamonds out of Seattle attracted the attention of Mark C. Vadon, a management consultant at Bain & Company, when he purchased from it a diamond engagement ring.   In 1999, Vadon raised $6 million to purchase 85 percent of the company, to improve the website.  In November of that year Blue Nile was officially born.   What the company essentially pioneered was a building a model that would make the experience of diamonds long-distance more comfortable. The elements that were created break the diamonds down, for the customers, into more understandable illustration of various components of value – namely carats or size, clarity, size and color, as well as shape. These are now used by websites the world over.   During its first full year in business, the company raised an additional $44 million to fund its investment in technology and software development, largely from venture capital. When it listed on the NASDAQ on May 18, 2004, it raised an additional $76 million.   Blue Nile had $44 million in revenue in 2000, but lost $30 million because it spent $40 million in television advertising. In 2006, it already sold $197 million in engagement rings and wedding bands, compared to $186 million for Tiffany & Co.   In 2015, Blue Nile reported net sales of $473 million and net income of $ 9.7 million.   The company says it specializes in educating first-time shoppers about diamond quality and making it easy for them to buy engagement rings. Diamond rings account for 70 percent of its sales, and other diamond jewelry accounts for an additional 20 percent.   Blue Nile lists more than 150,000 loose diamonds in their online inventory at any given time as well as several hundred settings.   What Blue also created was a business model that has become typical for online diamond retailers. It does not own or house the diamonds that are in its inventory, but instead follows a practice of buying the diamond from the supplier when it customer actually purchases and pays for the stone. What this means is that, compared to most diamond retailers whose primary burden is financing stock, Blue Nile runs a remarkably risk-free business.      

 

Millennials driving the growth of the online market  

Millennial consumers are driving much of the growth of online shopping, to a large degree because of their inbuilt comfort with digital shopping methods. Digital media is the essential channel through which young people share information and influence each other.   Affluent Millennials have an even stronger affinity to digital media, with 60 percent rating products and services on the Internet and uploading content online, and 29 percent running their own websites or blogs.   According to De Beers’ recent Insight Report, when it comes to shopping for diamonds and jewelry, Millennials use online methods alongside visiting traditional brick-and-mortar stores. They will often compare prices online, search for product information and look for discount coupons and promotions.   In the United States, De Beers reported, Millennials use the Internet considerably more frequently to research quality, designs and brands than do older consumers. Chinese Millennials also use the Internet for research in about a quarter of acquisitions, but traditional channels play a much more important role in the preparation for purchase.      

 

How will online sales develop into the future?  

How might luxury e-commerce develop? Altagamma-McKinsey Digital Luxury Experience Observatory analyzed the online-sales trajectories of more than 50 luxury brands over the past decade, and discovered that the market’s sales trajectory resembles an S-curve that can be divided into three stages.   During the first stage, companies investigate selling online either through partners with full-price, off-price, or events platforms, tending to only offer a reduced product range with only limited marketing resources being allocated.   Stage 2 is reached when they see revenue from e-commerce reaching 6 to 7 percent of total sales, which is a tipping point. They quickly scale their e-commerce operations and launch e-shops. Online business is now a top management priority, and requires significant investments required in IT, customer support and the supply chain management. Online sales can push toward 18 to 20 percent of total revenue over about five years.   Stage 3 will be reached when online businesses pass the 20-percent threshold, and growth of online sales tends to decelerate as a e-commerce operations reach maturity. As things happen, in the diamond and jewelry business that is unlikely to happen much before the mid-2020s. 

article provided by:
DFI- Alternative Wealth Solutions


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