Diamond Coco

The catastrophic demise of Diamond Exchange was big news in 2010. It was a sour close to a year intended as a celebration of the company’s first decade in business. One of Australia’s largest internet diamond retailers, it spiralled into administration and was liquidated in November some $2.5 million in debt after months of disputes with customers and trade creditors. The situation was detrimental for many customers who were either awaiting their diamond delivery or involved in wrangles over refunds with the company. The saga even ended up on prime-time, national TV. Needless to say, consumer confidence issues became a focus; such a debacle would do little for the public’s faith in buying diamonds online, it was said. So will the high-profile failures of one company permanently taint the online diamond industry, and what threat do such retailers pose to the traditional, bricks-and-mortar market anyway? Garry Holloway, director of two-store, Melbourne-based retail jeweller Holloway Diamonds, suspects Diamond Exchange’s failures were specific, rather than symptomatic of the entire online industry. “Melbourne Diamond Exchange was run very efficiently by smart people who made the mistake of responding to stimuli that involved increased operating costs they perhaps didn’t think they would ever incur as online retailers.” Indeed, in response to Jewellermagazine.com’s coverage of the collapse, Anthony Hansen, the co-owner of Australian e-tailer Diamond Coco, implored the industry not to use Diamond Exchange as a pin-up for all online retailers: “I am appalled at what Diamond Exchange did to its clients but don’t tarnish us all with the same brush. I am deeply committed to customer satisfaction and in the quality of diamonds I sell,” he said. Still, the incident has done little to allay already-present fears about the online retailing of loose diamonds and diamond jewellery. Whether it be consumers nervous about their own limited product knowledge and the never-ending slew of media horror stories, or traditional retailers that target these fears in smear campaigns against competitors with whom they find it difficult to compete on price, it’s clear that the idea of buying a diamond online still makes many people uneasy. There are certainly plenty of risks involved in buying anything of value online, let alone something as expensive – and as poorly understood by shoppers everywhere – as a diamond. But the market has improved immeasurably since the birth of e-commerce in the late 1990s. In fact, the benefits of online diamond shopping are both obvious and numerous. Firstly, it’s fast – one needs only to click a mouse button and it’s done; it’s cheap – no physical store means lower costs, and lower costs mean lower prices; it offers a huge selection – shoppers have entire inventories at their fingertips, spanning many suppliers across multiple continents without ever leaving home; and it’s convenient – many consumers might wonder why they should drive, park and wrestle their way through the crowds when they can get what they want without leaving the couch. It’s also important to differentiate between the different types of internet vendors: multichannel, pure-play and hybrid. Most Australian retailers that establish an online presence do so as multichannel businesses, using their website as an additional sales channel and not as a replacement for their store. At the other end of the spectrum there are pure-play vendors who only trade online – they have no physical showroom, sometimes not even any office location details on their websites, and only trade across electronic channels – eBay sellers fall into this category. Indeed, sometimes it’s not even apparent in which country the e-tailer is located. While the website might have a .com.au address, that doesn’t necessarily mean the site is an Australian site or even has a business in Australia. All transactions can be offshore and it could just as easily be operating from Russia or Romania. Not that that matters if the business is ‘legit’. Hybrid vendors, on the other hand, are those who are primarily online sellers with a transactional website but who also have a showroom or office to host customers. It is not usually the case that those without a traditional storefront simply float in the cyber ether, and the majority of the online diamond industry falls into this category. With three showrooms, in Sydney, Melbourne and Brisbane, Diamond Exchange was what Jeweller would describe as a hybrid jewellery retailer. Sigrid de Kaste, a marketing consultant specialising in jewellery retail, believes negative internet shopping experiences are far fewer in number than consumers are led to believe, and are more like urban myths that grow in magnitude and horror with each retelling. Resultantly, she argues, traditional retailers remain timid about selling online, lest they lose stock and money in doing so. “We’re seeing that the public is purchasing online more through both jeweller websites and marketplaces such as eBay,” de kaste says. “With this have come a number of consumer disputes. These most likely represent just a tiny fraction of total online transactions but the media tends to pick them up and run with them as if it is the normal situation. As a result, jewellers tend to be quite wary about expanding to include online sales as a part of their business.” Like many in the bricks-and-mortar industry, Travis Trewarne, director of four-store Victorian independent Trewarne Fine Jewellery, is of the opinion that online retailers have a negative impact on the sector. He claims that the business model of virtual diamond inventories favoured by online retailers is not only loaded with poorer quality product, but is used by unscrupulous traders to up-sell customers in a classic ‘bait and switch’ scenario. Both are issues that erode not only these businesses’ own credibility, but the credibility of the industry as a whole, he says. “The world of online diamonds can be a little misleading because the stock list that companies offer is not a true representation of the actual stock they are holding,” Trewarne claims. “From what I understand, when a customer picks out a diamond, a business might say it doesn’t have that one in stock and offer another one.” However, it would be a gross error of judgement to label online diamond sellers unethical across the board. Hansen from Diamond Coco, for one, says it is “nonsense” that online diamond retailers up-sell. “Today we have around 70,000 diamonds on our site and every one has a price. I also have around 6,500 jewellery items. Again, every one has a price. As an online retailer we have to be transparent in what we sell and we can only do that by showing a price.” One e-tailer that Jeweller spoke to with several websites – who did not want to be named because he feared a backlash from the bricks-and-mortar sector – is adamant that the virtual inventory business model is the best possible way to ensure customers have maximum choice. “When people want something unique, you can’t stock that – you might hold it for two or three years before somebody buys it. We find the best way is not to stock the diamonds, but buy them directly from diamond cutters. That way, the customer can have anything they want,” he says. This philosophy is actually not so different to the traditional ‘appro’ method, where the bricks-and-mortar retailer works with a number of diamond dealers to obtain stones for specific customer requests. Retailers using this business strategy therefore have a larger stock level available to them than that which it holds in its own store. However, the virtual inventory system does mean that an online retailer will often be offering for sale a stone they haven’t yet seen, and which they are selling based solely on the attributes provided by the wholesaler. The prevailing belief among traditional jewellers is that these diamonds, which are differentiated only by the value of their grading certificates, are listed for sale online at prices that appear to represent an attractive saving for the consumer and make traditional retail prices look expensive by comparison. Holloway says that traditional retailers can have access to the same virtual diamond inventories that the online retailers have; there’s nothing exclusive about that. However, he adds that, “While online retailers claim large inventories, they are virtual diamonds existing on diamond trading platforms. Retailers can join most of these wholesale sites if they want, and therefore have the same access. But it should also be remembered that the retailer’s network of local diamond dealers has an added advantage; they can ‘pull the stone’ and hold it in their hand while they discuss its qualities with the retailer before it is sent to the store on appro.” Without any opportunity to view the stone, consumers buying online are left to base their purchasing decisions upon a diamond’s paper value alone, something Trewarne warns vehemently against. “We tend to find that the diamonds ending up online are often those that look good on paper but don’t look so good in real life,” he says. In fact, there is widespread concern about the use of non-independent grading reports or in-house valuations in place of independent certificates – a lack of grading transparency could see colour or clarity grades overstated and any gem treatments go undisclosed. It’s here that Trewarne believes consumers are going to make mistakes: “You can’t tell whether a diamond on the internet is as good as its certificate but, if it isn’t, no skilled diamond retailer will allow that stone to enter his inventory.” Hansen says that, whether buying online or in-store, shopping for a diamond has its dangers if consumers haven’t done their homework. “Most people are aware of the four Cs but to buy diamonds on the four Cs alone is very risky unless you look a little further and know what you are doing. Buying diamonds online sight unseen is very easy if you know what you are looking for,” he says. According to the anonymous online diamond retailer that Jeweller spoke to, most of his customers fall into this category – they are educated, intelligent professionals who are already clear on what they want. This retailer is scathing of the perception from some quarters that the internet has become something of a dumping ground for product that is overlooked by traditional retailers. “To be fair there are a number of online dealers who are pretty shady, but bricks-and-mortar retailers need to differentiate between the eBay sellers – at least those who are selling cheap, imitation rubbish – and those like me who are selling top end, top quality.” This particular e-tailer only sells GIA (Gemological Institute of America)-certified diamonds, because he says the GIA’s independence provides extra quality assurance and its global reputation means the grading certificate is internationally recognised. On top of that, the retailer claims every stone then undergoes an internal grading check by the retailer, as well as another external check by a GIA-qualified grader that is employed by the e-tail company. “If someone buys a D internally flawless and I grade it myself in-house and I’m not happy, it goes back. The client gets a refund. If I’m happy, our external quality controller has a look at it [the GIA-qualified grader]. If they’re happy we proceed. If they’re not, the client gets a refund. We’re strict on that,” he explains. Hansen believes buying diamonds online can actually be safer than shopping on the high street. “To me there are less risks than had a customer walked into a traditional store. Sure we are cheaper but with 70,000 diamonds at my disposal I am not there to sell them a single diamond because that is what I have on display. I am there to sell them a diamond that best meets their needs and budget.” He adds, “To guarantee quality we only deal with the world’s leading diamond cutters and merchants so we are never sold inferior diamonds. To do so would be just as bad for their business as it is for ours. Our diamonds are our business card to the world and I get many referrals because of the price and quality I provide. I also only import diamonds that have been independently graded by reputable companies.” Similarly, the other online retailer claims that his extensive quality checks are more reliable than that which many bricks-and-mortar retailers use. “The problem is, if you buy a diamond in a store, they certify the thing themselves, make a valuation themselves – for example, value it at $7,000 and sell it at $4,000. They wonder why trust is going down. They’re not using any independence. How can a consumer walk in and trust a retailer?” Hansen is similarly concerned about “the unethical practice of over-inflated valuations simply to make prices look good” on the high street. Credibility is clearly a major issue for both online and bricks-and-mortar stores across the board – in this respect, there appears to be little difference between the two sectors after all. Holloway, however, says there’s another reason why consumers should not be contemplating buying sight unseen – emotional connection. “It’s not at all easy for the consumer to buy diamonds based on nothing but a GIA grading report for the simple fact that no professional in the trade would even buy a diamond for the person they loved without seeing it first.” Sentimentality is certainly one area that physical retailers can, and should, promote when it comes to the benefits of buying from a store rather than a website; the digital world simply can’t compete when it comes to the romance and emotion involved in walking into a shop and selecting a piece of jewellery or a diamond that is intended for a loved one. So who out there actually throws thousands of hard-earned dollars at a purchase that they’ve never even seen? Trewarne, for one, believes internet sales are still driven primarily by cheaper goods at the low end of the jewellery spectrum. “Internet diamond selling is not really affecting our bottom line because we find it’s only the cheaper items that encourage people to hand over money online. “There’s still an element of risk for more expensive items, where it’s not so generic. Consumers are inclined to hand over money to someone they can trust, someone with a physical point of recourse, than to hand it over to an online diamond retailer who they really don’t know,” he says. However, the experience of Diamond Exchange’s customers, many of whom have been left thousands of dollars out of pocket, shows this isn’t necessarily always the case; plenty of consumers have seen the attractions of buying online. The online diamond retailer Jeweller spoke to says, “I had a lady in Sydney buy a $64,000 pear-shaped diamond – and I never met her.” Not everyone feels the need to make face-to-face contact when considering a significant purchase, it would seem. Unlike Trewarne, Marcus Rose, director of Melbourne CBD retailer Charles Rose Jewellers, believes internet diamond selling is having an impact on the industry. “Some diamond retailers would definitely be affected,” he says. “Pure online retailers represent a different paradigm of retailing. Online operators have a unique cost structure and operate within an entirely different set of market fundamentals that separates them from regular brick-and-mortar retailers.” However, Rose does recognise that these different market fundamentals have their own costs – no retailer, online or otherwise, can get away without incurring certain operating costs. He says, “It should also be noted, however, that less visible online traders can incur considerable costs to promote their websites and this can undermine their profitability.” The anonymous online diamond retailer that Jeweller spoke to says it’s a bricks-and-mortar myth that operating online is a ‘cheap’ option. “You can’t just expect to set up a website – it’s a really expensive thing. It’s a lot of development, a lot of years and a lot of hard work. Bricks-and-mortar retailers don’t realise that. Technology, for example, is constantly being updated and moving forward. No serious internet retailer can afford not to keep up. Marketing, too, is just as vital – if not more so – for e-tailers as it is for bricks-and-mortar stores. “It’s not just a case of setting up on the internet, lowering your prices and sitting back,” says the e-tailer. “I don’t think bricks-and-mortar retailers really appreciate there’s a lot of investment in websites. It’s really techy. You don’t pay rent, but you do: the positioning online is your real estate.” He likens appearing at the top of the search engines to renting a store on Melbourne’s premium shopping thoroughfare, Collins Street. “Collins Street is your number one Google spot. You have to pay. Online you do have real estate – it’s getting on top of the search engines. I just want to appeal to more people than are walking down Collins Street,” the anonymous e-tailer explains. Historically, it is the absence of normal retail costs such as rent and inventory that has made it possible for online sellers to slash margins to levels unsustainable for bricks-and-mortar retailers. Given the widespread use of the internet as a research tool for large purchases, consumers quickly discover these prices and expect them to be matched in stores. “Quite often, customers see a product online at a particular price and believe it then entitles them to negotiate with us on that basis, despite the fact that key points of quality and service are not covered by the pure online trader,” Rose adds. What is created is a price war that traditional retailers cannot win. “If bricks-and-mortar retailers try to compete on the same criteria that the internet is competing on, they’re never going to win,” Trewarne says. “They have to recognise what instruments they have that the internet doesn’t have, and focus on those differences: the ability to build an ongoing relationship, to impart knowledge and establish trust – the internet sellers can’t do that, but we can.” To some extent this may be true, but the anonymous online diamond retailer says e-tailers are well placed to gain customers’ trust because of the nature of the online sales process. “An online dealer might talk to a consumer 10 to 15 times on the phone and follow that up with five to 10 emails, with images of all different rings and different diamond qualities. That takes three or four hours. In a store, somebody might walk in and go ‘I really like that’ and it takes 20 minutes. Four hours is what builds the rapport, the security and the relationship.” And what might once have looked like an attractive marketplace for internet cowboys is constantly evolving and becoming more competitive. Holloway is quick to point out that the gap between the online traders and the brick-and-mortar traders is shrinking. On price, online retailers have always had a distinct advantage, but the explosion of homogenous online stores across the worldwide web has meant that businesses will disappear like needles in a haystack without a large promotional spend. “Essentially, everyone thought it would be easy to become a retailer without having a shopfront and without having to invest in stock – you could sell diamonds at a lower cost and consumers would flock to you, but those days are gone,” he explains. “There are now thousands of internet companies all trying to do the same thing, so you have to do what everyone else in business has to do: promote, which leads to an increase in costs. The gap between traditional and internet retailing becomes closer and closer.” According to de Kaste, it is this over all other evidence that highlights just how undeniably linked the internet is with every single channel of diamond retailing, online or otherwise. She warns that retailers who ignore the internet are effectively ignoring the desires of their own customers. “Consumers, no matter whether they shop at traditional stores or online, all do their research online – they want to know who the business is, what the jeweller is and what is offered,” she says. “Amazingly, so many jewellers can’t even be found online; they either don’t have a site or their site is buried in a local directory listing or is one page on a larger buying group site. This means they’re just one of many competing jewellers, none of whom are standing out.” But if online diamond retailers are to prevent becoming a needle in an increasingly large haystack, as Holloway suggests, they will need to raise their game too. A solid marketing strategy is needed for any serious online retailer, otherwise a consumer will not find them. And therein lies a major problem for online retailers; presence. Bricks-and-mortar stores exist, they are ‘there’, they can be touched and visited. Unless an e-tailer promotes itself using Google Adwords and other internet marketing strategies, no one knows they exist. In fact, one of the ironies in the new digital age is guerrilla-style marketing. In the weeks that Diamond Exchange died its slow death, any online search for the retailer presented users with ads for Diamond Exchange’s competitors who had purchased the Google Adword for ’Diamond Exchange’. Indeed, not only did a search on ‘Diamond Exchange’ present both results with links to Diamond Exchange as well as to Diamond Exchange’s competitors, it presented the many news stories published by Jeweller about the company’s financial difficulties and imminent demise. In cyber space, a retailer’s own branding can be easily hijacked by rivals, and any bad news can easily be found by the consumer at the same time. Trading on the web is no picnic, and many might argue it actually offers a more transparent marketplace for consumers. For bricks-and-mortar retailers, Trewarne is clear that the emotional experience will remain paramount in future. “We’re the ones who can sell the emotion, the trust and the ongoing maintenance benefits that the net sellers can’t offer,” he says. “We make sure we keep the experience of buying a diamond ring enjoyable, informative and pleasurable for the couples who are looking to make that special moment memorable.” Internet sellers aren’t the problem, de Kaste urges. Resistance to the internet is the problem. Retailers don’t necessarily need to sell online with fully-fledged e-commerce websites, but they certainly need to be integrating the web into their business strategies, she argues. “Even in their traditional marketing methods, jewellers are just not stepping outside of what they’ve always done. They say: ‘We’ve done this, we’ve always done this and we’re going to do it again.’ And that’s where they’re missing out on sales big time, because the market is the one thing that isn’t staying the same – it’s changing every day.” Ultimately, there has to be a place for both online and bricks-and-mortar diamond retailers and to a large extent, the market will decide. The online world offers a new retail channel and, as far as jewellery is concerned, it simply might be offering another distribution channel just as mail order retailing and TV shopping did when they first arrived on the horizon many years ago. Markets change and evolve, and just like the stock market they have their ups and downs and they eventually find their correct ‘water level’. Online retailing is here to stay and as far as the jewellery industry is concerned, the water has yet to settle at the correct mark. As Hansen says, “I am not trying to compete with the local jeweller. They simply can’t compete with me on price but then I can’t compete with them in having a fully stocked shopfront. We all hang out our shingle in different ways and so long as each company does it honourably and the customer is happy then all is good. We could all do without the Diamond Exchanges of this world.” And the sooner both sides of the industry accept what unites them rather than separates them, the more honourable and harmonious a place it will be. THIS ARTICLE WAS WRITTEN BY NICK LORD FOR JEWELLER MAGAZINE Posted January 27, 2011 | By Nick Lord