The 'Net could pressure gem's retail prices

By Vito J. Racanelli

First books, then stocks and now, diamonds may be the new, new thing to sell over the Internet. Good news for consumers, but it could mean a squeeze on profit margins for traditional jewelers.

Thanks to the booming economy, U.S. diamond sales are soaring, gaining an estimated 11% or better last year to roughly $25 billion, good for half the world's market share. That follows a nifty 9% rise in 1998. Vendors are giddy as this year's demand appears to be just as promising, and retail diamond prices have been firm.

But the 'Net is casting a shadow on this sparkling outlook. Diamonds are probably one of the last things people associate with e-tailing, but that has begun to change. Far from being too expensive, too individual or too difficult to buy sight unseen, diamond sales over the Internet are surging, with a virtual explosion of sites in just the past six months dedicated to selling diamond jewelry. And the reason is simple: Prices that are anywhere from 20%-50% cheaper, carat for carat, on equivalent grades.

Most of the sites are small and private, so little hard data exist currently. Yet Bluenile.com, which, for example, began taking Internet orders last June, saw sales jump 233% to $10 million in the fourth quarter from the third quarter's $3 million. Other sites are seeing similar triple-digit growth rates. Once rare on the Internet, sales of $50,000- $70,000 diamonds now are not uncommon.

Third-party data also tend to confirm the huge growth. The Gemological Institute of America, one of two big U.S. diamond-rating agencies, saw requests for the number of grading reports rise by 42% last year, far higher than the 25% growth seen in the two previous years. Grading reports are typically issued with each diamond sold.

Dan Morehead, president of DiamondTrade.com in Dallas, says traditional bricks-and-mortar diamond pricing will come down inevitably as the sites and their popularity proliferate. Matched for quality, grade and color, diamonds generally cost roughly 30%- 40% less over the Internet, he asserts. Over the long run, such a differential "is going to pressure margins for the typical retailer," he predicts.

Rob Bates, editor of industry publication New York Diamonds, adds it's common now for people to take price lists from Websites to a traditional retailer and say, "'Match this!'" While 'Net diamond sales now are relatively puny, their steep growth rate suggests their impact on prices might come long before total sales become significant.

Paralleling what's happened in other businesses, a recent survey by trade magazine Jewelers Circular Keystone found the Internet threat topped a list of vendor concerns. And in the past year, top-flight managers from well-known traditional jewelers have migrated to the Web companies, just as in less-glitzy retail areas.

And even the world's best-known diamond purveyor, which had traditionally sniffed at Internet sales as not up to the "Tiffany experience," unveiled a commercial site the day after last Thanksgiving. Tiffany's vice president of investor relations, Mark Aaron, declined to discuss the Web's effect on diamond prices, but opined that "for those who don't offer good value, [the Internet] could force them to become more competitive."

Wholesale diamond prices, however, are beyond the reach of the Internet. They're essentially set by De Beers Consolidated Mines, the South African giant that controls roughly 60% of global supply.

But if you're shopping for Valentine's Day, here are some of the new diamond-selling sites: www.adornis.com; www.bluenile.com, www.diamondtrade.com; www.miadora.com; www.mondera.com; www.myjewelry.com; www.tiffany.com; and www.zales.com.