The Flip Side of the Dell Computers Model

Stephen DeAngelis

June 5, 2006

Recently I discussed an article about how Dell Computers is opening mall stores in Texas and New Jersey where its products are showcased but consumers must still go online to buy them (Dell Computers and the art of resilience). The flip side of that e-commerce model is also being tried. In an article in today’s New York Times (“New Jewelry Web Site Sends People to Real Stores“), Bob Tedeschi talks about “the Independent Jewelers Organization, a trade group representing more than 800 small jewelers, [which last week] introduced IJODiamonds.com, where consumers can select diamonds and have them delivered to a local store for a personal inspection before any money changes hands.”

 

Just like a decrease in its market share spurred Dell to explore ways to reverse that trend, small retail jewelry stores were starting to see a decrease a in market share because of online jewelers like BlueNile.com. Dell is trying to enhance its online business using mortar & brick stores, while the jewelers are trying to enhance their mortar & brick stores by using the web. In both cases, companies are trying to preserve what has been a successful business model (and protect their major resource investment as well). In the case of the jewelers:

“This is about protecting their business, and survival,” said Lauren Freedman, president of the E-Tailing Group, a Chicago-based consultancy. “These businesses have been very challenged by the Web, and this gives them a way to leverage the Web in a way they couldn’t do on their own.”

It sounds odd to say one is leveraging the web, when the primary aim of the site, according to the article, is “Don’t buy online.” But here is how they plan to do it:

IJODiamonds.com sells mostly loose diamonds, which are difficult to sell for a high profit because the stones are considered a commodity. But to cover their larger fixed costs, traditional stores typically mark up the price of loose diamonds more than online retailers do. IJODiamonds.com helps local merchants compete more effectively on price by offering consumers a selection of diamonds not from that local store, but directly from hundreds of diamond wholesalers. The wholesalers list the diamonds on the site, and when a customer selects one, the stone is shipped to a local store so the customer can examine it before taking it home. If the customer likes it, the store shares an undisclosed portion of the selling price with the wholesaler. If not, the customer pays nothing and the stone goes back to the wholesaler.

Of course, it is not the sale the of loose stones that local jewelers really care about, it’s providing the setting and other services that they traditionally sell. The real profits are in this aftermarket. IJODiamonds.com will ship stones directly to customers, but they discourage customers from taking advantage of that option, advising them, “Never consider buying a diamond without seeing it first.” Online jewelers are countering this advice by telling consumers that they carefully screen out questionable stones because they know an unsatisfied customer is not a return customer.

Although this business model is the negative-image of Dell’s approach, it is not likely to fare as well. The article again quotes an E-tailing Group analyst:

Ms. Freedman of the E-tailing Group said that there were two possible drawbacks to the IJODiamonds.com approach. First, with only around 850 participating retailers in the United States, the organization does not have enough coverage to satisfy some consumers who do not want to travel far to look at the diamond they selected. Second — perhaps more important — is that IJODiamonds.com is competing with numerous online diamond dealers that are marketing aggressively on search engines and other sites. Unless the Independent Jewelers Organization commits significant resources to promoting its site online, Ms. Freedman said, the site will not attract much attention.

I couldn’t agree more. Dell already has an enormous Web presence and media budget, its mall showcase stores not only appeal to current computer users but to potential computer users that cannot be reached online. On the other hand, the jewelers associated with IJODiamonds.com are not really reaching a new customer base. They are trying desperately to hold on to their traditional customer base. That’s not a resilient approach. It also highlights the fact that resiliency is not just a matter of technology.