Published on .

June 11, 2001

By Jenna Schnuer

CHICAGO ( -- For Internet retailers that target affluent customers, one lesson rings out louder than any others: People will

Diamonds from
spend online if it's easy for them.

"This customer is very Web savvy and is willing to pay a premium for convenience," said Martin McClanan, CEO of e-tailer RedEnvelope.

Retailers "pour millions into sites that they hope will replicate the rarefied experience of shopping in a brick-and-mortar luxury store. But affluent shoppers expect a different experience online. They use the Web in search of convenience, confidence and control," Forrester Research analyst Ekaterina Walsh noted in a report titled "Selling Luxury to the Affluent Online." Added Ms. Walsh: "The same customers are shopping [online] at the Gap, so that's where they're learning their lessons."

Luxury e-tailing is "a great category. It provides a tremendous one-stop shop for high-ticket items for busy people. It's the convenience factor that is what drives traffic on the Web," said Kevin Noonan, vice president of Internet and media research at the Yankee Group.

What limping economy?
For those e-tailers that keep this lesson in mind, the potential for growth appears significant despite the limp economy. Jupiter Media Metrix estimates the online sale of high-price

goods will reach $13 billion this year, and by 2005, it will grow to $32 billion.

"Luxury tends to do better in a bad economy," said Carl Steidtmann, director and chief economist at PricewaterhouseCoopers. But, he added, "I would think the luxury goods sector would be a difficult sector to crack on the Internet. ... [The affluent population is] a hard market to go after. It's relatively small and requires a lot of personal attention. People like to be schmoozed and sucked up to."

Traditional bricks-and-mortar retailers face the challenge of using the Web as a selling medium separate from their stores. Ms. Walsh said she was most surprised to find "traditional luxury brands have no clue as to what to do online." Retailers such as Tiffany & Co. are "so entrenched in their tradition, they're limiting selection severely. Getting people to go to the store should not be a primary goal." received kudos for its online presence: "It's clearly a leader and has been a leader for two years."

Pure-play e-tailers, spawned on the Internet, aren't tied down to an existing look, but that too can backfire on them because they "have the disadvantage of not having

Stem ware from
an established brand or a physical presence," Ms. Walsh said.

"Stand-alone businesses are hard to execute [online]. ... The problem each of them has had [is] in establishing a brand identity," Mr. Steidtmann said.

Less infrastructure needed
The luxury sites are "going to be one of the first and maybe one of the only [online] pure-play companies to make it to profitability," said Mark Vadon, CEO and co-founder of online jewelry purveyor Blue Nile. He contends that luxury retail sites require less infrastructure, like warehouse space, than mainstream retailers to generate sales, and that luxury sites have higher gross margins.

An immediate priority for the Internet-only retailers is to reach profitability in an inclement economy. Luxury e-tailers are counting on some pretty optimistic outlooks to put themselves in the black.

"The experts predict online spending will grow 50% to 75% year after year. We get to ride that wave of growth," said David Gow, CEO of, a high-end e-tailer whose offerings range from a $21 A.T. Cross pen to a $325,00 diamond and platinum ring. "We're a little less dependent on overall luxury spending and more dependent on overall online spending."

Ashford's example
Ashford can take some comfort in the $17 million net loss it reported for the quarter ended March 31, because it was down from a $41.3 million loss a year earlier. Revenue of $14.3 million was up 21%. During the quarter, Ashford added nearly 35,000 new customers and the average order size was $357.

Despite Mr. Gow's bullishness on the

watches from
growth potential of online retailing, Ashford in January laid off 23% of the employees on its retail business. The e-tailer, which went public in September 1999 at $13 a share, needs to quickly boost performance. Its stock has been trading at less than $1, and Nasdaq has given Ashford until July 9 to boost the price to avoid being delisted. Last last week, Ashford's share price had sunk below 30 cents.

Mr. Gow, who rose to CEO in April from chief financial officer, acknowledges the layoffs on the retail side but is quick to emphasize the company is hiring for its department that specializes in corporate gifts. Corporate sales contributed 15% of Ashford's revenue for the quarter ended March 31.

Ashford also has decided to rework some of its retail categories and brands. "We're going to eliminate brands and categories [including men's ties, vintage watches and some women's accessories] that don't generate a lot of sell-through," Mr. Gow said. Art is a new focus for the company, and Ashford recently completed the acquisition of online art dealer "The real opportunity is to take their product set and expose it to the traffic on the Ashford site," he says.

Ashford currently is focusing on a three-pronged approach to grow its customer base: online media advertising including on Microsoft Corp.'s MSN Internet portal and The New York Times'; a personalized weekly newsletter based on previously stated customer preferences and clicked responses; and marketing partnerships including the frequent-flier programs of Continental Airlines and Northwest Airlines, plus American Expres Membership Rewards.

"We don't have much offline media today," Mr. Gow said, but he added that Ashford might do newspaper advertising around the holidays. The e-tailer handles advertising in-house.

Targeting gift-buying men
At rival Blue Nile (, revenue hit about $50 million last year, said Mr. Vadon, adding that the privately owned company is ahead of its plan to be profitable by the fourth quarter. In February, the jewelry e-tailer laid off about 20 employees, 19% of its staff.

"Our model has always been targeting men," Mr. Vadon explained. "Our target market has been men who are younger, well-educated, more affluent and pretty confused about jewelry shopping. ... For high-end jewelry, the majority of purchases are made by men [as gifts]."

He said men don't like going into stores because the sales people drive the experience too much and they don't feel in control. Men don't want to touch the jewelry, Mr. Vadon said. Instead, they want information about the products, and that's what Blue Nile provides. The site also offers an online sports calendar to help customers make sure they don't schedule an engagement or wedding on a major sports event day. It's probably wise to avoid such scheduling snafus since the average price of an engagement ring purchased on Blue Nile is $5,000.

Blue Nile has tried to become "much more efficient" with its marketing this year, Mr. Vadon said. "In 2000, we explored a lot -- online advertising, radio, newspaper, TV. We tried everything. Last year for us was a lot of experimentation. Today the majority of our spending is online. It's a lot cheaper to buy online space now than it used to be. ... The Web is really a traditional direct-marketing-type vehicle. We know who our customer is and need to use vehicles that can pinpoint them."

In April, Blue Nile mailed out its first catalog to about 500,000 addresses. The e-tailer may do some offlline advertising again for the Christmas season. Leagas Delaney, San Francisco, handles that account.

Not 'breaking the pocketbook'
RedEnvelope, which started as a pure-play e-tailer but now alo has a catalog, claims it will be profitable this year. "We provide a luxury experience without breaking the pocketbook," Mr. McClanan said. "Our sweet spot is $100 to $150." The upscale gift category is a $30 billion to $40 billion per year business, he claimed, and "our intent is way beyond survival. This year we're expecting to grow 70% to 80%."

The privately held company employs less than 100 people and hasn't had any layoffs. According to Mr. McClanan, RedEnvelope "raised a significant amount of capital last summer."

Although RedEnvelope relied heavily on offline advertising at launch, the company now depends on a thriving catalog business and relationships with companies such as MSN and AOL Time Warner's America Online to grow its customer base. "We have done a lot of print advertising in our history but have reached our awareness targets," Mr. McClanan said. "Expect to be back in print in the not too distant future."

Leagas Delaney handled RedEnvelope's launch work, but the e-tailer currently has no agency of record.

RedEnvelope currently has 475,000 registered customers, and Mr. McClanan said it expects 45% of them to repeat purchases on an annual basis. The company also is "not dismissing the possibility of retail stores."

Reaching profitability
Jupiter analyst Heather Dougherty said luxury sites could indeed reach profitability by yearend.

"They have been very targeted. Ashford has had a lot of success in the brands they've been able to attract. They're starting to go after the wedding registry," she said. "RedEnvelope is firmly targeted at the gift buyer. Both are trying to outdo themselves with service ... and that plays really well to the customer. They also outdo themselves with product presentation."

Service is key, Ms. Dougherty added. "Both of those sites need to perform well in service because they're competing against established brands. They have to remain really focused on the types of customers they want to reach."

At the same time, "established," traditionally bricks-and-mortar luxury brands are learning how to play on the Internet.

"The big lesson is [that] the unique and hard-to-find sells well in Ralph Lauren stores but is hard for the customer to understand online," said Jeffrey D. Morgan, president-CEO of Ralph Lauren Media and Some of the top sellers on that site, which launched last year, include the "classic iconic product" like the oxford shirt, chinos, and the Polo mesh shirt.

Although Mr. Morgan doesn't "want to be specific" about the site's traffic or sales, he said's performance is "on our plan." The company recently launched Runway, a new site that showcases but does not sell the high-end collection of Ralph Lauren.

"It's not the kind of product people are going to buy sight unseen online. [Runway] is a service where they can see the latest fashion features in-store right now," Mr. Morgan said. "This connects the advertising with the Internet with the store. The Internet should be an extension of the marketing and existing retail. That's how we approach it."

Being realistic
But no matter how well-positioned, all these sites need to be realistic about the rest of the year. "New customer influx is probably going to be significantly reduced," said the Yankee Group's Mr. Noonan. "They will have to work harder to get new customers."

"The one difficult thing going forward is the weak economic condition," Ms. Dougherty noted. Even if the players are executing really well, she added, it's a problem if no one has money to spend.

Copyright June 2001, Crain Communications Inc.

Most Popular
In this article: