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OCTOBER 1, 2002 COMPANY CLOSEUP By Christopher Palmeri Ice.com's Gem of a Business After a shaky start, the online jeweler brought an old-fashioned retailing approach to the Web. It has been a recipe for 24-carat profits
Ice.com is also in expansion mode. It plans to close soon on the purchase of the online customer list of bankrupt retailer Service Merchandise Co. With 305,000 names producing around $16 million a year in sales -- most of it in jewelry -- Gniwisch expects to mine that list for new customers. "We took a traditional approach to building a retail business," Gniwisch says. "You start with one small store. You don't a build a superstore that opens on day one." Online jewelry has proved a surprising e-commerce success. Overall, the technology-forecasting outfit Forrester Research expects the segment's sales to climb 20% this year, to $1.2 billion. By 2007, that could hit $5.7 billion, Forrester says. Why the sparkle? For one, the market is fragmented. Apart from jewelers like Cartier and Tiffany, there are few large brands people trust. The e-stores have proven popular with men. Attracted to the ease and low-key nature of the shopping experience, men account for as much as 70% of the sales on some sites. And relative to other products sold over the Web, jewelry carries high margins and yet is inexpensive to ship. WINNERS AND LOSERS. Online jewelers have played up those strengths by providing strong customer service. Sites often offer free Federal Express delivery, extensive online tutorials on jewelry buying, and 100% money-back guarantees. "The online jewelers deliver on their promises," says Forrester online analyst Carrie Johnson. "That hasn't been the case with other categories, like grocers." Ice.com is among a handful of winners. Fred Mouawad, co-founder of Net jeweler Mondera.com, says his site, which was initially backed by Internet conglomerate CMGI, has positive cash flow and will be profitable by yearend. Blue Nile, an online jewelry startup supported by venture-capital firms Bessemer Venture Partners and Kleiner Perkins Caufield & Byers, reports that it has been profitable for the past three quarters on sales of about $70 million a year. Among the category's notable disappointments: Miadora.com, which was backed by Sequoia Capital and is now out of business, and Ashford.com, a former high-flyer purchased earlier this year by GSI Commerce. Survivors say differentiation has been a key factor in their success. Blue Nile focuses on male customers: More than half of its sales come from engagement rings. The average price for merchandise bought on Blue Nile is about $1,000. Ice.com targets women making lower-priced, impulse purchases for themselves. INCUBATING LOSSES. Its success doesn't mean the business is foolproof. Ice.com was founded in May, 1999, by the Gniwisch family -- brothers Shmuel, Mayer, and Pinny, and their brother-in-law Moshe. The foursome, who are nonpracticing rabbis, had experience in the business. Family matriarch, Leah, founded a jewelry manufacturing company in 1979, where the boys all worked. Shmuel got the idea to take the business online. After cold-calling Internet entrepreneur Bill Gross and securing $7 million in funding, Ice.com became part of Gross's idealab! Internet incubator. The Gniwisch clan briefly relocated to idealab!'s Pasadena (Calif.) headquarters and burned through several million dollars. "Our first Valentine's Day, we spent $300,000 in online advertising and generated $25,000 in sales," Shmuel recalls. "We were blowing our minds." And dollars. Stephanie A. Streeter, the former chief operating officer of idealab's Pasadena office and now chief executive of printer Banta, recalls a time in the summer of 2000 when Gross suggested that Ice.com buy merchandise from a local Tiffany store and sell it at a loss on the Ice.com site to goose growth. The Gniwisches passed on the idea. "Back in the days when it was all about eyeballs, and everyone was doing crazy promotions, these guys never lost sight of the fact it was about luring real customers, merchandising the heck out of your site, and being nice to your customers once they placed an order," Streeter says. Gross declined to comment for this story. PINCHING PENNIES. Things took off after the family regained control of the business. Thanks to the tech wreck and the retrenchment of Gross's empire, the Gniwisches took back idealab's 60% stake in their outfit by assuming over $600,000 of debt. Moving back into a family-owned building in Montreal has slashed expenses. Ice.com pays rent of just $1,500 a month for its 4,000 square feet of office space. Shmuel figures his costs for programmers and customer-service reps -- the company has only 15 employees -- are half of what he paid in the U.S. And he watches costs even more closely by focusing his marketing efforts on so-called affinity deals, wherein Ice.com pays a commission to other sites only if they send paying customers. Ice.com pays careful attention to its wares. Aside from watches, the merchandise is all private-label product designed by outside contractors. The direct relationship allows Ice.com to generate a 60% profit margin on an average sale of $180, according to Shmuel. "When we got started in this, the Web was about big egos and small margins," he says. "Now, it's about small egos and big margins." And, not coincidentally, that's why his business is profitable.  Palmeri is a correspondent in BusinessWeek's Los Angeles bureau Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. 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