January 21, 2007 / 2:30 AM / 11 years ago

Internet threatens NY diamond dealers' way of life

<p>A diamond dealer checks the quality of a diamond in a file photo. Diamond merchants form an enclave along a western block of Manhattan's 47th Street that is lined with jewelry stores. The Diamond Dealers Club estimates some 2,000 businesses along the street are connected in some way to the diamond businesses, among them shops, dealers and gem cutters. Many who work there are ultra-Orthodox Jews, clad in traditional long dark coats, black hats and beards.Francois Lenoir</p>

NEW YORK (Reuters) - In the confines of the Diamond Dealers Club, a Hasidic Jew from Brooklyn and a dealer from Antwerp huddle over a small, folded piece of paper.

The Hasid reaches inside to produce a flawless diamond, which his client inspects closely with a jeweler's magnifying glass. The two reach a deal, shake hands and say a Hebrew blessing "Mazal U' Bracha" ("Good luck and God bless").

This typical scene, witnessed earlier this month at the elite epicenter of New York City's diamond business, is becoming threatened by electronic commerce.

"In the olden days, most of the trading happened on the trading floor. Now it's moved to electronic," said Elliott Krisher, treasurer of the Diamond Dealers Club. "It's become an electronic handshake."

In the last five years, membership in the club has stayed flat at 2,000. Yet 1,200 new members joined the club's Web-based trading platform launched four years ago.

Many of the old-time dealers whose shops line Manhattan's West 47th Street are having difficulty competing with online companies such as Seattle-based BlueNile.com, a jewelry company whose estimated earnings for 2006 are $250 million, up from $44 million six years ago.

The diamond merchants form an enclave along a western block of Manhattan's 47th Street that is lined with jewelry stores. The dealers club estimates some 2,000 businesses along the street are connected in some way to the diamond businesses, among them shops, dealers and gem cutters.

Many who work there are ultra-Orthodox Jews, clad in traditional long dark coats, black hats and beards.

What has happened to the diamond business is like the troubles affecting many retailers such as book, video and electronic stores that struggle to beat online rivals.

The online companies are "cutting out the middleman," said Jack Friedman, a diamond broker. Friedman has earned his living for 20 years running from wholesaler to wholesaler finding stones for his clients, who are jewelry store owners.

There is no loyalty, he said, when jewelers can search for diamonds online.

"With the Internet, there are jewelers that don't call anymore," Friedman said, adding that the only reason he's still in business is because "He's still here," pointing to the sky.

Before the Internet, wholesalers would sell stones to jewelers, who would keep them in stock for future sales. Now that stones are just a click and overnight shipment away, there is less need for inventory.

Wholesalers increasingly must sell on consignment, and if a jeweler can't sell a diamond the wholesaler must take it back without making a cent.

Retailer Meyer Malakov, owner of Diva Diamonds on the corner of 47th Street and Fifth Avenue, said he has noticed a traffic decline in the diamond district over the past five years and that Internet-savvy shoppers have grown more educated.

He complained that their new-found knowledge is "deadly" because customers think they know a lot about diamonds but they cannot pick up on the nuances of a stone, he said.

"You have to feel it, touch it, make sure that you love it," he said.

Customers also use the Internet to comparison shop, Malakov said, and they expect him to match advertised prices.

Nevertheless, Malakov said he is doing well because he caters to high-end customers who would prefer to see a $20,000 stone in person before buying it.

However, people are increasingly buying expensive jewelry such as engagement rings and tennis bracelets online. According to spokesman John Baird, BlueNile.com sold a piece of jewelry for $324,000 in October, sight unseen.

Baird said the online diamonds have been certified by the Gemological Institute of America and the American Gem Society Laboratories, arbiters of a stone's value.

BlueNile.com sells diamonds for 30 to 40 percent less than the store price because there are no overhead costs such as retail space and large numbers of employees, Baird said.

"The supply chain was so convoluted" on 47th Street, he said. "There were layers and layers of middlemen, and all of that cost was being pushed down to consumers."

But purchasing diamonds online has its risks, said Cecilia Gardner, head of the Jewelers Vigilance Committee, an industry trade association.

She said some consumers who have tried to return diamonds bought online found the seller company no longer existed.

She advises online shoppers to get a return policy in writing. "Ask a lot of questions and if you're not getting answers, shop someplace else," she said.

Some diamond dealers are starting their own Web sites.

Corey Friedman, a wholesaler and jeweler at I. Friedman and Sons Jewelers on 47th Street, said he searches for merchandise online and runs a Web site that sells directly to retail shops and consumers.

"I just sold a five-carat fancy yellow diamond to someone in California," Friedman said. "I'll never meet him."

While Web sites may be a key to survival in the Diamond District, some believe that selecting engagement rings in person will never go out of fashion.

"A diamond is a romantic item," Krisher said. "It's not so romantic to click and buy something on the Internet."

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