“The steal of a lifetime,” crowed Patrick Byrne on the Overstock.com earnings call. “We did a $7 million deal on diamonds," Byrne told his admirers, for a 'Build Your Own Ring' feature the web site had opened--one of the “skunk works projects” Byrne likes to tease his fans with on the calls. “We intend to dominate in the $1,000 to $5,000 range” of diamond engagement rings, he bragged.
Big talk, even for the voluble Doctor Byrne.
According to Byrne—and this is important—Overstock will sell engagement rings at price-points above the low-end, which is “controlled by Zales and Wal-Mart,” and below the high-end where, among others, fast-growing online jewelry retailer Blue Nile lives.
Byrne defined the low-end as "up to $1,000"; the high-end at $5,000 and up. Blue Nile, for example, operates with an "average order size [of] about $5,500,” according to Bryne. This price gap between the Wal-Marts of the world at the sub-$1,000 low end, and the Blue Niles of the world at the $5,500 high-end, offer the potential for “fantastic pricing” for Overstock, Byrne exulted.
Unfortunately for Overstock.com, for Patrick Byrne and for Overstock.com shareholders and the analysts who recommend the stock, there is no such gap that I could find in the actual web sites of the companies he mentions; only, apparently, in the fertile imagination of Doctor Byrne.
Go to “Walmart.com”. Type in “Diamonds.” Sort them by “Top Seller.” You will find the Top 5 sellers to be priced, in order: $697, $5,488, $1,399, $3,288, $898. I wasn’t a math major, but that’s an average price of $2,354 per ring. Smack in the middle of the price range Overstock.com fancies itself "dominating."
Now, Wal-Mart certainly sells a great many more pieces below $1,000, and its average ticket is undoubtedly below the $2,354 average of its five best-selling rings. But Wal-Mart's best sellers are right there in Bryne's price "gap," and I find it hard to see how Overstock.com will source and sell better than Wal-Mart.
What about the high end of the diamond ring market—the $5,500 “average order size” that Blue Nile operates on, according to Byrne? Another sketchy data point from the erudite Doctor Byrne.
“A key metric is our average order size,” Blue Nile’s CFO states on that company's recent earnings call, “which was $1,283 in the fourth quarter.” While engagement rings did indeed average $5,500 in 2004, as Doctor Byrne noted, Blue Nile sells far more units of lower-priced merchandise. Tour the Blue Nile site and you will find pre-set engagement rings starting at $325.
Tour the Overstock.com site, on the other hand, and out of the Top 20 sellers, only 5 of the rings sell for over $1,000. The other 15 range from $199 to $999. Hardly the $1,000-$5,000 pricing strata staked out by Byrne.
So much for the hype behind the Byrne spin. But here's where the whole "steal of a lifetime" gets interesting.
Blue Nile ended its year with $9.9 million worth of inventory. Inventory for Blue Nile consisted of “settings for our customized diamond products, customized jewelry…and finished jewelry such as pearls and sterling silver products.”
Notably absent in Blue Nile’s inventory is the mention of a large slug of diamonds. This is because Blue Nile operates with hardly any actual loose diamonds. As of last October Blue Nile carried a mere $120,000 of loose diamonds on its balance sheet.
Patrick Byrne, on the other hand, positively gloats about “a $7 million deal on diamonds that was the steal of a lifetime.”
Why a fledgling Blue Nile-type web site knockoff requires $7 million worth of diamonds, when the actual Blue Nile operates with 98% less is a question worth asking.
Furthermore, even assuming Overstock.com has—thanks to its “skunk works”—figured out how to convert $7 million of diamonds into a profitable business, it would be worth understanding how exactly one goes about getting a “steal” on $7 million worth of diamonds.
The wholesale diamond market is not exactly inefficient in the manner of, say, Chinese pottery. Diamond sellers know what their inventory cost them, and what it is worth, and the wholesale buyers know it, too. Getting a “steal of a lifetime” on $7 million worth of diamonds is as hard to imagine as an oil trader pulling one over on the boys at Chevron.
I have no answers. But these matters of the price-point "gap" Overstock aims to "dominate" and the $120,000 of loose diamonds on Blue Nile's balance sheet compared to Overstock's $7 million "steal of a lifetime" are all subjects that should be explored more deeply.
Any informed input here is welcome.
I'm Not Making This Up