Blue Nile, Inc.

Brandon Dobson

Blue Nile was founded by Mark Vadon in 1999 after he was frustrated with his

own engagement ring-buying experience. At the time jewelry was almost exclusively

sold in retail stores such as in malls or small privately owned jewelry stores. Buying

diamonds was also arbitrary and complicated with its thousands of codes depicting

color, cut, clarity, and carats. Vadon decided to open a website selling directly to

consumers in mass giving him economies of scale and allowing Blue Nile to have lower

prices than the traditional stores. I chose this company because I have bought from

them many times including platinum earrings and have known for many years that the

website bluenile.com is the best place to get good jewelry at a much lower price than

going to a store. So finding out more about their finances, market, and strategies was

intriguing.

1) Financial Performance

For such a young company Blue Nile has been an extremely financially successful

company with revenue over 300 million. Currently it is in a likely temporary downward

trend in performance. While their revenue has gone up by 70 million in the past three

years, their cost of goods sold and selling general and administrative costs have gone up

tremendously by about 60 million leaving the gross profit not increasing much and the

operating profit dropping from 21 million down to 12 million.

After researching what was going on to cause this I found out that the company

has committed to quite a large undertaking of changing its focus in a new direction. It is

in the process of switching from its primarily discount engagement rings business to

also being a non-engagement and fashion jewelry business as well resulting in a 15%

growth in customer base so far. Even with this large cost outlay it still additionally

managed to achieve a 21.7% growth for engagement rings in the primary market of the

U.S. and 19.6% internationally.

Income Statement

View: Annual Data All numbers in thousands

Period Ending Dec 30, 2012 Jan 1, 2012 Jan 2, 2011

Total Revenue 400,035 348,013 332,889

Cost of Revenue 324,977 275,881 260,949

Gross Profit 75,058 72,132 71,940

Operating Income or Loss 12,287 16,919 21,286

Net Income 8,392 11,350 14,142

2) Macro-environment

The single macro-environmental event or trend that is most affecting Blue Nile,

Inc. is the globally high commodity prices. These high prices greatly influence cost and

thus demand for jewelry. The global prices of precious metals like gold, silver, and gems

like diamond are especially hindering profit margin. Blue Nile does not purchase a

diamond or gem from suppliers until a customer has placed an order with the purpose

being to save cash on purchasing. These price increases cannot be fully passed on to

customers do to competition and price sensitivity. So interestingly, something Blue Nile

had listed as strength has turned out to be a weakness. Since precious metals and gems

such as diamonds have easily risen 75% the past several years, the company has had to

pay current market prices, leaving little wiggle room in its selling prices and lowered

profit.

The change in business strategy towards non-engagement and fashion jewelry is

in part a response to this. The non-engagement jewelry products are typically bought in

bulk and taken into inventory ahead of time with the purchase order agreements

establishing terms for quantity, price, payment, and shipping. I have seen no indication

that the company has or intends to change this supply chain strategy for its engagement

rings that make up 70% sales.

3) Porter’s Five Forces (plus 2)

The single element in Porter's Five Forces (plus 2) analysis that poses the greatest

threat to Blue Nile is the intense rivalry among existing competitors. The engagement

and non-engagement retail market is intensely competitive and highly fragmented.

There is huge competition coming from online and offline retailers that may offer

products within the higher quality segment of the jewelry market. The biggest rival

threats are Signet, Tiffany, Zale, and Amazon who are more established, have longer

operating histories, greater brand recognition, existing customer and supplier

relationships, and significantly greater financial, marketing and other resources even

though Blue Nile is the largest online jewelry specific company.

4) Product Life Cycle

Blue Nile’s most important product is diamonds/engagement rings. These

products and industry are in the maturity stage of the product life cycle. They have been

sold for centuries and are very widely owned. It seems a lot of Blue Nile’s growth has

been through taking away market share from physical stores instead of actually more

diamonds selling overall. After a wildly volatile period between 2007 and 2010 the stock

seems to have stabilized to around $40. How Blue Nile has experienced such huge

growth is through differentiating itself from competitors with its efficient business

model, lower prices, emphasis on customer service/education, huge selection, and

unbeatable jewelry customization ability. It has not necessarily been by selling its own

unique proprietary products.

Regarding future prospects, at 60 billion in sales last year the jewelry industry is

quite large. Due to it being so ingrained in our culture along with the desire to have the

latest style/trend, the custom of men buying engagement rings or people buying jewelry

in general will continue into the foreseeable future. Blue Nile still has a lot of market

share it could capture with strong branding, diversification, and playing on its

competitive advantages. Currently they only have 5% of U.S. engagement ring market

share.

5) Strategy

Blue Nile’s strategy begins with its mission objective “to continue to grow our

leadership position in our core business by offering exceptional value to our customers

through supply chain efficiencies, an efficient cost structure and a high quality customer

experience.” They want to empower customers with information and expert guidance, as

well as offer tremendous selection of high-quality products and industry-leading value,

and redefine the way people search for and purchase jewelry.

They do this by selling online directly to customers which allows them to avoid

many of the costs that are typically incurred by physical retail stores, thus having lower

gross profit margin and prices. BN’s website has more than 100,000 diamonds and

styles of fine jewelry, including rings, wedding bands, earrings, necklaces, pendants,

bracelets, gifts, and accessories. They specialize in the customization of diamond jewelry

with what they call “Build Your Own”, a feature that offers customers the ability to

customize diamond rings, pendants and earrings.

The company has developed an industry changing cost structure with a better

supply solution. This gets rid of middlemen such as wholesalers so that they typically

only order diamonds after they have already been ordered by customers. With diamond

jewelry being such a large important purchase, potential customers like to research and

seek out advice from someone they can trust. Blue Nile goes out of its way to provide

this with its comprehensive website, expertly trained customer service employees who

are called diamond and jewelry consultants, interactive search capabilities, and highly

detailed product listings. An added value is there is no pressure to buy typically found in

physical stores which is another reason I prefer to buy from them. So to summarize their

competitive strategy has been to be low cost and differentiation through customer

satisfaction and value.

Blue Nile has recently implemented a strategy that is crucial to its future success.

They have begun investing heavily in marketing to reach more customers, especially in

the expansion of their international business. They are selectively pursuing each target

market/region/country based on consumer spending on jewelry, adoption rate of online

purchasing and competitive landscape. It seems they have spent most of their

advertising online such as on search engines.

Their strategies definitely are still appropriate as evidenced by their recent strong

growth numbers, high cash on hand, and the way things are going in the diamond

jewelry industry. Their decision to diversify into fashion jewelry is risky but also a very

smart move. I think that the lower stock price at around $40 is based largely on the

large increase in diamond/ precious metal prices and its resulting loss in profit for Blue

Nile. Once those prices go down and/or their fashion jewelry investment pays off, the

stock will be back up to $60 per share and beyond.

6) My Recommendation

In my opinion, the most important problem facing Blue Nile is that of brand

awareness and recognition. I do not think that most people know about the website or

why they would want to buy jewelry from there. The only reason I do is that I heavily

research most anything I buy and am in tune with what’s happening on the internet. My

family and friends buy Jewelry at a mall or at Jared’s who does have a heavy T.V.

presence with catchy ads. BN already has a significant portion of its budget allocated for

marketing but all of it is using online channels. Starting January 1st I would have them

aggressively place ads in other forms of mass media such as magazines, television, and

radio as well. I would also hire a much more effective marketing team that could

adequately communicate Blue Nile’s fantastic value proposition to the average person.

Early in the company’s history BN did spend absurd amounts on T.V. ads but it must

have not been deemed a good ROI and was stopped. Starting now, they need to be more

strategic in buying mass media ads starting off small, split-testing and then increasing

their spending carefully. When people think of buying Jewelry they should at least

consider Blue Nile as a choice. I believe if more people knew what BN was offering they

would wonder how they every managed to buy jewelry without it.

Sources:

http://en.wikipedia.org/wiki/Blue_Nile_Inc.

http://www.investorguide.com/stock.php?ticker=NILE

http://www.bluenile.com/

http://www.jckonline.com/blogs/cutting-remarks/2012/09/07/blue-niles-new-

direction-and-what-it-says-about-our-industry

http://finance.yahoo.com/

http://www.fastcompany.com/1685867/blue-nile-sparkles

http://www.prnewswire.com/news-releases/us-jewelry-market-report-focus-on-online-

segment---2012-edition-166392296.html

www.amstock.com/proxyservices/Files/AR40006.pdf