Blue Nile: A hidden gem in the diamond and fine jewelry online marketplace

Efficient use of supply chain management and low cost operating model delivering joy to many couples.

Founded in 1999, Blue Nile positioned itself as the company that would disrupt the diamond and jewelry marketplace by “de-mystifying” the consumer experience of buying diamonds online. With this idea in mind, Blue Nile focused on creating an innovative and disruptive business model that would deliver the most value to consumers through superb diamond education, customer service and most importantly lowest price guarantee. Since 1999, Blue Nile has grown to become the leading online retailer of high-quality diamonds and fine jewelry with over $470mm in revenue with virtually almost no inventory thanks to their remarkable integration of their business and operating model.

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What is Blue Nile’s business model?

As the leading online diamond and fine jewelry retailer, Blue Nile’s business is educating consumers throughout the complex process of buying a diamond online from the search phase to the actual checkout. Historically, this education process had been performed by the local jewelry commissioned driven experts yet Blue Nile managed very effectively to provide the same service through its online experience. Blue Nile’s online platform focuses on providing a user friendly process where consumers are educated on the key components to buying a diamond and compare products objectively to make informed decisions for purchase.

Once educated, Blue Nile’s customers are offered a selection of more than 250 thousand diamonds equivalent to approximately $2bn of virtual inventory for the customers to purchase from at a significant discount, usually around 20% to 40% versus traditional jewelers. Their proprietary search technology provides easy access to this inventory in their website with very convenient filters to search the key components of a diamond purchase (ie. Price, Cut, Color, Clarity, Carats). Additionally, the sales process is supported by diamond specialists available on call twenty-four hours seven days a week to make sure customers feel accompanied throughout the process should the need to talk to a specialist arise. Once a purchase has been made the diamond is then delivered to the customer’s doorstep in what could be labeled as the easiest and most convenience diamond shopping experience.

How can Blue Nile provide the best online experience with the lowest price point and no inventory?

The answer to the question is precisely the link between the company’s business model and the operating model.

Jewlery

From an operations standpoint, Blue Nile’s strength is its long standing relationship with its more than fifty suppliers. Such strong relationship allows Blue Nile to display suppliers’ diamonds for sale on the Blue Nile website without having the physical inventory and only procured from the supplier once a customer has made an online purchase. The relationships with the suppliers are governed by robust multi-year contracts with
favorable terms that allow for negative working capital benefits given the just-in-time delivery of supplier inventory with supplier payment terms between 30-120 days and cash collection from customers upfront. Additionally, given the large volume of diamond purchases and the importance of Blue Nile to each of its suppliers, the company can procure diamonds at significant savings that it passes to its customers by providing the lowest prices available in the marketplace.

From a logistics standpoint, Blue Nile delivers value to its customers by having a secure and efficient supply chain. Client customized orders on average are fulfilled between three to seven business days from the client purchase and require just in time accurate handling of the precious stones and its setting in the following process: (i) Client purchase triggers immediate procurement from supplier inventory by Blue Nile of the selected diamond and setting (ii) Diamond is shipped from supplier to Blue Nile and inspected upon receipt in a process that takes between one to three business days (iii) Diamond is assembled in setting and sized accordingly by Blue Nile promptly and shipped to customer via FedEx with customer signature required within the seven business day target.

Who gains with such a disruptive business model?

Without any doubt Blue Nile’s customers are currently the beneficiaries from such efficient use of supply chain management and low cost operating model that translates into 20% to 40% savings versus purchases at traditional jewelers. However, as the online retail market for jewelry continues its rapid growth, Blue Nile’s shareholders are best positioned to capitalize on this proven business model that has delivered joy to many couples.

Sources:

[1] www.bluenile.com

[2] Blue Nile, Inc. Securities and Exchange Commission Form 10K (2014)

[3] Blue Nile’s Riley & Co. 16th Annual Investor Conference Presentation (May 2015).

 

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4 thoughts on “Blue Nile: A hidden gem in the diamond and fine jewelry online marketplace

  1. Very interesting post. Given that diamonds are such a large, and some may argue, important, purchase if you’re buying an engagement or wedding ring, I’m curious how Blue Nile has gained customer trust. Do they have any retail stores? If this is just an online platform, how have they convinced customers to make such a large purchase without seeing the product in person? Do they accept returns if customers are not satisfied? What are the risks of allowing returns vs. not?

  2. I agree with the concerns Carolyn raised in her above post. The purchase of a diamond is an inherently high-involvement purchase that is dependent on a deep sense of trust with the seller. I think their long-term viability depends on the strength of their contracts with their numerous supplier and their ability to oversee them. It seems as if these contracts are too good to be true, and I wonder if shorter term contracts would better incentivize supplier to consistently deliver on quality. It also seems as if suppliers are motivated by selling a large number of diamonds, whereas Blue Nile is more dependent on their customers’ perception of quality. This potential misalignment could prove costly to Blue Nile unless it is able to appropriately manage its supply chain.
    Furthermore, repeat business is important to jewelers, as the jeweler’s ability to serve their customers throughout their lifetimes results in consistent and predictable future business. Oftentimes, the sale of a diamond is the hook to a lifetime relationship and is not simply viewed as a one-time purchase. I fear that Blue Nile’s operating model is not designed to forge this type of relationship.

  3. Nice analysis! Charlie and Carolyn definitely do raise some valid points. Having recently purchased an engagement ring for my fiancee through an online jewelry retailer (Brilliant Earth, which has a very similar value proposition to Blue Nile), I can respond to a few of the issues raised.

    First, Blue Nile does indeed offer returns. I believe their policy is a 30-day money-back guarantee. I think that without this kind of offer to build a bond of trust between consumer and retailer, Blue Nile would not be nearly as successful as they have been. Second, a benefit of Blue Nile and sites like it is that it offers a far greater selection than most brick-and-mortar stores. I was astounded by the number of diamonds and settings that I could mix and match both at Brilliant Earth and at Blue Nile.

    Finally, I totally agree that trust and providing consumers ease-of-mind is key in this business. One way that sites like Blue Nile have addressed this issue is with top notch customer service. Both at Blue Nile and Brilliant Earth, I spoke with at least a dozen times (probably more) representatives who were intimately familiar with the many considerations inherent in purchasing an engagement ring (for instance, they went beyond simply advising me about cut and clarity, and went on to tell me about the impact of fluorescence). At one point, a representative even persuaded me to buy a less expensive (but better) ring over the one that I was considering. I doubt that I would have had as much personal attention if I had purchased in store (my conversations with reps must have totaled several hours). Speaking from my own admittedly anecdotal experience, I quite enjoyed having as much time as I wanted to browse online, and then to consult with experts over the phone. I think it is key that Blue Nile continues to invest in high quality customer service, and that it does not tie their incentives to purchases. At no point in my conversations with representatives did I feel rushed or pressured to spend more money – this was critical to me being comfortable making a purchase.

  4. First of all – very interesting post.

    If my wife had not painted me into a corner by strongly suggesting I use her favorite jeweler, I would have used Blue Nile. In fact, before walking into the jewelery store to purchase her engagement ring, I used Blue Nile’s online tutorial to educate myself about the 4 C’s (clarity, cut, carat, color). The company does a great job of increasing transparency around such a large, once-in-a-lifetime (hopefully!) purchase. To address some of the trust issues mentioned in the comments above, every Blue Nile diamond comes with an independent, third party certification from GIA or AGSL. These certifications are quite detailed, providing information on imperfections imperceptible to the naked eye.

    The company’s negative working capital is impressive. Earlier this semester in FIN1, we saw that Dell’s market power allowed it to pressure its suppliers for aggressive payment terms, resulting in a negative cash conversion cycle as well. It will be interesting to see if suppliers push back on Blue Nile’s terms when contracts are up for renegotiation.

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