1) Blue Nile was founded in 1999 by Mark Vadon to sell diamonds and jewelry online at lower prices than traditional retail stores by cutting out middlemen. 2) While revenue has increased in recent years, costs have also risen significantly due to Blue Nile's expansion into non-engagement jewelry and global commodity price increases, reducing profits. 3) Blue Nile faces intense competition from larger retailers like Tiffany's and Amazon, and high commodity prices have squeezed margins by limiting their ability to pass on higher costs.

1. 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

2. 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

3. 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 dothis 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

4. 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.

5. 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