Blue Nile—No Longer in Denial?

For a long time, Blue Nile had what chairman Mark Vadon called “a beautiful [business] model.”

It never owned much inventory on its core product (diamond engagement rings), so its suppliers carried most of the financial burden. It didn’t spend a lot on marketing, seemingly luring most of its consumers through searches. And it generally offered a good deal, since it didn’t bear big inventory or marketing expenses, not to mention big retail rents. As long as online buying increased—as it has been—the company could keep growing, and the formula could be replicated overseas. Vadon even left to start a new business. 

But its latest disappointing financial results—which caused its stock to plunge precipitously—suggest the formula has grown stale. Blue Nile has lagged behind not just overall dot-com growth, but growth in online jewelry sales, as a chart in this post pretty clearly shows. The biggest culprit cited by executives: 2011’s big increase in diamond prices. When they shot up, Blue Nile, which buys on the spot market, was suddenly not so competitive anymore.    

Blue Nile’s main response to all this has been, first, to cut diamond prices. On an analyst conference call Wednesday, Vadon, who has returned to an active role in the company, called his customers “incredibly responsive” to price decreases. CFO David Binder added the seemingly obligatory swipe at brick-and-mortar competitors: “When we announce today that we are lowering prices, I suspect a lot of jewelers aren’t too happy with us.”

Now, I hope that smart jewelry retailers aren’t spending that much time on the pricing machinations of Blue Nile, but are instead figuring out how to differentiate themselves, increase their business, and bring in new customers. Which, actually, is what Blue Nile also needs to do—very badly.

All the concerns about the company—which seem to be shared by its former CEO—have certainly woken up the company’s executives: probably the most-used word at an “analyst/investor day” held yesterday was aggressive. The company has just completed an all-encompassing strategic review, and as a result it plans to enter the fashion jewelry realm—what it calls “the non-engagement” market—in a big way. This is a bigger market than engagement rings, executives noted, with healthier margins. Vadon said the site is considering hiring a design/creative director. It may even develop its own brands.

This is probably where that business needs to go. Still, capturing the female jewelry consumer is a lot different than the male engagement ring buyer. One market involves attracting customers with new and exciting product; the other involves just getting a customer, in Blue Nile’s case through low prices, who is in the market anyway.

The fashion side also requires more marketing spend, more inventory, and replacing styles according to the dictates of fashion. It has a business model, but I’m not sure it is such a beautiful one, given how many fashion jewelry sites have failed on the Internet. It can also be “a little more touch and feel oriented,” admitted Vadon, who added that building this business could take “years.” And there is always that the chance that the site’s message will become confused.  In fact, if Blue Nile is really committing to this the way they say they are, this may be the biggest change, and possibly the biggest gamble, in this often-conservative company’s history.

Yet in the end, anything has to be better than just offering a generic product at continually slashed prices. Blue Nile has built an impressive business based on “value.” Its challenge now is to show there is more to it than just selling for cheap.

JCK News Director