Three Questions About Blue Nile’s Plan to Open a Store

Blue Nile may want to rethink its “you’re too smart to shop at a jewelry store” slogan, now that it will soon open one.

Last week, the e-tailer announced plans to open a “showcase store” in “one of top malls.” Additional details are scarce, including when or where it will open. (In a research note, Wells Fargo Securities analysts predict it will debut in the second quarter.) The company stresses it’s only experimenting with the concept, just like its soon-to-close Nordstrom boutiques were only a test. Still, it’s not calling this a pop-up. It may be around for a while. 

Blue Nile is not the first dot-com to open a store. Amazon just opened one and may want more. Zappos, eBay, and Etsy have all tested pop-ups. Warby Parker, which started online, now has eight stores, and they’re profitable.

In jewelry it’s becoming even more common. BaubleBar opened a store. Gemvara had a pop-up. James Allen has boutiques in Sears. The newest jewelry dot-com on the block, Ritani, has gone full-bore clicks-and-bricks.   

It’s not even the first time Blue Nile has talked about this. In 2001, its chief operating officer told The Seattle Times it would open stores in Seattle, San Francisco, and New York City. That didn’t happen, and six years later, then-CEO Mark Vadon told an investment conference, “The economics [of a store] are not compelling, and it’s also not what we are good at.”

What’s changed? Blue Nile seems in a funk; even CEO Harvey Kanter called its fourth quarter results “below expectations.” While sales rose 7.9 percent, profits fell, as the company again lowered margins, continuing its trend of the last few years. (Kanter says margins will remain low for the rest of the year.) So the company is making less money on more sales. This all happened during a period when diamond prices have been steady or falling, which generally works to the company’s advantage.

Moreover, Blue Nile’s growth is falling behind the overall jewelry dot-com sector. ComScore estimates that desktop e-tail sales for jewelry jumped 11 percent during 2014. Blue Nile also lags the 20 percent jump in e-commerce sales (excluding Zale) recorded by Signet its fourth quarter.

Kanter, who oversaw a retail chain at his last job, has lamented that “the penetration for online jewelry is less than 10 percent. Somewhere around 70 percent of consumers say: ‘I can’t see it, touch it, feel it.’” The new store will target customers who may be “initially hesitant to buy online,” he says.

That said, a physical retailer raises several questions:

The legal question. 

As with its Nordstrom boutiques—and like another online brand that’s moved into brick-and-mortar, Bonobos—the new store won’t sell anything. Instead, salespeople will help customers buy items on the Blue Nile site, via in-store iPads.

This may fulfill the objective of increasing customer comfort with buying jewelry online. But it doesn’t make sense. Stores help dot-coms save on shipping expenses. They can sell last-minute gifts to men who put off buying them (which they often do). They can fulfill impulse purchases. Ordering online means you won’t get your ring for at least a day or two. 

It’s possible the decision to not have points of sale stems from the sales tax issue. When a company maintains a physical presence in a state, that creates a nexus, which means it has to collect taxes from residents of that state—which Blue Nile clearly doesn’t want to do.  

When asked whether the Nordstrom boutiques could lead to sales tax, spokesperson Josh Holland responded that since all the transactions happened on the site, “nothing is different.” That seemed a stretch, and, of course, Blue Nile never tested this out: Its Nordstrom showcases were located in Washington and New York, two states in which it already collects sales tax. 

It might make the same argument for its store, but that would be even more of a leap. If a store doesn’t constitute a physical presence, nothing does. Bonobos’ stores don’t have points of sale either, but it now collects sales tax in the states where they’re located.

So it’s highly likely the new store will open in New York, Washington, or one of the five states that don’t have a sales tax. Until Congress settles the online sales tax question—which may not happen for a while—this issue could stand in the way of an ambitious retail rollout.   

The economic question.

Kanter has said that Blue Nile can open a jewelry store “while keeping our overhead costs low and maintaining our superior price advantage.”

Maybe. But there are reasons why Vadon didn’t want his low-margin business to open a store. As its own site says, “the overhead of maintaining a brick-and-mortar store is high.”    

A store may perhaps make the most sense as a marketing expense, which is how many watch brands view their stores. The head of Bonobos told The New York Times that its stores marked a “turning point in the company.… Offline really works.” 

Clearly, Blue Nile’s marketing needs freshening. For years, its advertising has been heavily reliant on paid search. According to AdGooroo, a Chicago firm that tracks search spend, Blue Nile is consistently the leading jewelry buyer of search advertising. From Jan. 1 to Feb. 5, 2015, it spent an estimated $3.9 million on advertising for the top keywords, 50 percent more than any other jewelry player. But now, the Wells Fargo analysts maintain, it’s getting less bang for those bucks, as more big companies and other e-tailers get in the game.

“[Big retailer] marketing budgets will be significantly larger than NILE’s, as these competitors increasingly make growing online traffic a priority,” wrote senior analysts Matt Nemer and Trisha Dill. 

AdGooroo spokesperson Jim Leichenko says the ever-fragmented jewelry business has a comparatively high number of companies bidding for search terms.

Jewelry search terms “have unusually intense competition,” he says. “For engagement rings, there are 179 companies bidding. Wedding rings, 174. Jewelry stores, 299. That’s a lot.” 

And since Blue Nile does almost all its advertising online, its search spend is less efficient than say, Tiffany or Zale. 

“Studies show brands with good recognition benefit in paid search,” Leichenko says. “Unless you are Amazon, it’s tougher to establish yourself in the consumer mind with just search.”

Again, take Bonobos: Since opening its stores, it’s slashed digital marketing costs by 50 percent, the Los Angeles Times reported. 

The positioning question.

One fascinating thing about dot-coms opening stores is watching them put new spins on traditional retail. The Warby Parker stores mix the standard characteristics of eyeglass stores (an on-site optometrist), with signifiers of hip retail (local paintings on the wall) and high-tech innovations (Wi-Fi sensors tracking customer behavior). 

By contrast, Blue Nile’s Nordstrom boutiques weren’t particularly noteworthy, featuring an associate standing behind a display case. Kanter says the new store will have a “unique format”—so it’s possible that Blue Nile may create a new high-tech diamond-selling experience (as Hearts On Fire did) or devote space to its Zac Posen and Monique Lhuillier brands. But a high-tech format would lead to higher costs and make the economics even less compelling.

Further, while Blue Nile may not match the precise definition of a discounter, its selling proposition is based on low price. How will that fit in “one of the top malls”?  

The store won’t sell, but will it take returns? Allow pickups? Do repairs? Offer sizing? Just how much of a traditional jewelry store will it open?   

The company faces a lot of decisions ahead, as well as lot of work and costs. And it has no guarantee anyone will walk in the door. 

Welcome to the world of brick-and-mortar, Blue Nile.

JCK News Director