122 Chapter4 • DesigningDistributionNetworksandApplicationstoOnlineSales
Case stuDy
Blue Nile and Diamond Retailing1
Acustomerwalksintoyourjewelrystorewithprintouts
ofdiamondselectionsfromBlueNile,acompanythatis
the largest online retailer of diamonds. The list price for
the customer’s desired diamond is only $100 above your
total cost for a stone of the same characteristics. Do you
let the customer walk, or come down in price to compete?2
This dilemma has faced many jewelers. Some
argue that jewelers should lower prices on stones to keep
the customer. Future sales and add-on sales such as cus-
tom designs, mountings, and repairs can then be used to
make additional margins. Others argue that cutting
prices to compete sends a negative signal to loyal cus–
tomers from the past who may be upset by the fact that
they were not given the best price.
Astheeconomytightenedduringtheholidaysea–
son of 2007, the differences in performance between
BlueNileandbricks-and-mortarretailerswerestartling.
InJanuary2008,BlueNilereporteda24percentjumpin
sales during its fourth quarter. For the same quarter, Tif-
fany posted a 2 percent drop in domestic same-store
sales,andZalesreporteda9 percent drop.Thechief
operating officer of Blue Nile, Diane Irvine, stated,
“This business is all about taking market share. We look
atthistypeofenvironmentasoneofopportunity.”
The Diamond Retailing Industry
For both wholesalers and retailers in the diamond indus-
try, 2008 was a very difficult year. It was so bad at the
supply end that the dealers’ trade association, the World
Federation of Diamond Bourses, issued an appeal for the
diamond producers to reduce the supply of new gems
entering the market in an effort to reduce supply.
However, the world’s largest producer, De Beers,
appeared unmoved, refusing to give any commitment to
curtail production. The company had recently opened
theVoorspoedmineinSouthAfrica,which,whenfully
operational, could add 800,000 carats a year into an
already oversupplied market. Historically, De Beers had
exerted tremendous control over the supply of diamonds,
going so far as to purchase large quantities of rough dia-
1ThiscasewaswrittenjointlywithProfessorRobyThomasofElmhurstCollege.
2StaceyKing,“TheInternet:Retailers’NewChallenge,”Professional Jeweller Magazine,August1999.
Chapter4 • DesigningDistributionNetworksandApplicationstoOnlineSales 123
monds from other producers. In 2005, the European
Commission forced De Beers to phase out its agreement
to buy diamonds fromALROSA, the world’s second
largest diamond producer, which accounted for most of
the diamond production in Russia. Russia was the sec–
ond largest producer of diamonds in the world after
Botswana.
Although discount retailers such asWalmart and
Costco continued to thrive, the situation was difficult for
traditional jewelry retailers. Friedman’s filed for Chapter
11bankruptcyprotectioninJanuary2008,followedby
Chicago-basedWhitehall in June.When it filed for
bankruptcy, Friedman was the third largest jewelry
chain in North America, with 455 stores, whereas
Whitehallrankedfifth,with375storesinApril2008.In
February2008,Zalesannouncedaplantoclosemore
than 100 stores that year. This shakeup offered an
opportunity for other players to move in and try to gain
market share.
With the weakening economy, the third and fourth
quarters of 2008 were particularly hard on diamond
retailers.Evenhistorically successful players suchas
BlueNile,Tiffany,andZalessawadeclineinsalesanda
significantdropintheirshareprice.Ascustomerstight–
ened their belts and cut back on discretionary spending,
high-cost purchases such as diamond jewelry were often
the first to be postponed. The situation worsened as
competition for the shrinking number of customers
became fiercer. In such a difficult environment, it was
hard to judge which factors could best help different
and easy-to-understand jewelry education that’s perfect
foryouroccasion.”
Many customers (especially men) liked the low-
pressure selling tactics that focused on education.
BesidesexplainingthefourCs—cut,color,clarity,and
carat—BlueNileallowedcustomersto“buildyourown
ring.”Startingwiththecuttheypreferred,customers
could determine ranges along each of the four Cs and
price.BlueNilethendisplayedallstonesininventory
that fit the customer’s desired profile. Customers
selected the stone of their choice, followed by the setting
theylikedbest.Blue Nile also allowedcustomers to
have their questions resolved on the phone by sales reps
who did not work on commission. This low-pressure
selling approach had great appeal to a segment of the
population. In a BusinessWeek article in 2008, Internet
entrepreneurJasonCalacaniswasquotedassayingthat
shopping for his engagement ring (for which he spent
“tensofthousandsofdollars”)onBlueNile“wasthe
bestshoppingexperienceheneverhad.”3
The company focused on providing good value to
its customers. Whereas retail jewelers routinely marked
updiamondsbyupto50percent,BlueNilekeptalower
markupofaround20percent.BlueNilebelievedthatit
could afford the lower markup because of lower inven-
tory and warehousing expense. Unlike jewelry retailers
whomaintainedstoresinhigh-pricedareas,BlueNile
hadasinglewarehouseintheUnitedStatesinwhichit
stocked its entire inventory.
The company strategy was not without hurdles