Web jeweler Blue Nile bucks e-commerce bust

In a small, plainly illustrated handbook, online jeweler Blue Nile details not only how to select the right diamond, but why scars are so cool.

The sales brochure, distributed in 1999 after the Seattle company first launched, is geared toward men in general and young, Internet-savvy professionals in particular. The idea was to woo men at the age when they make their largest jewelry purchase — the engagement ring — and to keep them as customers for life.

At a time when entire e-commerce categories from furniture to pet supplies have all but disappeared, Blue Nile has sought to strengthen its online jewelry sales by following a seemingly counterintuitive approach: Educate the customer and market to young, professional men.

So far, the approach is working. The privately held company posted $50 million in sales in the past 12 months, giving it a 1 percent share of the U.S. engagement-ring market based on dollars spent. By some accounts, it is now the second-largest buyer of certified diamonds behind Tiffany. With an operating loss that's less than 5 percent of sales, the company said it expects to turn profitable on a qualified basis in the current quarter.

In a highly fragmented market (Wal-Mart is the largest U.S. jeweler, slightly ahead of Zales, with a 3.5 percent share), that leaves room for Blue Nile, www.bluenile.com, to establish a national online brand at a time when Internet commerce is a sea of sunken dot-coms.

"There was an identified need that we're addressing," said Chief Operating Officer Bob Paquin, who served in a similar capacity at L.L. Bean. "In that playground, we have no competition."

The four C's

Blue Nile was founded in early 1999 after Mark Vadon purchased a diamond engagement ring at InternetDiamonds.com, a Web site run by SeaTac jeweler Doug Williams. The two men eventually collaborated to run Blue Nile.

The company has raised $57 million in venture capital from firms including Bessemer Venture Partners, Trinity Ventures, Kleiner Perkins Caulfield & Byers and Vulcan Ventures.

The company built its business around the sale of custom-made diamond engagement rings, with a mantra to educate the buyer on the four C's: a diamond's cut, color, clarity and carat, or weight. It sold only certified diamonds, those verified by an independent grading lab, such as the Gemological Institute of America.

The company also cut its prices 20 percent to 40 percent below the typical retailer, which uses keystone pricing. Under that method, a jeweler sells at a 100 percent markup. If a ring costs $5,000, for instance, the jeweler would sell it for $10,000. Some would mark it as high as $12,000 and bring it down a bit so a customer feels he is receiving a savings.

Vadon said the company can offer lower prices because it has smaller overhead expense than a chain of jewelry stores. The company doesn't have to carry multiple copies of the same item, whereas a multistore chain may carry a $12,000 diamond necklace in each store to form a halo for its other products — even if such an item is sold just once every five years.

Blue Nile operates one 4,000-square-foot, distribution center in downtown Seattle. The company has 76 employees.

"The whole supply chain is the promise of the Internet," Chief Financial Officer Diane Irvine said. "They see their inventory go so quickly and they can display it in one place."

A diamond manufacturer who sells to Tiffany and Blue Nile, and who declined to be named, said the online retailer is the second- or third-largest U.S. buyer of certified diamonds. At a time when industry sales are waning, Blue Nile is moving them out the door, he said.

"Typical terms (for payment) are 30 days," he said. "They pay on Day 29 religiously. You don't have to pick up the phone and say, 'Where's the check?' "

Selling to men

The company said it has grown its business by targeting men, who purchase 70 percent of high-end jewelry.

True to form, 80 percent of Blue Nile's customer base is male. The typical customer is 25 to 49, with a $50,000-plus income. More than 75 percent have a college degree. Repeat and referral revenue makes up 40 percent of its business.

"Our model is the same as what Saturn did for automobiles," Vadon said. "They designed something that was much more comfortable for women. We designed something that made people more comfortable buying jewelry."

At the same time, the company has outlasted most of its online competitors. San Mateo, Calif.-based Miadora.com launched in 1999, raised more than $50 million and folded a year later, followed by competitors Adornis.com and Ijewelry.com.

The shareholders of Houston-based Ashford.com, which sells high-end jewelry and other luxury items, recently approved a reverse 10-to-1 stock split to kick its shares above $1 and remain listed on the Nasdaq Stock Exchange. Mondera.com, started by the fourth generation of famed watchmaker David Mouawad, slashed half of its staff.

Still, some observers question how profitable Blue Nile can become. Jewelers' profit margins have eroded significantly over the past two decades as better information, and better means to transport that information — first the fax machine, now the Internet — have all but removed the mystery from purchasing a diamond.

The Gemological Institute of America's highly regarded diamond-grading report and the Rapaport Diamond Report, the industry's de facto diamond-price list, are now used by consumers, as well as by industry insiders. Both can be found online.

"The age of information has really changed what you can charge a consumer for something," said Bruce Verstandig, a diamond wholesaler who sits on the board of the New York Diamond Dealers Club.

Branding efforts

To prevent further erosion, diamond retailers have turned to offering branded diamonds, differentiated by the quality of their cut and meant to evoke the same feeling as choosing a Gucci handbag over a plain leather purse.

Gemological Institute President William Boyajian said that, in contrast to his experience as a baby boomer, whole new generations of American consumers have grown up brand-conscious.

"It's only logical that the diamond industry would seek a brand that gives consumers confidence in the quality of the product and the consistency of the product," he said. "The consumer is willing to pay for that."

Meanwhile, brick-and-mortar retailers question how much business an online jeweler can take from them without offering its customers the ability to touch a product.

"Generally, people want to work through the concerns they have," said Steve Davolt, marketing director at Ben Bridge Jewelers, founded in Seattle in 1912. "Can they do that online? There's no doubt about that. But can they do that easier face to face with somebody? We think so."

While Blue Nile said it serves a compelling niche, it has tentatively planned to add brick-and-mortar stores by 2003 in its highest-selling markets, including Seattle, New York and San Francisco.

Vadon said the company talked to bankers about a possible initial public offering but never laid plans since the IPO window closed shortly after its founding. "The bulk of the building of the company took place after the markets started to decline," he said.

Paquin said opening stores would reinforce the company's brand, but the move depends on a number of factors.

"Does it make sense at the time we're ready to move?" he said. "Does it add to the business?"

The diamond pitch

Right now, the key to the company's future rests on the shoulders of employees such as Ed Taylor. Each day, Taylor and others on the customer-service team reassure customers, who buy tens of thousands of dollars' worth of merchandise, sight unseen.

As part of the reassurance, the company publishes its toll-free number on every page of its Web site. The average Blue Nile diamond customer spends four hours on the site over three weeks before buying something as substantial as an engagement ring.

The questions are understandable: How do I know the diamond is real? What happens if my order is lost in the mail? Why are your prices lower? Two diamonds look similar — why does one cost more?

"They want to have it built up to them," said Taylor, a twentysomething with a broad girth and a gentle demeanor, who learned the art of conversation by attending gatherings with his banker grandmother as a child.

"For us, it's full disclosure," he said. "Once we do that and let you go a little, when there's no pressure, (the sale) is done."

On any given day, Taylor sells diamonds in the $50,000 to $70,000 range. He once sold a $225,000 diamond to a man in San Francisco, but the man later returned it because his wife wanted the Tiffany box.

He has customers such as Lt. Wade Callender, a U.S. Navy lawyer, who later wrote back to describe how he proposed to his fiancée by hiding the ring in a hollowed-out photo album entitled, "The Story of Us." Callender had already referred two friends to purchase rings by then.

"I am keeping good on my promise to spread the word about how Blue Nile, and you, specifically, earned my business," he wrote, "and I hope it helps."

The Blue Nile handbook, designed to recruit customers like Callender, is a survival guide of sorts. It gives instructions on how to carve a turkey, choose a pearl and say "I love you" in Klingon. On the subject of scars, the book said they can be good conversation starters. If a woman asks about one, it tells men to make sure the story is good, even if a basketball game has to turn into a bar fight in which a man defends the honor of a woman.

It fails to gives an answer, though, on the subject of emotional scars, offering only this refrain: "Fight the good fight, brother."

Monica Soto may be reached at (206) 515-5632, msoto@seattletimes.com.