Jewellery's web blog

The psychological upheaval of Sept. 11′s terrorist attacks at first hurt online jewelry merchant Blue Nile Inc. Sales fell off in the aftershock.

But along with the post-attack patriotic fervor came a huge wave of emotional reactions that will help the Seattle-based e-tailer record its first profitable quarter.

More men, seeking stronger emotional attachments, bought engagement rings, engraved lockets or diamond crosses for the women in their lives. It also helped that Blue Nile offered a sterling silver bracelet with a flag charm. The patriotic item proved so popular that the company had to restock it three times.

Blue Nile will close its first profitable quarter this month, earning an estimated $1.3 million to $1.5 million for the three months ending Dec. 31 – and that’s net, not pro forma. Privately held Blue Nile still expects to lose money in 2001 on estimated revenues of $50 million.

Blue Nile first had already started making money in August, but saw its potential third-quarter profit slip away in September immediately following the attacks. Then in October, engagement ring sales jumped 20 percent over a year ago.

Chief executive Mark Vadon expects the company’s profitability to carry over in to the first quarter of 2002 – and beyond.

Outlasting other onlines

Venture-backed Blue Nile, founded in 1999, is a dot-com survivor. It has managed to outlast other online competitors such as well-heeled Miadora.com, which targeted women with designer jewelry.

Vadon says that’s because Blue Nile has held the line on advertising costs, honed its target marketing, controlled inventory and stayed lean.

“We run our business with 80 employees who each generate about three-quarters of a million in sales. That’s off the charts for most retailers,” Vadon said. “We carry one set of inventory and we turn it faster than anybody in the industry.”

Blue Nile, which has about 1 percent of the engagement ring market, sells its jewelry and watches at steep discounts, between 20 percent to 40 percent below its brick-and-mortar competitors.

While most jewelers maintain a 50 percent profit margin, Blue Nile’s lower operating costs enable the e-tailer to squeeze a profit out of its leaner 20 percent to 30 percent markup.

Another advantage is that there is no “800 pound gorilla” dominating jewelry sales. Wal-Mart with a 3.5 percent share, is the industry’s largest player. Wal-Mart and Blue Nile’s other main brick-and-mortar competitors, Zales Jewelry and Tiffany & Co., also target a different group of customers.

By operating online, Blue Nile avoids the leasing and staffing costs associated with competing brick-and-mortar stores. Without rows of display cases to fill, the company can manage its inventory through one 4,000-square-foot warehouse in Seattle.

Shipping is free with a 30-day money back guarantee on a jewelry sold through the Web site. The Web site also provides an online primer on diamond purchasing and certifies the quality of each diamond it sells.

While men shopping for gifts still account for the bulk of Blue Nile’s revenue with an average purchase of about $1,000, half of its sales are to women purchasing less expensive accessories for themselves.

Blue Nile targets Net-savvy men between 25 and 49 years of age with household income above $60,000 who are uncomfortable shopping for diamonds and looking for a good value. Wal-Mart and Zales sell lessexpensive jewelry to more budget-conscious consumers, while Tiffany’s customers are older, more affluent shoppers who are less sensitive to price than prestige.

Zales does only about $10 million in sales online because its lowerincome customers are not as likely to go online to shop, Vadon said. Meanwhile Tiffany’s customers prefer the experience of shopping in a luxury store to shopping online.

“Psychodemographically, they are very different,” Vadon said. “They feel really good about shopping at Tiffany’s. … Our customers feel out of place there. They are intimidated by the experience.”

Concentrated marketing

As Blue Nile has matured, the company has shifted away from its early scattershot approach to marketing to concentrate on more efficient direct mail and online advertising.

“In our early days, we tried everything – we did TV, did print, did some radio, some online and direct marketing,” Vadon said, “We learned early on that TV, while it helped grow brand awareness, did not drive sales in the short term.”

Online advertising costs have dropped dramatically as a result of the dot-com debacle. Blue Nile, which used to pay portal sites such as Yahoo on a per impression basis for each page view, now pays for performance only, with portals taking a commission on sales generated through their sites.

Blue Nile has marketing relationships with AOL, Yahoo and MSN, several smaller portals and a number of Internet search engines. The company also has an exclusive relationship with the Wedding Channel, the online gift registry for a number of traditional retailers.

Blue Nile was recently named the best jewelry site on the Web for the third year in a row by Fortune magazine.

With profitability at hand, Blue Nile plans to spend the next year building revenue, Vadon said.

That could be a challenge as the recession continues to bite into sales of luxury goods in general. While the e-tailer sold a $60,000 fourcarat diamond ring in November and a $40,000 item earlier this month, such sales are less common these days. Sales of Blue Nile’s 9carat “Eternity” diamond necklace have dropped off sharply since the dot-com crash.

Publicly traded rival Web site Ashford.com Inc. in Houston, which sells a variety of luxury goods online, is losing money and recently was acquired by Global Sports in King of Prussia, Pa. Additionally, said analyst Dan Geiman at McAdams Wright Ragen in Seattle, “That sociological trend toward coupling we may be seeing may be a fairly short-lived spike.”

Blue Nile has had two rounds of layoffs, cutting a total of 30 jobs in 2000 and early 2001 as improved technology enabled the company to automate a portion of its customer service, But Blue Nile still has a cache of venture capital to fall back on should the economy make continued profitability elusive.

Backers include Paul Allen’s Vulcan Ventures Inc., Kleiner Perkins Caufield & Byers, Bessemer Venture Partners, Trinity Ventures, Integral Capital Partners, Comdisco Ventures and lightSpeed Venture Partners.

“We are generating positive cash flow, we have significant capital in the bank and there is no pressure to do anything to get liquidity,” Vadon said.