Blue Nile Company History Founded

Blue Nile Company History

Founded in 1999, IPO in 2004

Stock price hovers around $30-35 per share during 1/06 -- 8/08.

Websites for USA, UK and Canada

World's largest online retailer of certified diamonds and fine jewelry

Larger than the next three competitors combined

Sold over 80K engagement rings between 2000 -- 2Q06

2006 Sales = $251.6 million

2005 Sales = $203.2 million

72% of 2005 Sales were engagement rings at the average cost of $5,600

18% of 2005 Sales were other diamond jewelry

Non-diamond jewelry = 10% of 2005 revenues

Management believed it had 50% share of online sales of engagement rings and 3.2% of all engagement rings sold

Received many awards including The Biz-Rate.com Circle of Excellence Platinum

Award for customer service 2002 -2006 and several other awards for their business

Industry Analysis

Industry famous for big markups, frequent closeout sale, consumers often confused in determining a gem's value

Jeweler Industry Sales

2006 = $55-60 billion

2005 = $59 billion

2004 = $57 billion

Annual sales of diamond jewelry = $30-35 billion, with diamond rings = $4-5 billion

US compound annual market growth rate is 5.7% over the past 25 years

Annual sales growth

2003 = 2.9%

2004 = 8.0%

2005 = 2.7%

2006 = 6.0% (forecasted estimate)

Sales are seasonal with highest sales during February, May and October -- December.

The market for diamond and fine jewelry is highly fragmented

Locally owned stores = 34%

Retail chains with more than 100 stores = 13%

Chain department stores = 12%

On-line retails and online auctions = 4%

Television shopping retails = 4%

Mass merchants (big box stores) = 23%

2005 Online sales

Engagement rings = $340 million

All other jewelry = $2 billion

Majority of online jewelry buyers are men

Online competitors include: diamonds.com, whiteflash.com, ice.com and jamesallen.com, zale.com and tiffany.com

Brick and mortar competitors include: Zale Corporation and Tiffany & Co.

SWOT Analysis

Strengths

Overcoming consumer's concern of buying online with educational information, in-depth product information and certification ratings from well-known and respected third parties.

Business Model: minimal inventory, just in time purchasing of diamonds and exclusive supplier arrangements and cash float of 40-55 days

Offers high quality jewelry at competitive prices

Wide product selection

Gems and minerals available from Bile Nile include diamonds, platinum, gold, pearl, and sterling silver

Settings, rings, wedding bands, earrings, necklaces, pendants, bracelets and watches

"Build your own" -- choose your gem and choose your setting

60,000 independently certified diamonds, 100's of styles

Prices 20-40% lower than local retailers

Brand based on trust, guidance and value.

Economical supply chain

Multiyear exclusive agreements with leading diamond and gem suppliers, representing more than 50% of total supply of high quality diamonds in USA

Very low inventory -- did not purchase diamonds until it had been ordered by a consumer

Lack of inventory resulted in all products being sold at full-price

Low operation costs

Licensed third party IT systems for: financial reporting, inventory management, order fulfillment and merchandising

Redundant internet carries

Significantly lower SG&A expenses in 2005 compared to competition

Blue Nile = 13.3% of annual sales

Zales = 41.2% of annual sales

Tiffany = 40.1% of annual sales

Award winning customer service including customer financing, free certificate of value for insurance coverage and 99.96% of orders delivered on time.

Self- funding - able to generate cash 40-55 prior to having to pay suppliers

Weaknesses

Other websites are offering similar features

Educational information and certification information

Free shipping

30-day return policy

Large product offering

Opportunity

Small but increasing number of sales over $100K

Varying gross margin for higher priced jewelry

Using current success to extend existing exclusive supplier contracts

Ability to test market new products at a low cost

Slowly testing expansion into international market

Threats

Bricks and mortar stores building web presence

Zale Corporation

Tiffany & Co.

Ability to maintain lower costs and pricing strategy

Lower costs = lower prices and lower markups and lower profit margins

Blue Nile = 33% markup resulting in 22% profit margins

Zale = 100% markup resulting in 56% profit margins

Tiffany = 127% markup resulting in 56% profit margins

Net profit margins

Blue Nile = 6.5% in 2005

Zales = 4.5% in 2005

Tiffany = 10.6 in 2005

Dropped diamond prices in 2Q06 for 30% increase in sales

Increasing advertising costs

2003 = $4.5 million

2004 = $6.5 million

2005 = $7.6 million

2006 = $9.7 million

Should watch Jamesallen.com whose offer and features very closely match Blue Nile

Key Success Factors for online diamond and fine jewelry

1. Accurate product descriptions and certifications

Selling online eliminates the opportunity to have physical engagement with the jewelry. Accurate descriptions and third party certifications build confidence for the buyer that the items they purchase are genuine.

2. Easy to use website

Given the large number of products sold on the jewelry sites, the website must have sophisticated search capabilities. If customization is an option, a tool to see multiple combination at one time would be allow the customer to compare different combinations.

3. Reliable suppliers

Online retailers must have suppliers they can count on to deliver supplies within 24 hours. Given the nature of the products, the suppliers must provide adequate protective package for shipping.

4. Internet redundancy

In online retailing, if there are Internet problems, the store is closed. Redundancy provides protection from outages and increases capacity.

5. Reliable shipping suppliers

Shipping suppliers need to provide careful packaging, insurance against theft, lost and damage, on time pickup and delivery and the ability to track packages anywhere in the delivery system.

6. Low operating costs

Low operating costs and SG&A are necessary for competitive pricing and good profit margins.

7. Low inventories

Low inventories reduce costs and eliminate the need to reduce prices to clear out inventory.

8. Competitive pricing

When buying on the Internet, consumers have easy access to competitor site and to price comparison site such as mysimon.com. This will raise the consumer's price sensitivities.

9. Brand reputation

The seller's brand reputation is very important in jewelry sales. Fake diamond and gems are often marketed as real; therefore an online seller must be able to eliminate any doubt about the quality of its products. Additionally, there must be a fair return policy incase the item is misrepresented in the online photo or the size is incorrect.

Porter's Five Forces Analysis: Threats of new entrants

While the threat of new entrants is high, Blue Nile has one competitive advantage which will be difficult to replicate: Exclusive and highly favorable arrangements with a number of diamond and gemstone suppliers. This allows Blue Nile to over a wide range of products without having to maintain an inventory. Additionally, and most importantly, Blue Nile's supplier agreements have 45-60 day payment periods. This allows Blue Nile to hold on to revenues for 40-55 days. This cash can provide additional income via interest and it allows Blue Nile to self-fund its' operations.

Competitive Strength Assessment

Blue Nile has two categories of competitors: online retails and bricks and mortar retailers.

Online JamesAllen.com matches and exceeds Blue Nile's features, with the exception of pricing which is unknown without further research.

Online competitors

Feature

Blue Nile

James Allen Long

Diamonds

Whiteflash

Ice.com

Website functionality

Customer service

High quality diamonds

Build your own capability

Large selection of diamond

Educational information

Certified diamonds

Financing options

30 day return policy

Low pricing

N/A

N/A

Overnight delivery

Preset diamonds

Name designers

Upgrade policy

Financial Analysis

The liquidity ratios show strength, specifically: a decreasing current ratio of 2.38 in 2005 to 1.56 in 2006, meaning that the company is becoming less solvent. A decreasing quick ratio of 1.37 for 2006, which meets the banker's desire for at least 1 or higher. This ratio has dropped from 2.17 in 2005 and should be monitored.