Blue Nile Inc. Strategic Analysis: Competition and Growth

Company Overview

Blue Nile Inc. was founded in 1999 and went public in 2004. The company deals in fine jewelry and certified diamonds, with engagement rings representing the majority of its product line — approximately 230,000 of which had been sold by 2010. In that same year, Blue Nile achieved sales of $332 million, a substantial increase from the $169 million recorded in 2004. Blue Nile is also one of the top online retailers of certified diamonds and jewelry of all kinds, offering not only rings but also bracelets, earrings, and pendants (Arthur A. & Ronald W., 2011, p. 314).

The company currently faces several significant macro-environmental factors that challenge its ability to remain competitive and continue generating meaningful profits.

Macro-Environmental Challenges

The first factor involves political, regulatory, and legal pressures. There has been a largely restricted trend in the movement of diamonds, particularly from African nations and other developing countries. This stems from the recognition that the diamond trade was used to finance several conflicts — a prominent example being the blood diamonds of Liberia, which Charles Taylor allegedly used to fund atrocities. The newly implemented laws and regulations make it difficult even for Blue Nile's suppliers to access diamonds, thereby affecting the company's business operations.

The second factor concerns the general economic conditions of potential consumers. Because Blue Nile deals in high-end jewelry that can cost upward of $20,000, its primary target market is middle-class and affluent consumers. This segment was badly affected by the global recession, leading to a decline in online orders for the company's products.

The third and most influential factor is the immediate industry and competitive environment. Brick-and-mortar jewelers have increasingly moved into internet marketing and sales, challenging a space that was traditionally dominated by Blue Nile. These competitors identified Blue Nile's weaknesses — particularly its concentration on engagement rings — and approached the market from a broader, more diversified perspective.

The threat of new entrants into Blue Nile's market niche is high, as many retail outlets have moved into internet-based marketing and sales. Several major companies have directly challenged Blue Nile's market position.

Diamonds.com was founded in 2000 with proprietors possessing more than 25 years of experience in the loose diamond trade, sourcing from New York, and employing trained and experienced gemologists. Whiteflash.com majored in customized jewelry — which accounted for half of its orders — and offered clients the ability to swap their purchased stones for any higher-valued stone at any time, paying only the difference in price, an incentive Blue Nile did not offer. Ice.com entered the market in 2001 and attracted more than 500,000 customers in its first year by offering monthly payment options and free shipping on orders over $150, along with a toll-free inquiry line. JamesAllen.com, founded in 1998, grew into one of the leading online jewelry marketers by offering certified and graded engagement rings from reputable laboratories and a 30-day return policy (Arthur A. & Ronald W., 2011, p. 327).

Five Forces Analysis

The threat of continued market entry is high given the strength of existing competitors and the potential for additional dealers to enter the field. However, barriers to entry do exist, including high startup capital requirements and the time needed to earn consumer trust. This is particularly relevant given that only approximately 13% of diamonds sold in the United States are considered ideal grade, making it difficult for clients to trust the quality and authenticity of diamonds from less-established retailers.

Blue Nile maintains an economical supply chain that yields comparatively lower operating costs while still delivering quality diamonds. The supply chain bypasses traditional wholesalers and brokers, reducing costs. The company does not purchase diamonds from suppliers until a client places an order, thereby avoiding the burden of carrying large inventory. Much of Blue Nile's competitiveness depends on negotiating and maintaining favorable relationships with multiple suppliers, which reduces dependence on any single source. By 2010, the top three suppliers accounted for only 28% of total supply (Arthur A. & Ronald W., 2011, p. 315). Suppliers also provide real-time market intelligence, informing Blue Nile of which products are likely to sell at any given time and enabling effective inventory management.

Given their consistency, reliability, and informational value, Blue Nile's suppliers can be categorized as a strong asset to the company. The company's strong financial performance is attributable in part to the sustained support of its supplier network.

Blue Nile's active client base consists primarily of upper-class and middle-class consumers who are predominantly purchasing engagement rings. The company also targets middle-class buyers seeking diamond jewelry as gifts or for personal use. This client base has remained consistently strong, as the company has not experienced a significant prolonged downturn in customer engagement over its history.

Diamond, being one of the most expensive gems in the market, has several substitutes for consumers unable to afford Blue Nile's price points. These include lower-grade diamonds, white gold, natural blue sapphire, ruby, emerald, and alexandrite — all of which have increasingly competed against diamond jewelry in recent years (Sam Abbay, 2012).

Blue Nile faces intense competition from both established firms and new market entrants. Competition continues to intensify as more firms enter internet-based retail and as the availability of diamonds and other gems increases. Pricing strategies across the industry have also shifted in response to the economic recession, with consumers increasingly selecting the most affordable option available.

Despite these pressures, Blue Nile remains on a profitable trajectory and has not been pushed to the margins of the market. Its high-quality offerings, broad product range, custom-order option, competitive pricing, strong brand recognition, customer support, and the trust it has cultivated over the years all contribute to its continued profitability.

Diamonds.com: The company's objective is to supply consumers with the most affordable gems sourced from New York. Its current strategy emphasizes offering a wider selection than any other jeweler while educating clients extensively about their products. Its key strength lies in the 25-year expertise of its founders. The anticipated competitive response to Blue Nile would be to expand product range and price accessibility.

Whiteflash.com: The company aims to challenge Blue Nile in the custom-made jewelry segment while growing its client base through flexible return and upgrade policies. Its strategy centers on offering clients favorable payment terms and the ability to upgrade their purchases over time.

Based on this industry analysis, the sector remains attractive for investment, given strong sales turnover and profit margins. The relatively limited number of major participants also supports the sustainability of higher margins.