In 1999 Blue Nile Inc began selling diamonds and other
In 1999, Blue Nile, Inc. began selling diamonds and other fi ne jewelry over the Internet. Using an online retailing model, Blue Nile prices its diamonds at an average of 35% less than traditional bricks-and-mortar jewelers. In fewer than five years, the company had become the eighth-largest specialty jeweler in the United States.
On May 20, 2004, Blue Nile went public with an initial stock offering priced at $20.50 per share. By the end of the day, shares were trading at $28.40. Before the end of the month, the share price had doubled, before closing at month's end in the mid-$30s.
While traditional jewelers operate with gross margins of up to 50%, Blue Nile's gross margin percentage for the year ended January 1, 2012 was just 20.7%. Yet the company remains competitive despite its lower gross margin. As of January 1, 2012, Blue Nile employed 206 full-time and 6 part-time employees. It leased its 29,000-square-foot corporate headquarters in Seattle, Washington, as well as an additional 27,000-square-foot fulfillment center in the United States and a 10,000-square-foot fulfillment center in Dublin, Ireland.
Compared to Blue Nile, Tiffany & Co., one of the world's best-known in-store jewelers, is a giant. Tiffany & Co. opened its doors in New York City in 1837 and has since grown into an international operation. Regarded as one of the world's premier jewelers, the company went public in 1987 at $1.92 per share and closed that day at $1.93 per share. A month later it was trading at $1.90 per share. Seventeen years later, on the day Blue Nile went public, Tiffany & Co. closed at $33.90 per share.
As of January 31, 2012, Tiffany & Co. employed approximately 9,800 people. The company owns a 124,000-square-foot headquarters building on Fifth Avenue in New York City, 42,000 square feet of which is devoted to a retail storefront. The company has 86 other stores in the United States and 160 more abroad. The average operating profit as a percentage of sales for the retail jewelry industry is 5%.
Selected income statement information for the two companies is as follows.

a. How do Tiffany's fixed costs compare to those of Blue Nile, Inc.?
b. How can Blue Nile, Inc. remain competitive with its 20.7% gross margin percentage when Tiffany & Co. earns a 59.0% gross margin?
c. Which company do you believe has the greater operating leverage? Why?
d. In Tiffany & Co.'s 2011 Annual Report, management stated that gross margin had declined for several reasons, one of which was "changes in sales mix toward higher priced jewelry that achieves a lower gross margin." How would this shift have affected the company's contribution margin?
e. On April 22, 2004, launched its online jewelry store. Which company's cost structure do you think it resembles, Blue Nile's or Tiffany's?Why?
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