Blue Nile

In December 1998, Mark Vadon, a young consultant, was shopping for an engagement ring and stumbled across a company called Internet Diamonds, run by Seattle jeweler Doug Williams. Vadon not only bought a ring but also went into business with Williams in early 1999. The company changed its name to Blue Nile by the end of 1999 because the new name "sounded elegant and upscale," according to Vadon.

On its website, Blue Nile articulated its philosophy as follows: "Offer high-quality diamonds and fine jewelry at outstanding prices. When you visit our website, you'll find extraordinary jewelry, useful guidance, and easy-to-understand jewelry education that's perfect for your occasion."

Many customers (especially men) liked the low-pressure selling tactics that focused on education. Besides explaining the four Cscut, color, clarity, and caratBlue Nile allowed customers to "build your own ring." Starting with the cut they preferred, customers could determine ranges along each of the four Cs and price. Blue Nile then displayed all stones in inventory that fit the customer's desired profile. Customers selected the stone of their choice, followed by the setting they liked best. Blue Nile also allowed customers to have their questions resolved on the phone by sales reps who did not work on commission. This low-pressure selling approach had great appeal to a segment of the population. In a BusinessWeek article in 2008, Internet entrepreneur Jason Calacanis was quoted as saying that shopping for his engagement ring (for which he spent "tens of thousands of dollars") on Blue Nile "was the best shopping experience he never had."3

3 Jay Greene, "Blue Nile: No Diamond in the Rough," BusinessWeek e.biz, May 2000.

The company focused on providing good value to its customers. Whereas retail jewelers routinely marked up diamonds by up to 50 percent, Blue Nile kept a lower markup of around 20 percent. Blue Nile believed that it could afford the lower markup because of lower inventory and warehousing expense. Unlike jewelry retailers who maintained stores in high-priced areas, Blue Nile had a single warehouse in the United States in which it stocked its entire inventory.

The company strategy was not without hurdles because some customers did not care as much about underpricing the competition. For example, some customers preferred "a piece of fine jewelry in a robin's egg blue box with Tiffany on it"4 to getting a price discount. Also, it was not entirely clear that customers would be willing to spend thousands of dollars on an item they had not seen or touched. To counter this issue, Blue Nile offered a 30-day money back guarantee on items in original condition.

4 King, "The Internet: Retailers' New Challenge."

In 2007, the company launched websites in Canada and the United Kingdom and opened an office in Dublin with local customer service and fulfillment operations. The Dublin office offered free shipping to several countries in Western Europe. The U.S. facility handled international shipping to some countries in the Asia-Pacific region. International sales had increased from $17 million in 2007 to more than $62 million in 2012.

By 2007, Blue Nile had sold more than 70,000 rings larger than a carat, with 25 orders totaling more than $100,000. In June 2007, the company sold a single diamond for $1.5 million. Forbes called it perhaps "the largest consumer purchase in Web historyand also the most unlikely."5 The stone, larger than 10 carats, had a diameter roughly the size of a penny. Blue Nile did not have the stone in inventory, but its network of suppliers quickly located one on a plane en route from a dealer in New York to a retailer in Italy. The stone was rerouted to Blue Nile headquarters in Seattle and transported in a Brinks armored carrier to the buyerand the whole process took only three days.

5 Victoria Murphy Barret, "The Digital Diamond District," Forbes.com , October 2007.

In February 2014, Blue Nile offered more than 140,000 diamonds on its site. Of these diamonds, more than 50,000 were one carat or larger, with prices up to $2.9 million. Almost 76,000 diamonds on the Blue Nile website were priced higher than $2,500. In 2010, company CEO Diane Irvine said, "We're not positioned as a discounter. We are selling a very high-end product but selling it for much less." The 2012 annual report stated that "we aim to limit our diamond offerings to those possessing characteristics associated with high quality."

In 2012, the company had sales of about $400 million with a net income of $8.4 million. Although sales had risen, income had dropped relative to 2011. The company had also started to offer a broad range of non-engagement products, including rings, wedding bands, necklaces, pendants, bracelets, and gifts and accessories containing precious metals, diamonds, gemstones, or pearls. The company, however, maintained that the engagement category was its core business.

a) Please define distribution for Blue Nile.

b) What are key factors when designing the distribution network for Blue Nile?

c) Please discuss the strengths and weaknesses of various distribution options for Blue Nile.

d) Explain factors influencing the distribution network design you develop for Blue Nile.