Case Study

Blue Nile and Diamond Retailing$1$

A customer walks into your jewelry store with printouts

of diamond selections from Blue Nile, a company that is

the largest online retailer of diamonds. The list price for

the customer$$s desired diamond is only $$100$ above your

total cost for a stone of the same characteristics. Do you

let the customer walk, or come down in price to compete?$2$

This dilemma has faced many jewelers. Some

argue that jewelers should lower prices on stones to keep

the customer. Future sales and add$-$on sales such as custom

designs, mountings, and repairs can then be used to

make additional margins. Others argue that cutting

prices to compete sends a negative signal to loyal customers

from the past who may be upset by the fact that

they were not given the best price.

As the economy tightened during the holiday season

of $2007,$ the differences in performance between

Blue Nile and bricks$-$and$-$mortar retailers were startling.

In January $2008,$ Blue Nile reported a $24$ percent jump in

sales during its fourth quarter. For the same quarter, Tiffany

posted a $2$ percent drop in domestic same$-$store

sales, and Zales reported a $9$ percent drop. The chief

operating officer of Blue Nile, Diane Irvine, stated,

$$This business is all about taking market share. We look

at this type of environment as one of opportunity.$$

The Diamond Retailing Industry

For both wholesalers and retailers in the diamond industry,

$2008$ was a very difficult year. It was so bad at the

supply end that the dealers$$ trade association, the World

Federation of Diamond Bourses, issued an appeal for the

diamond producers to reduce the supply of new gems

entering the market in an effort to reduce supply.

However, the world$$s largest producer, De Beers,

appeared unmoved, refusing to give any commitment to

curtail production. The company had recently opened

the Voorspoed mine in South Africa, which, when fully

operational, could add $800,000$ carats a year into an

already oversupplied market. Historically, De Beers had

exerted tremendous control over the supply of diamonds,

going so far as to purchase large quantities of rough diamonds

from other producers. In $2005,$ the European

Commission forced De Beers to phase out its agreement

to buy diamonds from ALROSA, the world$$s second

largest diamond producer, which accounted for most of

the diamond production in Russia. Russia was the second

largest producer of diamonds in the world after

Botswana.

Although discount retailers such as Walmart and

Costco continued to thrive, the situation was difficult for

traditional jewelry retailers. Friedman$$s filed for Chapter $11$

bankruptcy protection in January $2008,$ followed by

Chicago$-$

based Whitehall in June. When it filed for

bankruptcy, Friedman was the third largest jewelry chain

in North America, with $455$ stores, whereas Whitehall

ranked fifth, with $375$ stores in April $2008.$ In February

$2008,$ Zales announced a plan to close more than

$100$ stores that year. This shakeup offered an opportunity

for other players to move in and try to gain market share.

With the weakening economy, the third and fourth

quarters of $2008$ were particularly hard on diamond

retailers. Even historically successful players such as

Blue Nile, Tiffany, and Zales saw a decline in sales and a

significant drop in their share price. As customers tightened

their belts and cut back on discretionary spending,

high$-$cost purchases such as diamond jewelry were often

the first to be postponed. The situation worsened as

competition for the shrinking number of customers

became fiercer. In such a difficult environment, it was

hard to judge which factors could best help different

jewelry retailers succeed.

Blue Nile

In December $1998,$ Mark Vad