Blue Nile and Diamond Retailing

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1.What are some key success factors in diamond retailing?
How do Blue Nile, Zales, and Tiffany compare on those dimensions?

Key drivers of customer purchases in diamond retailing include quality and range of products offered, reputation, professional advice offered, and customer perception and emotional bonds, including a positive buying experience and customer service. Success is also dependent upon obtaining economies of scale through such avenues as preferential access to resources, an effective supply chain and marketing strategy, as well as an ability to control facilities and operating costs and manage inventory effectively.

Blue Nile’s, Zales’, and Tiffany’s key success factors in dealing with customers are related to the characteristics of their individual target markets. Blue Nile, for example, offers high quality diamonds and fine jewelry online that are comparable to Tiffany’s but with markups that are lower than Tiffany’s and Zales’. Blue Nile, which was founded in 1999, focuses on customers who want good value and who prefer to shop conveniently from home and without incurring high pressure sales tactics. They also provide customers with easy-to-understand jewelry education, as well as the ability to design custom jewelry. However, its customers must forego a hands-on purchasing experience as well as the instant delivery offered by Tiffany’s and Zales’ retail locations.

Tiffany, which opened in 1834, is an independent, specialty jeweler that offers premium-priced diamond rings, gemstone and fine jewelry, watches, and crystal and sterling silver serving pieces. Tiffany’s exclusivity and prestigious brand image, extensive service, and fashionable locations allow it to maintain and gain luxury market share domestically and globally. In contrast, Zales, a specialty retailer of diamond fashion jewelry and diamond rings in the U.S. since 1924, has high name-brand recognition and appeal to value-conscious shoppers. Zales’ chain of retail venues for its middle-class target customers includes Zales Jewelers, Gordon’s, and Piercing Pagoda’s mall-based kiosks that appeal to teenagers. Zales offers more moderately priced and promotion-driven products compared to Blue Nile and Tiffany. It also competes with discounters such as Costco.

Economies of scale and sourcing are achieved differently by each company. Blue Nile has the most cost-effective business model because of exclusive supplier relationships that allow the online retailer to offer a manufacturer’s diamond inventory without purchasing it until needed. In addition to low warehouse and inventory costs, Blue Nile avoids the facilities investment expense and operating costs of the bricks-and-mortar retailers. U.S. retailer Zales is able to obtain economies of scale because of its large number of stores, but high inventory costs due to extreme changes in product offerings and marketing strategy in 2006-2007 confused its traditional customers and severely hurt its bottom line. Tiffany sustains high profit margins through its globally dispersed locations and online presence, established third- party sourcing as well as in-house manufacturing which provided 60 percent of its products, and by utilizing centralized inventory management to maintain tight control over its supply chain and reduce operational risk.

2.What do you think of the fact that Blue Nile carries over 30,000 stones priced at $2,500 or higher while almost 60 percent of the products sold from the Tiffany Website are priced at around $200? Which of the two product categories is better suited to the strengths of the online channel?

Blue Nile is able to successfully offer diamonds priced up to $1 million or more online by emphasizing the large variety of certified high-quality stones available and a markup that is significantly lower than that of its store-front competitors. The main source of Blue Nile’s competitive advantage over traditional, store-based retail...
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