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Online diamond duel

By Monica Soto Ouchi
Seattle Times technology reporter

BETTY UDESEN / THE SEATTLE TIMES Eric Broussard, vice president of jewelry for Amazon.com, shows some of the varied products the online retailer has been offering since it started selling jewelry in April.

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The Seattle-based online jeweler, which built its reputation marketing high-end engagement rings to men, saw its stock soar 38.5 percent on May 20, its first day on the Nasdaq Stock Market. Its shares have nearly doubled in value since.

If Blue Nile delivered one of the more memorable initial public offerings in recent memory — particularly for an Internet commerce company — the flip side is that its secret is out the door.

Online retail giant Amazon.com in April started its own online jewelry store, with an avowed goal to undercut Blue Nile. Walmart.com, whose parent Wal-Mart is the largest jeweler in the world, sells everything from charm bracelets to 2-carat engagement rings, too.

"In our view, it's a much better mousetrap than has been offered before," said Blue Nile Chief Executive Mark Vadon of his company's business model. "Customers have taken to that."

If the online jewelry industry has received increasing attention, it's because the business takes advantage of the Internet's initial promise: less overhead, lower prices, larger selection and, ultimately, bigger profits.

Amazon marks up diamond jewelry 15 percent — far below the industry average of 45 to 50 percent — while Blue Nile cuts its prices between 20 and 40 percent lower than chain stores, depending on the product. (Roughly 90 percent of the jewelry it sells contains a diamond.)

Both say they can offer lower prices because they have lower overhead expenses.

Neither Blue Nile nor Amazon pays for retail space, and both carry a larger variety of items because they rely on the virtual inventory of suppliers rather than trying to stock the inventory themselves. (Blue Nile said its customers can select from 40,000 individual diamonds.)

This means that neither retailer has to carry multiple copies of the same item, whereas a multistore chain may carry a $12,000 diamond necklace in each store to form a "halo" for its other products — even if such an item is sold just once every five years. (Until that product is sold, it remains a liability on its books.)

Soaring profits

	BRIAN CASSELLA / THE SEATTLE TIMES Mark Vadon, CEO of Blue Nile, says the online jeweler will continue to specialize in engagement rings. He doesn't see Amazon.com's "sell everything" strategy as direct competition.

Blue Nile last year reported an 89 percent jump in sales, to $128.9 million, compared with the year before.

For the quarter ended March 31, its operating expenses were 14.8 percent of sales, less than half that of traditional chains such as Zales.

Lower operating costs led to higher profits: The online jeweler said first-quarter pretax profit rose 75.6 percent to $3.0 million when compared with the year-ago quarter.

Thomas Weisel analyst Anne-Marie Peterson, who recently picked up coverage of Blue Nile's stock, said the diamond-jewelry category is one of the few segments of retail where traditional retailers don't carry a multi-channel advantage.

And the trend toward certifying diamonds — providing verification from an independent grading lab, such as the Gemological Institute of America — has eased concerns about the quality of a product ordered online.

"A diamond is a commodity with universal standards ... ," Peterson wrote in her initial research report.

To be sure, comScore Networks estimates that consumers last year spent between $800 million and $1 billion on jewelry products online.

	BETTY UDESEN / THE SEATTLE TIMES A "Diamond in the Rough" blue abalone pendant is held aloft by Amazon.com's Eric Broussard. The online jewelry store sells everything from $5 charms to a $93,000 necklace.

This figure doesn't include auction sales. (In April, eBay reported $1.6 billion in annualized jewelry sales.)

The online jewelry category also mutes another concern that has beset online retail: shipping fees.

Because the sales price for diamond jewelry is considerably higher than, say, the cost of a CD or a book, and an item tends to be light in weight, the shipping fee becomes negligible.

"The variable cost of picking, packing and shipping (a diamond) item is not drastically different from picking, packing and shipping a book," said Eric Broussard, Amazon's vice president of jewelry. "We want to pass the savings to customers. The driving factor is a business model that's conducive for us to do that."

If online jewelers have a business model in common, this is where their similarities end.

Blue Nile built its business around the sale of custom-made diamond engagement rings, with a mantra to educate the buyer on the four C's: a diamond's cut, clarity, color and carat, or weight.

It sells only certified diamonds, and its average sales price is $1,100.

Pushing for volume

Amazon has applied the same strategy in jewelry as it uses in other categories: Deeply discount products and drive volume. Broussard said his company focuses on a wide selection to appease the tastes of different types of customers. In its beta test, Amazon sold 100,000 products in its jewelry store.

The company's highest-cost item on the site is a $93,000 necklace. But the top seller in fine jewelry Friday morning was a $25 pair of 14-carat heart-shaped blue-topaz earrings. Its top 10 best-selling items for the period were $65 and under.

Broussard said Amazon, as a company, has sold higher-cost items on its site for a long time; jewelry is no different. "We have a very diverse customer base," he said. "Our customer base is fairly big, with people who have different needs."

But Blue Nile's Vadon said jewelry retailers tend to focus on a specific niche, whether it's Wal-Mart for lower-cost items or Tiffany for more exclusive jewelry. Amazon, he said, is "trying to sell everything" — a strategy that has not been attempted before.

For that reason, Vadon said his company doesn't see Amazon as direct competition. "What we're focused on is engagement rings," he said. "The amount of business they can capture (in that area) is very small."

Price busting

Amazon's jewelry store has been open less than a month; it's too early to tell whether Vadon's belief holds true. But if Blue Nile is focused on its brick-and-mortar competitors, Amazon has its eyes squarely on Blue Nile.

At Amazon's annual meeting in May, Chief Executive Jeff Bezos told reporters that its online jewelry store intends to have the lowest prices.

Bezos is not known to speak directly of competitors. When asked whether those prices will be lower than Blue Nile, he paused and replied:

"Absolutely."

Monica Soto Ouchi: 206-515-5632 or msoto@seattletimes.com

Copyright © 2004 The Seattle Times Company

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