Online Seattle jeweler sparkles, traditional jewelers bristle

The holiday shoppers staring into the display cases at a well-known upscale jewelry store in downtown Seattle look the part: Dapper-dressed gentlemen at ease with spending $26,000 for a diamond-pendant necklace.

Not so Mark Vadon. Youngish, stubble-faced and wearing cords and funky sneakers, Vadon appears stunned when the saleswoman hits him with the necklace's price. "The markup is insane," he said moments later outside the store.

Vadon is not just a tough customer, he's also a shrewd competitor.

As the chief executive of Seattle-based Blue Nile, Vadon has created an Internet diamond retailer that emerged from the dot-com bust of seven years ago to become one of the nation's biggest sellers of engagement rings — and perhaps the most formidable threat to traditional jewelers this holiday season.

No other online vendor comes close to selling more diamonds than Blue Nile, said Liz Chatelain, president of MVI Marketing in Paso Robles, Calif.

November and December — popular months for popping the question as families celebrate the holidays — account for a fifth of all engagement rings sold annually in the U.S.

Blue Nile, which is expected to post 2007 sales of about $320 million, up from $252 million last year, is poised to benefit: Engagement rings make up more than 70 percent of its business, with about $180 million worth sold in 2006.

Jewelry stores, meanwhile, are dealing with the Blue Nile threat by improving customer service and carrying more products that aren't easily found online, such as ultraexpensive watches, analysts say.

Vadon declined to discuss sales trends because Blue Nile is in its quiet period before announcing fourth-quarter results. But he seemed encouraged by an update for Dec. 13: The Web site had logged $1.2 million in sales since midnight on the East Coast, including one for $51,000.

As proof of its appeal, Blue Nile offered up Steven Keller, 43, who discovered its Web site when he set out to buy an engagement ring in October. He was reluctant to buy online and intended only to read up on diamonds. (Blue Nile has a section at the top of its site called "education.")

Keller visited more than two dozen jewelry stores in Southern California, where he lives and works as a schools superintendent in Redondo Beach, but kept returning to Blue Nile.

After a phone call with a customer-service representative, who assured him of the company's 30-day, money-back guarantee, he found a ring on the site for about $15,000. He took delivery of it last month and plans to propose when the moment feels right.

"I am absolutely certain that I would have had to pay another $2,000 for a diamond of this quality" elsewhere, Keller said. "I'm done, I'm happy and she'll be happy."

About 30 percent of U.S. jewelry buyers in October said their most expensive purchases were made online, a three-fold increase from the 2002 holiday season, according to a survey by the Jewelry Consumer Opinion Council, a research division of MVI Marketing. About 45 percent of consumers said they bought their most expensive jewelry in retail stores, down from 80 percent five years ago.

Blue Nile's typical engagement-ring buyer spends $5,600, compared with a national average of $3,200, according to trade publication Jewelers Circular Keystone.

Jewelry stores survived the rise of the Home Shopping Network and discount retailers such as Wal-Mart, "but what's scary about Blue Nile is that it's upscale," said Rob Bates, senior editor at the New York-based publication. "They're selling the same products for less. And it's one thing if their service was bad, but it's pretty good."

Vadon, 37, had earned an MBA from Stanford and was working as a consultant for Bain & Co. in San Francisco during the late 1990s when he walked into a Tiffany store to buy an engagement ring.

Describing a salesperson as "not helpful," Vadon left the store empty-handed and turned to the Internet, where he discovered a Seattle-based Web site called InternetDiamonds. He bought a ring for a little under $6,000, and then the site a few months later, eventually renaming it Blue Nile.

The 185-employee company is headquartered in the Chinatown International District and operates an order-fulfillment center on the outskirts of downtown.

Blue Nile's stock traded as high as $100 a share in September and October — up from $20.50 at its 2004 initial public offering — but has dropped to the low $70s amid analysts' concerns about the ability of consumers to buy expensive jewelry amid a housing-market slowdown and credit crunch.

Blue Nile has no stores, and its overhead costs are relatively low, which allows it to sell diamonds for lower prices than many of its brick-and-mortar competitors, Vadon said.

The company typically doesn't buy its diamonds from wholesalers until a customer places an order online. The diamond is then shipped to its warehouse, where employees take a day to assemble a ring to the customer's specifications. The goal is to have it on a customer's doorstep within three days of the order.

Still, some shoppers are leery of picking out fine jewelry sight unseen. "I don't buy anything online. I don't trust it," said Ryan Stiles, a TV actor who was a regular on "The Drew Carey Show" and "Whose Line Is It Anyway?" He bought a couple of pricey gifts Wednesday at the Alvin Goldfarb Jeweler store in downtown Seattle.

Stiles, who lives near Bellingham, had met the store's president, Steven Goldfarb, at a local charity event. Goldfarb said he believes his community participation gives him an advantage over online competitors. Rarely does he see Web sites getting involved with local or national charities, he said.

At Goldfarb's newly opened Seattle store — an expansion for the longtime Bellevue business — shoppers are encouraged to help themselves to cookies and coffee, or relax near the fireplace.

Goldfarb said he knows that shopping for jewelry, especially engagement rings, "can be a little overwhelming. We try to make it a little more comfortable," he said. "It's not just the money. You're getting married!"

Shane Decker, a jewelry consultant based in Greenwood, Ind., said "more and more jewelers are calling" for advice on going up against the Internet. Decker talks about "romancing the product" and the need for stores to be "world-class friendly." He also points out that a diamond's "brilliance" isn't necessarily apparent from a lab report or online description.

"You've got to create a relationship. Find out what his [future] wife's name is, where they're going on their honeymoon. Be the nicest person they've met all day," he said. "Awesome people in our industry learn how to sell emotions."

Vadon countered that it's "romantic to say, 'I did my homework, and I bought you 1.5 carats instead of 1 carat.' "

Seattle-based Ben Bridge, which operates 79 jewelry stores, mostly in the West, touts its longevity and hefty financial backing. It's been in business for 95 years, "and we expect to be in business for another 95 years," said marketing Vice President Steve Davolt. Ben Bridge is owned by a division of Warren Buffett's Omaha-based Berkshire Hathaway.

"If you buy your diamond from us this holiday season, we're there to take care of it, to service it, to clean it, to do whatever you might like to have done to it in the future, and to stand behind it," he said.

Amy Martinez: 206-464-2923 or amartinez@seattletimes.com