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WIKI ANALYSIS
Blue Nile (NILE) is the largest online diamond retailer. The company specializes in custom diamond jewelry with a focus on engagement rings. Its primary business is in the United States, but it also operates websites in the United Kingdom and Canada.[1] In addition, NILE ships products to over 25 countries worldwide.[2]
Blue Nile is the exclusive internet retailer for 11 of the world's largest diamond manufacturers.[3] NILE's unique relationship with suppliers lets it pay for its diamond supply only after a customer places an order. This means the company doesn't need to hold large amounts of inventory, which limits NILE's risk of potential mark-downs.[4] NILE's exclusive supplier arrangements also eliminate traditional layers of diamond wholesalers and brokers and the mark-ups imposed by these intermediaries. Blue Nile also avoids most of the operating costs associated with physical retail stores. The cost savings generated in these areas mean NILE can price diamonds 20% to 35% less than traditional retailers.[3]
De Beers, the world's largest diamond producer, launched its own website selling engagement rings, a move that threatens NILE's business. Additionally, while NILE markets itself as a high-end jewelry retailer, the majority of purchases made on its site are below $5,000.[5] It seems customers looking to purchase pricier pieces are still more comfortable walking into a Tiffany’s store than making the transaction online from a lesser known and relatively new retailer. Thus, Blue Nile remains vulnerable to economic downturns despite its classification as a luxury retailer.
Business Overview
Business & Financial Metrics[6]
In 2009, Blue Nile generated a net income of $12.8 million on total sales of $302.1 million. This represents a 10.1% increase in net income and a 2.3% increase in total sales from 2008, when the company earned $11.6 million on $295.3 million in total sales.
Demand for Blue Nile's products fluctuates depending on the season and various holidays (Valentine's Day in the first quarter, Mother's Day in the second quarter, and Christmas/New Year's in the fourth quarter). As a result, the firm's revenue is generally the lowest in the third quarter and highest in the fourth quarter. Fourth quarter sales accounted for 34.0% of total sales in 2009.[7]
Business Segments[8]
Blue Nile operates through only one reportable business segment, called "online retail jewelry." Most of the company's sales occur to customers in the United States.
Trends and Forces
Blue Nile remains vulnerable to economic downturns
As a seller of high-end jewelry, Blue Nile is supposed to appeal to customers in the upper-income bracket whose absolute spending power is not significantly affected by economic downturns. Yet despite this categorization, the majority of purchases made on Blue Nile’s site are below $5,000.[5] One possible explanation is that customers looking to purchase pricier pieces are still more comfortable walking into a Tiffany’s store than making the transaction online from a lesser known and relatively newer retailer. Thus, Blue Nile remains vulnerable to decreases in consumer demand despite its classification as a luxury retailer.
NILE's profitability depends on its exlusive supplier agreements
Blue Nile is the exclusive internet retailer for 11 of the world's largest diamond manufacturers.[3] NILE's unique relationship with suppliers lets it pay for its diamond supply only after a customer places an order. This precludes the need to hold large amounts of inventory, which limits NILE's risk of potential mark-downs.[4] NILE's exclusive supplier arrangements also eliminate traditional layers of diamond wholesalers and brokers, which lets the company purchase its products offerings at lower prices by avoiding mark-ups imposed by intermediaries. These cost savings mean NILE can price diamonds 20% to 35% less than traditional retailers.[3] The firm's special supply relationships have shielded it from other online competitors so far. De Beers, the world's largest diamond producer, has launched its own website selling engagement rings, a move that threatens NILE's advantageous positioning.
NILE's status as an e-commerce player has benefits and drawbacks
Blue Nile stands to benefit from the growth of e-commerce and the increasing penetration of broadband internet around the world. Its online structure is easily scalable to foreign markets and requires little cost of capital. E-commerce players like Blue Nile are at a competitive advantage over traditional retailers because of lower operating expenses and better inventory management. Another benefit is that U.S. customers outside of the Washington state are exempt from sales tax because of the Internet Tax Freedom Act, which Congress renewed for seven more years in 2007.[9] On diamond purchases that can amount to many thousands of dollars, this is a significant savings. There are a few drawbacks to being an e-commerce player, however. Customers cannot try on jewelry and do not have the help of a knowledgeable salesperson to guide them through the complexities of choosing the right diamond, disadvantages that direct some consumers to traditional retailers.
Fluctuations in the prices of commodities impact Blue Nile’s margins
NILE's profit margins are affected by the price of commodities that are inputs in jewelry such as gold, silver and other precious metals. The supply of many of these commodities is controlled by a small number of groups that have significant pricing power. For instance, the supply and price of diamonds in the world markets are significantly influenced by a single organization, the Diamond Trading Company.[10]
Competition
Given the fragmented nature of the retail jewelry business, Blue Nile competes with a number of national jewelry chains (the UK-based Signet, Tiffany, Zale (ZLC)), department stores, mass merchandisers (Wal-Mart), and TV shopping networks (QVC, Inc.). NILE also has to contend with the De Beers website selling engagement rings.
References
- ↑ NILE 2007 10-K pg. 4
- ↑ Blue Nile. Retrieved on July 14, 2008.
- ↑ 3.0 3.1 3.2 3.3 Blue Nile: Online Jewelry Sales Increase. Retrieved on July 15, 2008.
- ↑ 4.0 4.1 Reuters. Retrieved on July 11, 2008.
- ↑ 5.0 5.1 Seeking Alpha: Blue Nile. Retrieved on July 15, 2008.
- ↑ NILE 2009 10-K pg. 26
- ↑ NILE 2009 10-K pg. 58
- ↑ 8.0 8.1 NILE 2009 10-K pg. 57
- ↑ Wikipedia: Internet Taxes. Retrieved on July 14, 2008.
- ↑ ZLC 2007 10-K pg. 7
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