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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].
Fiscal 2008 saw a 7.5% decrease in net sales from 2007, due primarily to the decrease in consumer spending for luxury goods over that time period.[3] The majority of the NILE's sales are in the engagement category (diamonds, ring settings and wedding bands), with about ~70% of the company's revenue in 2007 and slightly more in 2008 coming from this category.[4].[3]
Blue Nile is the exclusive internet retailer for 11 of the world's largest diamond manufacturers[5]. 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[6]. 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 does not incur 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[5].
The firm's exclusive supply relationships have shielded it from other online competitors so far. But in 2007, 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[7]. 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 Financials
Net sales in Fiscal 2008 were $295M, a 7.5% decrease from 2007.[3] The decrease resulted from an overall decline in orders shipped as a result of a decline in consumer spending on low-end luxury goods.[3] International sales in 2008 were $27.7M, comprising 9.4% of total sales, and increasing 62.9% from 2007's figure of $17.0M.[3] This increase in international growth is due largely to the continued growth of the company's facility in Ireland to process U.K. and E.U. orders, opened in 2007.[1][3]
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 29% of net sales in 2008, and 35% of net sales in 2007.[8][9]
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[7]. 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[5]. 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[6]. 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[5]. The firm's special supply relationships have shielded it from other online competitors so far. But in 2007, De Beers, the world's largest diamond producer, 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[11]. 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. In 2007, the price of silver rose from $11.55/oz in 2006 to $13.38/oz[12]. 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[13].
Competition and Market Share
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 will also have to contend with the 2007 launch of De Beers' (the world's largest diamond producer) website selling engagement rings.
| Company | Net Sales (millions USD) | 1 Year Sales Growth | Operating Income (millions USD) | Operating Margin | Net Income (millions USD) | Average Diamond Ring Sale (USD) | Market Share |
|---|---|---|---|---|---|---|---|
| Blue Nile | 319[10] | 26.9%[10] | 22[10] | 7.0%[10] | 17[10] | 5,200[5] | 0.5%[14] |
| Signet | 3,559[15] | 3.0%[15] | 351[15] | 9.6%[15] | 266[15] | 4.2%[14] | |
| Zale (ZLC) | 2,437[16] | (0.1%)[16] | 103[16] | 4.2%[16] | 59[16] | 3.7%[14] | |
| Tiffany | 2,939[17] | 14.8%[17] | 530[17] | 18.0%[17] | 304[17] | 3,000[18] | 2.3%[14] |
Note: Market share figures assume $64.7B U.S. jewelry market in 2007[14].
References
- ↑ 1.0 1.1 NILE 2007 10-K pg. 4
- ↑ Blue Nile. Retrieved on July 14, 2008.
- ↑ 3.0 3.1 3.2 3.3 3.4 3.5 3.6 Blue Nile 2009 10-K, pp 26 - 34
- ↑ NILE 2007 10-K pg. 27
- ↑ 5.0 5.1 5.2 5.3 5.4 Blue Nile: Online Jewelry Sales Increase. Retrieved on July 15, 2008.
- ↑ 6.0 6.1 Reuters. Retrieved on July 11, 2008.
- ↑ 7.0 7.1 Seeking Alpha: Blue Nile. Retrieved on July 15, 2008.
- ↑ Blue Nile 2009 10-K, pp 8 - 21
- ↑ NILE 2007 10-K pg. 6
- ↑ 10.0 10.1 10.2 10.3 10.4 10.5 NILE 2007 10-K pg. 23
- ↑ Wikipedia: Internet Taxes. Retrieved on July 14, 2008.
- ↑ National Mining Association: Historical Silver Prices. Retrieved on July 14, 2008.
- ↑ ZLC 2007 10-K pg. 7
- ↑ 14.0 14.1 14.2 14.3 14.4 Signet Group plc: U.S. Jewellery Marketplace. Retrieved on July 16, 2008.
- ↑ 15.0 15.1 15.2 15.3 15.4 Signet Group Pro Forma Translated Results: Five Year History in US Dollars. Retrieved on July 11, 2008.
- ↑ 16.0 16.1 16.2 16.3 16.4
- ↑ 17.0 17.1 17.2 17.3 17.4 TIF 2007 10-K pg. 28
- ↑ TIF 2007 10-K pg. K-5
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