BLUE NILE By,

•Ishank Sahu - 1902094

& •Jayraj Bhagat – 1902098
DIAMOND •Jugal Doshi – 1902101
RETAILIN •Keshav Pandey - 1902109
G
 Discusses about the dilemma of diamond makers to either lower the
price or lose the customers
Highlights the difference in the financial performance of online (Blue-

CASE
nile) and brick and mortar stores (Tiffany and Zales) before, during and
after economic slowdown
DESCRIPTIO In 2008, World Federation of Diamond Bourses, issued an appeal for
N: the diamond producers to reduce the supply of new gems entering the
market to reduce supply
In 2008, discount retailers such as Wal-Mart and Costco continued to
thrive but traditional jewellery retailers filed for either bankruptcy or
closing some of their outlets
 Started by Doug Williams as Internet Diamonds, In 1999 it was bought
by Mark Vadon and named as Blue Nile to sound elegant and upscale
Offered high-quality diamonds and fine jewellery at outstanding prices
Focused on educating the customers on four Cs—cut, color, clarity, and
carat and allowed customers to build their own ring
Allowed customers to have their questions resolved on the phone by
sales reps who did not work on commission
Blue Nile kept a lower markup of 20 to 30 percent compared to 50% of
BLUE NILE local retailers due to lower inventory and warehouse expense
Blue Nile had a single warehouse in the United States where it stocked
its entire inventory
To gain customer trust Blue Nile offered a 30-day money back guarantee
on items in returned original condition
In 2007, the company launched Web sites in Canada and the United
Kingdom and opened an office in Dublin with local customer service and
fulfillment operations
International sales had increased from $17 million in 2007 to more than
$33 million in 2009 despite poor economic conditions
 Zales Jewelers was established by Morris (M. B.) Zale, William Zale, and Ben Lipshy in 1924
Their marketing strategy was to offer a credit plan of “a penny down and a dollar a week.”
Company grew to hundreds of stores by buying up other stores and smaller chains since
1941
In 1986, the company was purchased in a leveraged buyout by Peoples Jewelers of Canada
and Swarovski International.
In 1992, its debt pushed Zales into Chapter 11 bankruptcy for a year
It became a public company again in that decade and operated nearly 2,400 stores by 2005
The company’s divisions included Piercing Pagoda, which ran mall-based kiosks selling
jewelry to teenagers; Zales Jewelers, which sold diamond jewelry for working-class mall
Zales shoppers; and the upscale Gordon’s
Losing market share to discounters like Walmart and Costco made Zales to move away from
its promotion-driven, lower end reputation to upscale and fashion conscious
Moving to upscale led to a disaster as there were delays in bringing in new merchandise,
and same-store sales dropped and lost traditional customers without winning the new ones
In 2006, new CEO transited back to promotional retailer image which led to loss of $26.4
million due to inventory write downs
The company had some success with its new strategy but was hurt by the rise in fuel prices
and falling home prices in 2007 that made its middle-class customers feel less secure
In February 2008, the company announced a plan to close approximately 105 stores,
reduce inventory by $100 million, and reduce staff in company headquarters by about 20
percent
 Tiffany opened in 1837 as a stationery and fancy goods emporium in New York City and in
1886, Tiffany introduced its now famous “Tiffany setting” for solitaire engagement rings
Tiffany’s high-end products included diamond rings, wedding bands, gemstone jewelry, and
gemstone bands with diamonds as the primary gemstone
Besides its own designs, Tiffany also sold jewelry designed by Elsa Peretti, Paloma Picasso,
the late Jean Schlumberger, and architect Frank Gehry
By 2010, Tiffany had 220 stores and boutiques all over the world with about 80 of them in
the United States. Of its global outlets, Tiffany had more than 50 in Japan and almost 45 in the
rest of the Asia-Pacific region
Stores ranged from 1,300 to 18,000 square feet with an average of 7,100 square feet

Tiffany Its flagship store in New York contributed about 10 percent of the company’s sales in 2007.

Besides retail outlets, Tiffany also sold products though a Web site and catalogs

The direct channel focused on what Tiffany referred to as “D” items, which consisted
primarily of non-gemstone, sterling silver jewelry with an average price of $200 in 200 while
more than half the retail sales came from high-end products such as diamond rings and
gemstone jewelry with an average sale price in 2007 higher than $3,000
Tiffany maintained its own manufacturing facilities in Rhode Island and New York but also
continued to source from third parties but internal contributed to 60% in 2007
In 2007, approximately 40 percent of the diamonds used by Tiffany were produced from
rough diamonds purchased by the company
In 2007, 86 percent of Tiffany’s net sales came from jewelry, with approximately 48 percent
of net sales coming from products containing diamonds of various sizes
 As with most retailing, the key success factors in diamond retailing can be
measured by customer service factors and cost factors.
1) What are Customer Service:
some key Blue Nile offers customers to “build their own ring” while Customers
purchasing at Tiffany and Zales have been limited to the inventory
success available at the store. Customers who are comfortable making large

factors in
purchases online will find the low-pressure purchasing experience at
Blue Nile, supported by the educational Web site, salaried sales support,
diamond and thirty-day return guarantee, appealing. Given that the jewelry is
made to order, clients at Blue Nile must be willing to wait to receive their
retailing? orders, unlike at Tiffany or Zales.
The Tiffany brand is very strong and well established. It is associated with
How do Blue glamour, trust, and customer service. These associations allow the
company to sell at higher margins than its competitors. Diamond and
Nile, Zales, other high-end jewelry purchases are expensive, and many customers

and Tiffany
will trade off other factors for the Tiffany customer experience when
making such purchases. Moreover, when spending thousands of dollars
compare on for a single item, customers often want to see and feel what they are
buying.
those Zales does not have the product variety and availability that Blue Nile
provides, nor does it have the brand name advantage that Tiffany enjoys.
dimensions? The weaker brand is reflected in the firm’s margins, which are lower than
those of Tiffany. Blue Nile’s focus on low prices is reflected in the lower
margins it has relative to both Zales and Tiffany.
 Facility & Inventory Cost:
Blue Nile operates out of one warehouse, with its entire inventory at this facility. The
1) What are inventories at both Tiffany and Zales are disaggregated through their stores.

some key
High-end jewelry items are high-priced, have relatively low demand, and have high
demand variability. Such items realize the most savings in inventory holding cost

success
through lower safety stock inventory when the inventory is aggregated.
Further, since items sold through the Blue Nile Web site are customized, the inherent

factors in postponement allows the company to keep inventory aggregated longer, thus reducing
safety inventory even more. While Blue Nile’s inventory-to-sales ratio is around 6

diamond percent, the ratios for both Tiffany and Zales are about 40 percent.
In addition to stores all over the world, Tiffany has manufacturing facilities, a retail
retailing? service center that supplies stores, and diamond processing centers in seven countries.
While Tiffany has advantages from being vertically integrated, Blue Nile operates on a
How do Blue very low fixed-cost structure.
Blue Nile also has an advantage in facility operating costs. Because customers design,
Nile, Zales, select, and order jewelry on the Web site, the company does not incur the level of
human resources costs in the form of sales staff that Tiffany and Zales do.
and Tiffany Transportation costs:

compare on As with most e-retailers, its higher at Blue Nile than at Tiffany or Zales.
The outbound transportation distance and hence costs and time tend to be much
those higher when inventories are aggregated, as is the case at Blue Nile.
In the case of Tiffany and Zales, some economies of scale can still be realized on
dimensions? inbound transportation at all downstream stages of the supply chain until the
merchandise hits retail stores, and the customer takes care of the last mile of outbound
transportation costs.
 Blue Nile:
 In the case of Blue Nile, the primary reasons could be the savings in inventory holding cost due to lower
safety stocks and the broad product variety and product availability that the firm can offer customers.
 Stones priced at $2,500 or higher are unique, high-value items with relatively low demand and high
2) What do you demand variability.
think of the fact  The high demand variability necessitates carrying larger safety stock in order to meet required customer
that Blue Nile service levels. Given the high price of the stones, the cost of holding them in inventory is proportionally
higher.
carries more than  Aggregating inventory reduces the amount of safety stock required since the demand variability is less
30,000 stones than in a disaggregated scenario. By aggregating the inventory in the online channel, Blue Nile also
broadens the product availability and variety available to customers.
priced at $2,500 or  It is a smart move for Blue Nile to aggregate and carry its high-priced products with low demand and
higher while almost high demand variability on an online channel.

60 percent of the Tiffany:

 The Tiffany brand is built on the glamour, luxury, and quality that customers perceive when visiting a
products sold from Tiffany store.
the Tiffany Web site  The company’s inventory includes a wide variety of items ranging from very high-end diamond jewelry
are priced at to basic but elegant tableware.
 Tiffany has stores as small as 1,300 square feet, and in 2008 the firm began opening stores of about
around $200? 2,000 square feet selling high-margin products in affluent U.S. areas.
Which of the two  Given the strategic importance of the brand image, the breadth of inventory, and the push toward
smaller facilities and lower cost, it makes sense for Tiffany to position the high-end luxury products at
product categories the store and move the D items to the online channel.
is better suited to  This allows it to utilize the limited facility space to highlight the high-end items and customer service and
offer the lower-end items online, where product substitution can be used as means of aggregating
the strengths of the inventory and lowering safety stocks for the D items.
online channel?  This structure, however, puts Tiffany at a cost disadvantage relative to Blue Nile because Tiffany
decentralizes its high-value items with low demand and high variety while centralizing its lower-value
items.
 Such a cost disadvantage can be justified if Tiffany can maintain its strong brand and associate it with the
store experience.
 Tiffany has an image of providing luxury items to customers.
Since, Diamonds are of high value, customers tend to purchase
them after experiencing the feel of it.
Also, online shoppers prefer buying cheaper items online after
3) What do comparing the costs.

you think of Hence, Tiffany decided focus on retail outlets, focusing on high-
end products having high variety to reach the premium customer
Tiffany’s base

decision to However, It increased the inventory level and overall safety stock
of Tiffany when compared to online model
not sell This structure, however, puts Tiffany at a cost disadvantage
diamonds relative to Blue Nile because Tiffany decentralizes its high-value
online? items with low demand and high variety while centralizing its
lower-value items.
Such a cost disadvantage can be justified if Tiffany can maintain
its strong brand and associate it with the store experience.
 Zales’s upscale strategy was in response to fierce competition it was
facing from mass merchant department stores such as Wal-Mart, national
chain department stores such as JCPenney, and home shopping networks.
4) Given that A large portion of the company’s revenue came from value-oriented
Tiffany stores customers who frequented malls. The success of the Zales brand was built
have thrived on the perception of the good value one got for the money, but with that
came the perception of being inexpensive.
with their focus It takes much time and effort to educate new customers and transform a
on selling high- brand. Zales tried to make too many radical changes in too little time. The
end jewelry, firm drastically changed its portfolio of products, 15 percent of the
suppliers in the supply chain network were new and included new
what do you overseas vendors, and holiday promotions and monthly payment plans
think caused were eliminated, to name a few changes.

the failure of All this resulted in the firm’s losing not only its core customer base but
also sales due to delays in bringing merchandise in on time and not
Zales with its making inroads into new target markets.
upscale Given that it has a much weaker brand than Tiffany; Zales’s strategy of
strategy in bringing high-end jewelry to its stores raised its inventory costs without
raising its margins enough to offset this increase.
2006?
Zales’s inventories in FY 2006, when it tried the high-end strategy, rose to
47 percent of sales, even higher than Tiffany’s; its margins, however,
remained lower than Tiffany’s.
 A lean and nimble structure is an advantage in a downturn. Blue Nile has a
distinct advantage in this regard with its very low fixed-cost structure
compared to Tiffany and Zales.
Property and equipment to net sales ratios are 2.38, 13.93, and 25.46
5) Which of percent for Blue Nile, Zales, and Tiffany, respectively. Both Zales and Tiffany
are contractually tied up in many medium- to long-term leases for their
the three facilities.

companies The selling, general, and administrative expenses at Tiffany and Zales are
about four times those incurred at Blue Nile. Much of this discrepancy can be
do you think attributed to the costs of operating stores.

is best Blue Nile also has a very low investment in inventory compared to the other
two companies.
structured to The cost of sales at Blue Nile is higher, but this can attribute to the lower
deal with margins and the higher cost of outbound distribution. The low-cost structure
at Blue Nile is well suited for times when demand shrinks in the industry. Blue
weak Nile should take advantage of its low-cost structure and lower prices to get
more market share.
economic Zales is perhaps in the weakest position to handle the downturn, given the
times? inventory write-off it had to take when its high-end strategy failed. With
tightened credit, Zales may find it difficult to survive the downturn. Tiffany
certainly has the strength to survive the downturn but is hurt significantly by
dropping sales, given its relatively high fixed costs.
 Blue Nile:
 It has a strategy that focuses on lower prices on a large variety of high-end stones that aligns
very well with its centralized structure.
 Its marketing focus on convincing customers that the four Cs and third-party validation are the
key ingredients when valuing a diamond is also well aligned with its structure, which does not

6) What
allow customers to touch and see the stone before buying.
 Given its significant cost advantages and customers’ tendency to try to save money during

advice
difficult times, Blue Nile has a significant opportunity in this downturn.
 Blue Nile can take an aggressive position, emphasizing its lower prices with similar quality to

would you
very high-end diamond retailers. Although this is a difficult message to sell in general, it may
be easier in the difficult economic environment of 2009.

give to each Zales:

 From a financial perspective, Zales needs to get control of its inventories. One way to do this is
of the three to centralize more of its expensive diamond inventory, making it available to stores as needed.
Lower-value diamonds could be stocked and sold from retail stores.
companies  For higher-end diamonds, rings with imitation stones could be used to help customers select a
style, followed by having the real diamond installed later at a central location and shipped to
regarding its the store for customer pick-up.
 Zales’s ideal situation seems to be one in which it stocks and sells lower-cost products from
strategy and decentralized locations with higher-value stones centralized and provided on demand.

structure? Tiffany:
 It cannot centralize its high-end stones because that would conflict with its brand image.
 Pricing pressure at retail is likely to continue with the growth of Blue Nile at the high end and
retailers such as Wal-Mart and Costco at the lower end.
 As a result, Tiffany must continue working hard to maintain its brand image. Its move into the
wholesale part of the diamond business has potential pluses—it gives the company the
wholesale margin and could give it some form of exclusivity on its stones.
THANK YOU