For most of its history, Blue Nile’s business has been built on value-priced diamond engagement rings, backed by solid service and fast shipping. This has brought the Seattle e-tailer great success—except when diamond prices go up. 

Since Blue Nile relies on suppliers to set prices, the diamonds it carries all bear the new, steeper price tags, while jewelers still stock the stones they bought cheaper months ago. And so in 2011, and again this past quarter, we saw the e-tailer’s sales fall when diamond prices rose—proving perhaps, that for all the advantages of online shopping, many consumers would rather buy at a traditional jeweler, all things being equal. It also shows how central value is to Blue Nile’s appeal, and that its customers actively weigh its prices against competitors’. It lives by the price comparisons, and on occasion, it dies by them.

Given all this, it’s not surprising that Blue Nile has been tiptoeing outside its comfort zone. It is very tentatively stepping into the world of bricks and clicks, displaying (but technically not selling) its wares in two Nordstroms. And while it keeps saying results from this test are good, judging from its latest conference call, executives seem genuinely puzzled whether to expand it. Some have suggested that Blue Nile go even further and open up retail stores, which could also help publicize its brand. But that runs into the sales tax issue, and its current margins, at least on diamonds, would not likely support retail rents. (Still, I would not be surprised if that happens in some form.) 

Blue Nile has also beefed up its nonengagement and fashion offerings, as that category promises more repeat business and better margins (showing even Blue Nile has had it with prime comparisons). It’s enjoyed some success with its Monique Lhuillier line and is adding another designer “the caliber of Monique” soon. During its latest conference call, executives noted with pride that sales of nonengagement jewelry rose, despite drops elsewhere. 

One possible stumbling block here is that fashion jewelry and low-price engagement rings attract two different buyers. Most consumers know Blue Nile as a low-cost e-tailer. Some have advised the company, if it wants to truly brand itself a fashion destination, to open a separate female-oriented site. (Pink Nile?) For now, though, it’s catering to both segments—with the value pitch still occupying most of the home page real estate. 

Starting a second site wouldn’t be cheap, of course. Which brings up another problem: Because of its low margins, the site is reluctant to spend money. (One analyst called it “the most fiscally responsible brand I’ve ever covered.”) We have written about Blue Nile’s lack of name recognition. Company founder Mark Vadon’s new business, Zulily.com, is arguably better known than Blue Nile, and it’s been around only four years, versus Blue Nile’s 14. (Perhaps not coincidentally, it also has higher sales.) Analysts have urged the e-tailer to:

Spend more to build its brand in the United States and more effectively compete with big national jewelry chains and the likes of Amazon.com.

“People recognize Kay Jewelers. People recognize Jared more than they recognize Blue Nile,” said Stephens Inc. analyst Rick Patel, referring to two of the biggest U.S. brands. “That’s not a very easy situation to tackle.” 

Blue Nile does advertise, but almost entirely online, using vehicles such as Google AdWords and Facebook. But even though analysts might want it to do more, it might not be in a position to. To really get your name out there can costs millions. Blue Nile earns about $2 million a quarter. Having such low margins doesn’t give you much room to maneuver.  

All in all, Blue Nile seems stuck. Its old business model brought it substantial success. But it also brought certain limitations. (Here’s one more: The big talk in e-tail is same-day delivery. With its current setup, Blue Nile could never pull that off.)

To be fair, the people at the company recognize the need to build on, and maybe even move past, its traditional model, and they are doing just that. Its latest disappointing financial results might even speed up that process. Everyone agrees Blue Nile changed this industry. Its future depends on how much it can change itself.

Rob Bates

JCK News Director