Nothing can scratch a diamond except another diamond, but a recession can carve deep gouges in the diamond- jewelry business. Take the holiday season that just ended: sales of luxury goods, including jewelry, fell 34 percent. Still, Marc Stolzman, CFO of online diamond and jewelry merchant Blue Nile, sees opportunity in hardship. Like traditional retailers, Blue Nile (2007 net sales: $319 million) has been hammered by the downturn; its domestic net sales have fallen for the past three quarters and its stock price has plummeted more than 50 percent. But the online jeweler, which was founded in 1999, has few of the costs incurred by its bricks-and-mortar rivals. Customers can build engagement rings to order on Blue Nile’s Website, choosing from a huge variety of stones and settings. Stolzman says the same lean business model that enabled Blue Nile to survive the dot-com bust and dominate its online niche will allow it to weather this downturn, too, and grow its market share.
How did Blue Nile’s business model hold up when consumer demand began falling?
We have a very-low-inventory model. While traditional bricks-and-mortar retailers were concerned with excess inventory and were scaling back their selection, we could expand our offerings without taking financial risks. We have exclusive relationships with diamond and jewelry suppliers; what you see on our Website can be found only on Blue Nile. We have more than 50,000 diamonds available at any time, but it’s [mostly] a virtual inventory, so we don’t have the carrying cost of what would be $500 million to $600 million of inventory.
That allows us to be nimble, to have a just-in-time purchasing model. We operate in a negative-working-capital [environment] where we buy a diamond to satisfy a customer purchase and two days later the raw diamond is turned into an engagement ring. That’s just an amazing process to see.
Many companies are concerned about debt these days, but that’s not something you have to worry about.
We don’t have debt. It’s clear this economic situation is going to lead to a significant contraction of the jewelry retail sector. [As this article went to press, Shane Co., which operates jewelry stores in 14 states, filed for Chapter 11 protection.] It’s likely to put some pressure on the supplier side, too. But we work with dozens of suppliers and some of the strongest suppliers in the world.
How do you plan to grow your market share?
There’s a numerator and a denominator to market share. The consolidation and closures that have occurred over the past year and that are likely to occur over the coming year are going to decrease the denominator — and therefore Blue Nile market share grows automatically. But we’re also focused on the numerator and want to make sure we have strong sales growth in the near future. Right now we have about a 4 percent share of the engagement[-ring] business in the United States, and we think we can double or triple that in the next five years. We want to expand our market share both domestically and internationally.