Blue Nile pestel analysis. Blue Nile is a publicly traded company. The company was established in 1999 and is headquartered in Seattle, WA and is one of leading online retailers of diamonds and fine jewelry.

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Final paper

Lars Isaksaetre,

Henrik Oiseth, and

Jason Casey

BUSA 499, Section One

Professor Pham

May 13, 2009

Table of contents

Executive summary………………………………………………………………        page 2

Company profile……………………………………………………………………        page 3

Overview of the jewelry industry……………………………………………….        page 4

External environment…………………………………………………………        page 5

Industry analysis………………………………………………………………        page 10

Jewelry supply chain………………………………………………………….        page 16

Industry value chain, Jewelry Retail…………………………………………..        page 19

Company analysis………………………………………………………………        page 24

SWOT……………………………………………………………………………        page 46

Financial ratios……………………………………………………………………        page 50

Strategies…………………………………………………………………………        page 53

Preferred strategy………………………………………………………………..        page 60

EVA………………………………………………………………………………        page 62

Blue Nile balance sheet……………………………………………………………        page 63

References………………………………………………………………………….        Page 64

Executive Summary

Blue Nile is a publicly traded company. The company was established in 1999 and is headquartered in Seattle, WA and is one of leading online retailers of diamonds and fine jewelry. In addition to serving the U.S. market, Blue Nile offers products to selected countries through its Canadian and UK websites. 70% of their sales are from engagement rings and wedding bands and they are known for being a high-end jewelry retailer. The company offers its products on its websites without actually holding the products. Because of its unique business model, it is able to sell its products at much lower prices than the competitors. After a thorough analysis of the trends impacting the market, and Blue Nile in particular, we have come up with a strategy that will maintain and improve the company’s position in the industry. By increasing its focus on marketing, Blue Nile should be able to gain more of the market share in the online retail market.

Blue Nile has had success since its start up and received multiple awards for its user friendly websites and business model. However, because of the fierce competition in the market Blue Nile operates in the company needs to seek for continues improvement and take advantage of the opportunities in the market place. The company has achieved high customer satisfaction for its existing customers, but lack of brand recognition in the general market place for diamonds and fine jewelry has restricted Blue Nile to perform upon its capabilities.

By increasing the exposure of the Blue Nile brand, the company can achieve a higher customer base and increased revenues. Through increased advertising in magazines, posters and billboards consumers will be more familiar with the Blue Nile brand and what the company has to offer. Currently, most of its international sales come from its English speaking websites, but by making its websites more user-friendly for international customers, the company can reach a broader market. We recommend that the company outsource the creative advertising and creation of a marketing campaign to BBDO. The company operates throughout the world and we believe that Blue Nile can take advantage of their expertise and knowledge. Our estimates show that the increased revenues will far exceed the costs of hiring BBDO. Making these changes will increase the brand awareness and increase the value created for its shareholders.

Company Profile

        Blue Nile was founded in 1999 and today, it is one of the largest online retailers of diamonds. In addition to selling diamonds, it also offers platinum, gold, pearl, and sterling silver jewelry. It is headquartered in Seattle, Washington and it operates in 25 countries, offering products through its United States, Canada and the United Kingdom websites (Blue Nile Inc, 2009). The company is publicly traded on the Nasdaq stock exchange and has received several rewards for its service, price and education.

Its mission is to be the best jewelry retailer in the industry, and it will achieve that by providing high quality products at compelling values through a powerful shopping experience. The company delivers a great customer experience, as well as providing consumers with a unique way to buy rings and other fine jewelry. Blue Nile displays diamond inventories available with the suppliers on its websites without actually holding them until customers place an order. The website offers a wide range of educational materials that give the consumers the ability to handle the entire shopping process (Investor Relations, 1999). Another alternative is to contact its call center where customers can talk to trained diamond and jewelry consultants. Guidance will be given on all steps in the process of buying diamonds and fine jewelry, such as selecting the correct item, purchase, financing and payment alternatives and shipping services.

        Blue Nile has a significant advantage over its competitors in the way it operates. The strategies, distribution channels and supplier solution lower the company’s cost and create barriers to entry. Contracts with suppliers give it the right to sell stones online at volume-pricing discounts. These are only a few advantages that separate Blue Nile from other competing companies, which we will analyze more in depth as we go on with our project.

        The company has a partnership with Bank of America through which it offers finances for diamond and fine jewelry purchases. It also arranges for insurance for jewelry purchased through Jewelers Mutual Insurance Company (Blue Nile Inc Profile, 2008).

Overview of the Jewelry Retail Industry

        The jewelry retail industry generates about $25 million just in the U.S on an annual basis. This is the biggest market and as of today, the largest companies are Tiffany, Blue Nile and Zale. In this industry, price is not the only thing that matters. A company’s profitability is from the quality of its products and how it has been introduced to the market. That is why small companies can compete with the larger chains. Jewelry is mainly sold in department stores and online, but also by mass merchants.

The industry consists mostly of bridal jewelry, fashion jewelry, watches and precious stones and metals. The only one of these that does not suffer as much under the economic conditions that the world is in right now, is bridal jewelry. The reason for that is that the others are considered luxury goods. Jewelry is expensive and difficult for consumers to evaluate. Therefore, customers require good service and expertise when purchasing jewelry. People prefer to buy products from companies that they know and trust, and not by some “new” retailer. That is why building a brand and having a differentiated product is so important in this sector. It is much easier today to find out about products, because most jewelry can be found online and people can make informed decisions.

        The retail jewelry industry is highly fragmented, with the top chains covering about 25 percent of the market in the U.S. The reason for this growing market can be explained by the increase in affluent people, fashion-conscious men and double-income households. Sales in the industry are seasonal in nature and most of the revenue comes in the second half of the fiscal year.

        Online jewelry sales have increased at a steady rate over the past ten years. This popular form of retailing has made it harder for merchants to adapt and a lot of companies have moved their operations online as well. Consumers and businesses value good designers and since jewelry is rarely branded, the importance of product differentiation becomes a key point among retailers (Gottlieb, 2006).

External Environment

For the analysis of the external environment for the Blue Nile and the jewelry industry we have used the PEST framework. This framework describes the factors of a macro-environmental analysis. These four factors are; Political, Economic, Social, and Technological.    


On July 29, 2003 President Bush signed Executive Order 13312; this order also called “the Clean Diamond Trade Act” was implemented to enforce the regulations on diamond trade set by the United Nations General Assembly (Bush, 2003). These regulations came as a result of a meeting in Kimberley, South-Africa in 2000, where states from the diamond producing states from Southern Africa came together to discuss ways to stop illicit trade of diamonds, and ensure diamond trade was not funding violence. As a result of the process started at this meeting, negotiations between governments, the international diamond industry, and civil society organizations resulted in the creation of the Kimberley Process Certification Scheme (KPSC) in November 2002. The KPSC document set the standards for controlling diamond production and trade, and KPSC was put into force in 2003 when participating countries began to enforce the rules. A result of this new resolution the share of illegal diamond trade in the global diamond market is now only 1% compared to 15% in the 1990s (What is the Kimberley Process?, 2002).

The KPSC is also meant to provide incentives to more stable political systems in Africa and other diamond producing countries. African countries are the major producers of rough diamonds in the world. Botswana alone has a share of 27% of the world production volume. Another major producer of rough diamonds is Russia. Political stability in these countries is important for a consistent and reliable supply of rough diamonds, gold and platinum to the jewelry industry, as these countries are the biggest suppliers. As mean to improve political stability and development in their own region, African countries want to add more value to their own diamonds instead of sending diamonds to other countries for processing like; grading, cutting, and polishing (Diamonds Kimberley Process Effective, 2007).

Blue Nile is a U.S. corporation and has to follow U.S. Federal Laws and tax rules. Some of the key U.S. Laws that affect a company like Blue Nile is:

The Sherman Act of 1890 – Makes trusts and conspiracies in restraint of trade illegal; makes monopolies and attempts to monopolize a misdemeanor.

Calyton Act of 1914 – Outlaws discrimination in prices to different buyers; prohibits tying contracts (which require the buyer of one product to also buy another item in the line); makes illegal the combining of two or more competing corporations by pooling ownership of stock.

Federal Trade Commission Act of 1914 – created the Federal Trade Commission to deal with antitrust matters; outlaws unfair methods of competition.

Securities Act of 1933 – Companies publicly offering securities for investment dollars must tell the public the truth about their businesses, the securities they are selling, and the risks involved in investing.

Robinson-Patman Act of 1936 – Prohibits charging different prices to different buyers of merchandise of like grade and quantity; requires sellers to make any supplementary services or allowances available to all purchasers on a proportionately equal basis.

Wheeler-Lea Amendments to the FTC Act of 1938 – Broadens the Federal Commission’s power to prohibit practices that might injure the public without affecting competition; outlaws false and deceptive advertising.

Lanham Act of 1946 – Establishes protection for trademarks.

Celler-Kefauver Antimerger Act of 1950 – Strengthens the Clayton Act to prevent corporate acquisitions that reduce competition.

Hart-Scott-Rodino Act of 1976 – Requires large companies to notify the government of their intent to merge.

Consumer Credit Protection Act of 1968 – Requires that lenders fully disclose true interest rates and all other charges to credit customers for loans and installment purchases.

Sarbanes-Oxley Act of 2002 – Mandates that the singing officers to certify accurate financial disclosure, and that they are responsible for establishing and maintaining internal controls to identify material information regarding the company and its consolidated subsidiaries.

Do Not Call Law of 2003 – Protects consumers against unwanted telemarketing calls.

CAN-SPAM Act of 2003 – Protects consumers against unwanted e-mail, or spam. (Charles W. Lamb, Joseph F. Hair, Jr., Carl McDaniel, 2008)

With the increasing popularity of internet as a market place, for collecting consumer data, and other interactions with consumers, has started to worry online users. Many online users are unaware of how new technology collects and stores data, that such information are sold from companies collecting it to other entities that makes use of this data. While privacy policies for U.S. companies are few or close to none existing, the European Union has strict regulations regarding personal information. The European Data Protection Directive states that any business that conducts business with European organizations must comply with EU’s rules for handling such information. The directive prohibits distribution of private information to parties not doing enough to protect privacy. Australia is another country that has implied new laws regarding private data. Companies are required to follow strict rules when collecting, storage, and use of personal information. Common privacy laws are that information should be collected lawfully and only used for its initial specified purpose, and after the information is used for its purpose it shall be deleted. Such international and local foreign laws have to be followed to conduct business in a global environment (Charles W. Lamb, Joseph F. Hair, Jr., Carl McDaniel, 2008).

Blue Nile is based out of Seattle and Washington State; this requires the company to follow Washington State Legislative laws and King County regulations. These relates to employment law, regulations regarding conducting business inside the state of Washington and; State, County and, City tax laws. In the city of Seattle an “employer” means any person who has one or more employees or the employer’s designee or any person acting in the interest of such employer.”Marital status” is in the city of Seattle the presence or absence of a marital relationship and includes the status of married, separated, divorced, engaged, widowed, and single or cohabitating. This will directly affect a company regarding benefit packages it might set up for it employees (Doing Business, 2009).


The economic climate is also often referred to as the health of a nation’s economy or the health of the global economy. As of today, February 2009, the world economy is in a recession. In order to improve the current situation have the federal bank lowered interest rates to increase the money supply in the market, governments around the world are creating stimulus packages to improve the current situation. The general opinion is that government spending and loans should help boost the economy out of the stagnation it currently is in.

Bad debt and increasing unemployment rates are key issues in today’s situation. Decreasing equity prices and drop in housing prices leave people uncertain about their own wealth. In addition to uncertainty with the unstable and decreasing job market has slowed down the biggest engine in the U.S. economy, the American consumer (Global Economic Forecast for 2009; Will Deamnd for News Outpace Supply?, 2009). The consumer confidence index published by The Conference Board showed further decline in February 2009 to an all-time low, the index began in 1967. The survey concludes with skepticism in the outlook of the general economy (Consumer Confidence Survey, 2009).

The current situation gives people and businesses with good liquidity opportunities for cheap acquisitions of stocks, real-estate, and other companies. As the downturn in the U.S. Economy and troubled bank sector was the first signs of the recession that is current today, the U.S. dollar decreased in value. The last couple of months have shown that people feel safer investing in the big economies in the global environment and the U.S. dollar has again increased its value.


        Another segment of the general environment is demography. This is concerned with the size of the population, age, gender, ethnicity and the distribution of income. Because many companies compete in global markets, this segment is often globally analyzed (Michael A. Hitt, R. Duane Ireland, Robert E. Hoskisson, 2009).

        The world’s population continues to grow and today there are about 6.6 billion people walking the earth. Even though birth rates are declining, the population is expected to reach over 9 billion in forty years. Most of the population growth takes place in Africa, Asia and Latin America. Among world regions, the largest proportionate increases in share of world population will continue to be in the Sub-Saharan Africa, which is expected to grow to be over 1 billion in the next decade (Population Size and Growth). The biggest problem for countries that suffers from an aging population is the need for workers. The U.S. has an advantage in the way that immigration is high, and so is the birthrate. Asian and European countries on the other hand are looking into overcoming these problems by making workers work longer than they were set to.

        The growing population of baby boomers will eventually hurt the economy and individuals. The reason for that is that as people get older they continue to spend money, which will lead to an increase in the economy. When all these baby boomers are gone, governments are going to have to step in and cope with this in a matter that does not favor the people as a whole, or as individuals. This means that people might lose their benefits and they have to pay more taxes. This clearly shows that age has an effect on the economy.

        The demographic age groups are divided based on age. “Tweens” is considered the group of the population aged between 8 – 14 years old. The next group is “Generation Y” born between 1979 and 1994. This group is considered to be the children of the baby boomers. This generation group is three times larger than “Generation X” (born between 1965 and 1978). Generation Y is characterized by their understanding of information technology and focus on luxury. Raised by the baby boomers has increased the priority of the family for generation Y. This generation has also grown up with everything being automated and expect things done right now (Charles W. Lamb, Joseph F. Hair, Jr., Carl McDaniel, 2008).

Generation X is at that stage in life where they have launched their careers and started families. Building a home and settling down is the main characteristics of this generation. Generation X in known for being cynical consumers and they are considerable fewer than the baby boomers and generation Y. In the next ten years generation X will enter the age 45 to 54, the age range that is known to be the age range that is known to be the moneymaking years.

Baby boomers born between 1946 and 1964 are considered to be America’s mass market. They are now entering the face of their life where they settle down after the kids have moved out and started their own lives. With money saved up and all major investments done, this group is considered to be the generation with the biggest purchasing power.

Consumers’ income and purchasing power is an important factor of the external environment. The financial power of woman is increasing, as women are more successful in building their own carriers. Even if the highest incomes usually are earned in the big city centers, the costs of living are also bigger in these places. New York City has almost three times the cost of living than Youngstown, Ohio (Charles W. Lamb, Joseph F. Hair, Jr., Carl McDaniel, 2008). This means that one need to make close to $300,000 in New York to have the same standard of living as someone earning $100,000 in Youngstown. People not living in the big city centers are often not a targeted market as they are living geographically longer apart.

American core values and culture trends are also important factors of the external environment. Values are strongly held common beliefs and there are four basic values that have had a strong influence on the American society, and these are; 1. Self-sufficiency, everyone should stand on their own feet. 2. Success should be rewarded to those with education, work hard, and play by the rules. 3. Hard work and ethics is central to starting and caring for a family. 4. No one should expect to be treated differently than anyone else.


Technological innovations are continually making the daily life to those who have access to it easier, more efficient and effective. For technology-based companies, like Blue Nile, change in technology is a very important factor. A firm can use new technology to separate themselves from the competitors and create a competitive advantage. If a firm is not able to adapt to innovative changes and implement new technologies successfully, it would risk of removing itself from the marketplace.

Technological advances do not only create new opportunities, it could also create new threats. With new marketplaces that make it easier to sell product and services online it is now easier to counterfeit, for example selling unlicensed products online through auction sites. Other treats are hacking and spoofing. Hacking that someone manages to gather sensitive information through the use of new technology and take advantage of such information. Spoofing is the creation of TCP/IP packets using someone else’s IP address. Through spoofing someone can intercept information sent between two points, redirecting information from one source to the hacker’s source.

Another issue that affects businesses is that new technology has lowered the barriers for people to express their opinions. At the same time as new forms of using technology like blogging enabled by Web 2.0 makes it easier firms to communicate with consumers. It also makes it easier for consumers to create websites where they discuss and publish their own opinions that could have a negative effect for a company.

Industry Analysis

        For this analysis we have used the framework developed by Michael. E Porter. This is later referred to as Porter’s Five Forces Model. This is a micro-environmental analysis of an industry that consists of these five forces; 1. Supplier bargaining power, 2. Bargaining power of buyers, 3. Threat of new entrants, 4. Treat of substitute products, 5. Competitive rivalry.

Supplier bargaining power

Methods used by suppliers to get power over companies competing in the same industry are: reducing the quality of their products and increasing prices. This means that if a company were unable to recover these increases in cost through its own prices, their profitability would be reduced (Michael A. Hitt, R. Duane Ireland, Robert E. Hoskisson, 2009).Today, the world’s biggest supplier of diamonds is De Beers. Although, they do not have as big of a market share as they used to, they are still one of the leading suppliers in the industry with nearly half of the world’s supply by value (Diamond Trading Company, 2009). However, this does not mean that they are the only supplier in the industry. Some companies have taken action against De Beers’ monopolistic way of doing business. Small companies have merged together, which has changed the industry from having only one major supplier to several suppliers. Today, De Beers does not have the bargaining power they used to, because there are several other firms competing in the same sector. However, De Beers still control much of the pricing in the industry. The customers of high-end jewelry are highly concentrated, which can lower the bargaining power of suppliers. Another thing that makes suppliers have less bargaining power is that there are marginal costs of switching to another supplier (Barmecha, 2007).The competition is increasing in this growing industry, and therefore companies need to adapt to the market in order to survive. Supplier power is to a certain extent weakened by the fact that mining equipment is highly specialized, and equipment manufacturers would find it hard to find a market for their products outside the industry. That said, individual suppliers often use technological innovations in order to differentiate their services and increase the retailers’ reliance upon them (Blue Nile Inc Profile, 2008).

There are no large differences in the inputs of the suppliers that can put one company in a better position than the others, except the ownership of more mining companies. For the end user, there are differences in the diamonds that you can buy. This is also the case with the mining companies, but since all diamonds are unique, the companies have all types of diamonds in their mines. Diamonds differ from gold in the way that they do not have a standardized value. Each varies by color, clarity and weight, and as a result, one diamond compared to another is not necessarily a good substitute (Barmecha, 2007). Although, diamonds are the largest part of jewelry sales, gold, rubies, sapphires and emeralds are other factors that drives the industry.

A few decades ago, when the big online retailers started up their businesses, the supplier power was probably higher than it is today. It is easier to find new suppliers on a general basis in this industry today, as long as there are diamonds to be found. Some companies have built their business around their retailers and if some of their contracts were eliminated, their existence in the industry would not last very long.  

As mentioned, the bargaining power has shifted and it will continue to shift as new mines come on stream. However, a large company like De Beers has been smart when thinking about the possibilities within the industry they are competing. When combining a mining company and a jewelry retail company, they have taken their business to another level. Instead of only selling jewelry to other retail companies, they are also distributing jewelry themselves, which can influence the balance of the market. This way of doing business is called forward integration (Barmecha, 2007).

Barriers to entry

        The online diamond industry is considered hard to enter. Even though the Internet has changed the world and how businesses operate, a company still needs to have all the connections with its suppliers and distributors that they can trust. They may have a barrier to entry on the operational side, in terms of obtaining access to the major distributors. Since there are only a few big companies that supply jewelry, firms need to make sure that mining companies can provide the amount and quality that customers demand.

        It takes time to build a strong brand in this industry, and a lot of money will be needed from the time the company is launched, to the time the brand is known and accepted by the customers. If the company is already established in the form of department stores, it will have an advantage in the online industry if the brand has a good reputation. It is a capital-intensive industry, where a great amount of dollars is spent before you start making any profits. Marketing, logistics and facilities cost money, and when entering a market that is already established it is going to be tough. However, online retailing is increasingly profitable and companies can reach a higher amount of people.

        When companies want to enter the online jewelry industry, they need to be careful when picking their suppliers. They must be sure that the diamonds they are buying are conflict free. All diamonds that are sold must be imported with a Kimberly Process certificate (Combating Conflict Diamonds, 2009). This process is a joint governments, industry and civil society initiative to stem the flow of conflict diamonds (What is the Kimberley Process?, 2002).The industry used to be self-regulated, but that did not work. The governments have let the diamond industry off the hook and they need do more to make sure that the industry is conflict free. In addition, jewelers must adhere to fair trade and credit laws, but are not hindered by any trade-specific regulations. However, they are required by the FTC (Federal Trade Commission) to accurately advertise and describe gemstones (Gottlieb, 2006).

        De Beers controls the majority of the world’s distribution of jewelry. A new online retailer of jewelry would most likely consider using De Beers as their supplier because of their market share, as well as name recognition. Making a brand and to be accepted by the market is going to take a lot of time and effort. Also, when entering a new industry, especially the online retailing industry, existing firms are going to do whatever they can to make sure that they do not lose their market share or profitability. However, it is not easy to stop or hinder new entrants in the online industry because it is so big. Anyone can use the Internet, which makes the industry more accessible. Companies that have been using the Internet for some time would have to use their knowledge and expertise to drive new entrants out of the market.

        Companies may have patents and copyrights on their products, but by the time those get approved, someone else might have stolen the idea. Some retailers actually have proprietary agreements with the ones who design the jewelry. Most often, the agreement is that the design is sold exclusively through the company. Some retailers also hold agreements with manufacturers to sell products on consignment (Gottlieb, 2006).

        The advantages of entering this sector can be huge profits. Especially, if a company has a well developed strategy that can save them money, but at the same time make money. There is money to be saved for a company that goes online, because of the unlimited use of space when advertising for new products. Fewer people are needed in the operations and therefore overhead costs will not be as much.

Threat of Substitutes

        In Michaels Porter’s 5 forces model one of the aspects is the threat of substitutes. Substitutes are products that are in other industries but that can be used to replace the product within a given industry. An example of this would be drinking water instead of soda pop. They are easily interchangeable because they both quench your thirst but different due to their taste and contents. If the price of soda pop was to double tomorrow less people would drink soda and they would substitute it by drinking water. Substitute products affect the products price elasticity. A product will become more elastic as more substitutes are readily available.

The overall threat of substitutes depends on four major ideas: The first being the overall quality of the substitute. Is this other product better and will it fulfill the needs of the consumer better? Second is the buyer’s willingness to substitute this product. Are they brand or company loyal? The next aspect is the most decisive when it comes to actually substituting products and that is the relative price and performance of substitutes. Is the substitute cheaper and does it do a better job? The final aspect is the cost of switching to a substitute. Does the consumer face additional costs by changing products? All of these aspects play key roles is determining what products consumers purchase and if they continue to purchase these goods.

        The jewelry store industry is has many substitutes that coexist with it. Jewelry is considered to be a luxury good therefore anything that is not a necessity and typically of expensive taste can take the place of jewelry. When a consumer is going to spend a large amount of money on something special or meaningful they don’t necessarily spend it on jewelry, they have many options. Some common substitutes for jewelry would be any designer handbags and clothes, luxury vehicles, luxury home amenities, and any other items that are not necessities and considered luxury goods. When a consumer is deciding to spend the kind of money they would on jewelry items they have to consider if they will get more out of something else or will the jewelry provide what they are looking for. Typically jewelry is purchased for sentimental value and to be a lifelong good. For a sentimental meaning there is nothing that can really replace the meaning that comes from jewelry. Especially when it comes to engagement rings. There is no substitute for an engagement ring. The act of giving a ring to the person you are going to marry has been around for centuries and will never be replaced. Most people at some point in their life will spend money on an engagement ring for their partner.

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        When it comes to the switching costs of changing to a substitute there are not any. Consumers have no obligation to purchasing jewelry over other luxury goods therefore there are no costs to the consumers. If someone is going to spend a large sum of money on an item that is not a necessity they are going to spend it on what they please and most of the time if they can afford it they will spend it on multiple items. Luxury goods are a privilege and do not require any costs from switching from one substitute to another.

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