“I Like Innovative, Disruptive Businesses”

Can an online jeweler survive the massive pullback in consumer spending? An interview with Marc Stolzman, CFO, Blue Nile Inc.
Kate PlourdFebruary 1, 2009

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.

We want to do that by offering education, quality, and selection. And we’ll continue to expand our service to the customer both in terms of [technology] tools and in terms of access, whether it’s by online chat, E-mail, or telephone.

So in the long term, the recession might be good for you.

Definitely. In a tight economy there’s a flight to value, so we expect more customers will be drawn to Blue Nile. We see this as an opportunity to strengthen our customer relationships and ultimately come out as a stronger player.

Speaking of surviving recessions, Blue Nile is one of the few venture-backed Internet companies that was able to withstand the dot-com bust and go public, in 2004. What gave your company an advantage over other online competitors?

In the early days there were three or four other online retailers with similar capital backing and sales. But what they failed to do was work both consumer value and supplier relationships. We made sure we had the strongest exclusive supplier relationships in the sector. And our customers are constantly giving us feedback. We’ve always had the principle that we start and end with the customer.

Despite the fact that most of the purchase process is done online, our customer-service group gets involved in a vast majority of our purchases, because customers still think, “OK, I’m making a significant purchase, and I want to make sure I’ve made the right decision.” So they get comfort in accessing our diamond experts and knowing the purchase they’re about to make is solid.

What kind of credit assistance do you offer customers?

Our customers are generally younger, with strong educations and incomes, but without much of an asset base. So access to credit is important for them. We have tried to help them by adding a six-month payment option, called Bill Me Later. Credit cards and bank wires remain the primary sources of our purchases, but we’ve had very positive feedback from customers [for Bill Me Later].

Your career path has wound through several different industries, from Starbucks to Imperium Renewables, a biodiesel company, and now to Blue Nile. What attracted you to these industries?

I like innovative, disruptive businesses. Starbucks transformed what was a simple commodity, coffee, and created an entirely new business model. Imperium is doing the same thing by opening the largest biodiesel plant in the nation. From day one, Blue Nile created a disruptive business model that was going to be unpopular in the industry. This is not an industry that wanted transparency. Traditional diamond retailers didn’t want a disruptive business model to interfere with their high-price, high-confusion sales tactics.

We showed that you can have a consumer proposition that is responsible and respectful to the consumer. We have a no-pressure, no-commission sales force without any conflict or personal bias that could cause them to push higher-margin items for their own benefit. That said, I also want to work for an organization that stands for quality. I want to work for a brand that resonates with customers in a way that they know they can trust anything that comes from the company.

Do you wear more jewelry since you came to Blue Nile?

I try not to wear too much bling. But certainly my wife has taken advantage of my working here. And I have young twin girls who I’m sure will look forward to this in the future.