These Top 500 e-retailers caught our attention. Here`s how.
BlueNile.com
A passion for customer service makes Blue Nile
the top niche merchant in the Internet Retailer Top 500
By Mark Brohan
Blue Nile Inc. founder and CEO Mark Vadon knows a golden opportunity when he sees one. After giving up on conventional jewelers who couldn’t answer his questions about the quality and price of different engagement rings, Vadon turned to the Internet for answers.
In the process of researching engagement rings online, he located InternetDiamonds.com, an online jewelry site and one of the first sites to post certificates that authenticate the color, clarity and carat weight of diamonds. He liked the site and its potential so much he acquired the company by taking the owner to dinner and writing a $5 million promissory note on the back of a dinner napkin.
Today InternetDiamonds.com is Blue Nile (No. 49), the largest online jewelry retailer with annual sales expected to reach $305 million in 2007, an increase of 21% from $251.6 million in 2006 and 50% higher than $203.2 million in 2005.
60,000 stones
With 60,000 stones and a global network of diamond suppliers, Blue Nile also is the biggest web retailer of engagement rings and a -specialist in selling to the high end of the online jewelry market. “We’ve found a niche that we are going to stick with and grow,” Vadon says. “Every three years the company has doubled in size and we intend to keep that momentum going.”
Blue Nile is a prime example of the power of niche retailing and a demonstration that niche -retailers aren’t necessarily consigned to a small part of the market. “Blue Nile seized on the opportunity that educated buyers will purchase higher-end jewelry on the Internet and they’ve never looked back,” says Ben Janowski, president of Janos Consultants, a New York-based diamond industry and retail consulting firm. “The diamond industry once thought that -jewelry could never be sold online, but Blue Nile proved the critics were wrong.”
Business at Blue Nile is solid—the publicly owned company has been profitable since 2002 and annual sales could reach $1 billion as soon as 2012, the company says. But other online and multi-channel retailers, including national chains such as Tiffany & Co., Zale Corp. and Ross-Simons Inc., also see significant market opportunity.
Today, Blue Nile generates 6.3% of all online jewelry sales, estimated by Forrester Research Inc. to reach $4.8 billion this year. But to -sustain its market lead, Blue Nile is -embarking on an ambitious agenda to expand overseas. The company also is working to improve the customer experience and add even more content and navigation features to BlueNile.com.
Going overseas
Blue Nile built its business model around a specific market niche: men shopping for high priced jewelry, especially engagement rings. About 86% of its customers are men. In an online jewelry market where the average ticket is about $300, Blue Nile shoppers spend about $1,536 on each purchase. A typical order for an engagement ring at BlueNile.com is about $5,500, compared with an industry average of about $2,800. “We know our core customers very well and have built the business around giving them the content and merchandise selection they need to make an intelligent decision,” says Blue Nile senior vice president of marketing Darrell Cavens. “Aside from their car and maybe a house, this is the biggest purchase many of our customers have ever made.”
With its success in the U.S., Blue Nile is now taking its niche approach overseas. About 97% of sales come from the U.S., but the company’s fastest-growing customer base are international shoppers. Blue Nile has web sites in Canada and the United Kingdom, which generated sales of $8.3 million in 2006, an increase of 151.5% from $3.3 million in 2005.
The company recently opened a new distribution center in Dublin, Ireland, to serve European jewelry buyers, who account for about 13% of all worldwide fine jewelry and diamond sales. “We felt it was more important to get out there now and then learn and adapt to those markets,” says Cavens. “A different alternative could have been to do a year of research, open a facility, put a marketing and customer service team in place and hope that the demand came. We took the other way.”
Attention to detail
One of the keys to success in niche retailing is attention to detail, which gives customers a certain comfort level that the retailer they have bought from is really an expert in the area. Vadon keeps Blue Nile focused on attention to detail, especially important in the jewelry market. “We are a niche retailer that tries to do the same thing better and better,” Vadon says. “We have reams of -information on our customers, but we can’t see them. The next best thing we can do is pay careful at-tention to customer service and look at the things we can improve such as our level of customer service and packaging.”
Before each order is sent out from the Blue Nile fulfillment center, the jewelry and its packaging are subject to a 26-point inspection. Inspectors take a magnifying glass to each piece of jewelry to check for chips and for the proper color and clarity. Each piece of jewelry also must be placed uniformly in its packaging using the same quantity and quality of bubble wrap, with the label on each delivery box placed in the upper right corner the same way for each shipment.
In another example, Blue Nile recently analyzed hundreds of wood stains to pick a new final shade that would make its mahogany jewelry boxes look more consistent when customers take the box out of the shipping package. Blue Nile can achieve its attention to detail because it keeps most of its product creation in-house. It recently expanded its Seattle fulfillment center from 13,000 square feet to 27,000 and it cuts most gems and completes the setting for most orders in-house. A custom engagement ring can be personalized on BlueNile.com, the diamond cut, polished and placed in a setting and sent to the customer in about four business days. Blue Nile’s on-time order delivery rate is about 99.96%.
Blue Nile is constantly working to improve customer service. For instance, Vadon still listens to about 10% of all incoming calls to ascertain what customers like and dislike about their shopping experience. “I think it’s very important to stay in touch with the customers,” he says. “That’s how we learn what we can improve.”
Attention to detail and specialization is paying off for Blue Nile—about 50% of all first-time male shoppers become repeat buyers and engagement rings now represent about 70% of Blue Nile’s total sales. Today Blue Nile controls a third of sales among specialized online jewelers, according to the Top 500, but the company also isn’t entirely running away with the market. Other significant online jewelers include Bidz.com Inc. (No. 86), with 2006 web sales of $132 million, followed by Tiffany (No. 98) with $120 million, Ross-Simons (No. 139) with $73 million, Jewelry Television (No. 141) with $70.2 million, Ice.com (No. 182) with $49 million and Zale (No. 189) with $45 -million. The web sales for Tiffany are an Internet Retailer estimate.
The jewelry business is highly fragmented and other online -jewelers are building their own niches. Blue Nile raced ahead in the online jewelry market because of its ability to attract first-time buyers with higher household income. But now the fastest-growing part of the online jewelry segment market is selling to security-conscious and more budget-minded shoppers looking for deals on earrings, pendants, necklaces and bracelets, says Shmuel Gniwisch, CEO of rival Ice.com. “Blue Nile won the race for selling to first-time Internet users who were professionals, such as doctors and lawyers with very good incomes looking for a very specific purchase, but now there are other specific online jewelry segments that customers can also shop,” says Gniwisch. “Blue Nile specializes in engagement rings and I can’t see Blue Nile selling $1 billion of just one category of rings. At some point they are going to hit a sales wall.”
But Blue Nile believes it can achieve the goal of $1 billion in annual web sales by sticking with its current business model and by continuing to niche out the higher end of the online jewelry -market, a strategy that appears to be -working. In the first quarter, Blue Nile’s average orders for jewelry priced at more than $25,000 rose by 69% over the previous year and included seven transactions valued at more than $100,000. “We are just going to keep on doing the same thing better and better,” Vadon says. “We have no intention of growing complacent.”
mark@verticalwebmedia.com
Costco.com
A mass
merchandise
retailer has a
niche experience
Smaller specialty retailers were the fastest-growing merchants in the 2007 Top 500 Guide, but Costco.com proves that a mass merchandise site can also experience start-up-style growth by focusing on the right niche.
With Costco.com, the online arm of Costco Wholesale Corp., that niche is serving affluent members with annual household income of more than $78,000, including 25% with incomes greater than $100,000. In 2006, Costco.com (No. 21) was the fastest-growing mass merchandise site with 2006 online sales of $880 million, an increase of 65% from web sales of $534 million in 2005. It was also the fastest growing site among the 50 largest and the second fastest growing among the Top 100.
Costco.com carries the same number of SKUs—about 4,000—as a typical Costco -members-only warehouse. But Costco.com differentiates itself from the company’s bricks-and-mortar locations by carrying bigger and more diverse items. Many items are seasonal at a typical Costco warehouse. But not on the web. “Our sites enable us to offer large and bulky merchandise that we are unable to carry in our warehouses year-round, such as furniture, spas, outdoor play sets and patio furniture,” says Costco senior vice president of e-commerce and publishing Ginnie Roeglin. “Most of the items on our sites are not available in our warehouses.”
College grads
About 74% of Costco.com’s customers are college graduates and 90% are homeowners. 50% of customers who shop online also are executive members, who pay a higher annual fee for perks such as annual rewards and lower prices on services such as check printing, auto financing and long-distance phone service.
Costco, which launched its U.S. e-commerce site in 1999 and a Canadian site in 2005, uses its online channel to introduce warehouse products, promote multi-channel offers and place orders for specialty items such as tires. But a big part of Costco.com’s mission is giving members a wide range of consumer brands at warehouse prices. “Members know they will get the same experience whether they are shopping online or in one of the warehouses, but on the web sites they are going to find diversity and services that make it easier to complete a re-order,” Roeglin says. “We derive a large percentage of our business center sales through online orders.”
Over time Costco has upgraded Costco.com with a redesigned home page with a new category and sub-category design, improved search, bigger images and zoom technology. In 2007, Costco.com also is planning a number of new site upgrades, including giving members the ability to ship items to multiple addresses in a single order and to schedule preferred arrival dates on many gift items. “We will continue to develop and refine our search capabilities to make it easier for members to find what they are looking for,” Roeglin says. “We also plan to migrate to a new front-end platform early in 2008.”
More improvements
Along with the planned site improvements, Costco.com is on track to generate online sales of $1.2 billion for its current 2007 fiscal year, an increase of 36.4% over 2006. To achieve that sales target, Costco.com is adding merchandise to categories such as -sporting goods, housewares, baby products and gourmet foods. Costco also is testing an interactive kiosk program that will enable customers to place orders online when they are shopping in a warehouse.
Even with sales that position Costco.com firmly among the largest online retailers, however, the web site still is a kind of a niche. “We find that the cream of the crop shop online at Costco.com,” Roeglin says.
mark@verticalwebmedia.com
GreenMountainCoffee.com
Green Mountain wants customers to join the club
By Bill Briggs
Café Express is the web-based coffee buying service for Green Mountain Coffee Roasters customers and the company’s marketing plan begins and ends with one simple goal: Get customers to climb aboard.
Green Mountain is the fastest-growing company in the catalog/call center category of this year’s Top 500 Guide but the company’s single-minded focus on driving customers to its web site represents the kind of marketing tunnel vision shared by many of the Top 500 companies. Green Mountain’s online sales for 2006 were $17.1 million, an increase of 235.29% compared to $5.1 million in 2005. They were enough to rank Green Mountain No. 314 in the Top 500.
“When it comes to the Green Mountain coffee web site, a third of our sales come from club members,” says Ken Crites, director of the consumer direct business segment, which includes club, catalog and web sales. In essence a subscription coffee service, Café Express is the fastest growing segment in this fast-growing company, Crites says. “Everything we do is about getting people into our Café Express club,” he adds.
The company started selling coffee to consumers in 1981 and news about its product began to spread outward from its Waterbury, Vt., headquarters throughout New England, Crites says. The company sold whole and ground coffee by the bag exclusively until a few years later when the Internet began to take off. At about the same time Green Mountain invested in Keurig, a single-cup coffee and tea brewing equipment maker for commercial and consumer customers that also packages coffee from other roasting companies.
Growth has been steady since then, Crites says. Overall sales for the fiscal year ending Sept. 30, 2006, were $225.3 million, up 39% from $161.5 in fiscal 2005. Web sales accounted for 8% of total sales in fiscal 2006, compared to 3% in fiscal 2005.
Growth by acquisition
Some of Green Mountain’s web sales growth last year stemmed from its acquisition of Keurig.com in September, Crites says. Green Mountain had invested in Keurig in 1996 to gain a foothold in the office coffee business. “We liked the product so much we bought the company,” he says. Keurig.com still functions largely independently, he says, but the two businesses complement each other. They sell each other’s products, but derive the majority of their respective income from core products. “We sell brewers—at a loss. It’s the K-cup coffee where business has taken off,” he adds.
The “K-Cup” is a plastic package shaped like a pint of cottage cheese, but about a tenth the size. The cup is inserted into a Keurig brewing device and in a few -seconds yields a 7.25 oz. to 11.25 oz. hot beverage.
Green Mountain has adopted a deliberate strategy of moving customers to its web site. After an initial sale that could come from one of the company’s eight catalogs via telephone or web, new customers are encouraged to visit GreenMountainCoffee.com. Once they have completed the free sign-up, they can establish a standing order size and frequency, at a discount. Future transactions then are conducted online, where customers can change their order any time, and all subsequent orders are attributed to the web.
Green Mountain is now planning to build on its strong growth, but has few e-commerce technology plans until mid-2008. “Once we merge some back-end information systems between the companies we’ll probably look at other tools,” Crites says. Outsourcing likely will fit into the plan, but for the present the goal is to ride the wave. “Right now we’re trying to get brewers into homes, trying to seize what momentum we already have,” he says.
Crites says Green Mountain expects similar growth for 2007, if not as flashy. “Our online sales are up because we combined the two sites and they are growing like crazy. We think both will grow this year, but we won’t have that bump from the acquisition,” he says.
Plans include introducing more varieties of K-Cups on top of the 40 already on the market. The addition of cocoa was a big winner in 2006, Crites says. “Now we’re looking for other ways to bring our products into consumers’ homes. We’ll include more product innovation, such as improved brewers,” he adds.
billb@verticalwebmedia.com
BigFishGames.com
No playing around
when it comes to creating loyal customers and
attracting new ones
By Bill Briggs
Triple-digit growth percentages are nothing new to Big Fish Games Inc. The web-only video game developer and merchant posted $24.1 million in sales for 2006, up 180% from $8.6 million in 2005. Big Fish Games, the fifth fastest-growing company in the Internet Retailer 2007 Top 500 Guide, also logged sales growth of 125% from 2004 to 2005.
Like many of its peers in the Top 500 Guide, this niche e-retailer has turned web analytics into marketing success. In Big Fish Games’ case, 2006 sales growth came from a combination of aggressively exploring new ideas—such as social -networking—then adding its own spin. As a result of its hefty sales increase, the company ranks No. 271 -overall this year, compared to No. 395 in the 2006 edition.
Big Fish’s sales increase for 2006 is a classic combination of explosive growth in new buyers and careful nurturing of existing customers and affiliates, says Paul Thelen, founder and CEO of the Seattle-based e-retailer. Success on both fronts can be traced to the September launch of the company’s My Game Space social networking site. “A lot of our 2006 growth came in the last four months of the year. Without My Game Space it would have been noticeably less,” Thelen says.
A twist on social networking
Registered customers can use My Game Space to set up a web site—which they can personalize to their liking—and interact with other online gamers, write reviews and build favorite game lists. Customers, in turn, have shown they like Big Fish Games. The company serves more than 500,000 casual gaming customers daily at BigFishGames.com, where it offers more than 400 interactive and regular game titles. Customers have access to online and downloadable games accessible by subscription.
My Game Space is rooted in Big Fish executives’ realization in 2005 that they were spending a lot of money each month to acquire new customers. “It was getting increasingly difficult to get a healthy return on every dollar spent. We were approaching a plateau where one dollar spent only returned one dollar,” Thelen says.
Big Fish was mesmerized by the success of social networking sites such as MySpace and YouTube. “They were really taking off with almost no money spent as far as generating traffic,” Thelen says. But after conducting surveys and focus groups, Big Fish executives were surprised to find their Internet--literate customers had a different view of social networking from adolescents and college students who like to see their own pictures online. “Almost 0% of our users participate in MySpace and YouTube. In our demographic, 75% are over age 35 and 75% are female. They are not the MySpace crowd,” Thelen says.
Big Fish customers said they like keeping in touch with their friends and sharing their passion for casual video games, however, so the company decided to establish an online forum for exchanging such information. The project took 14 months to develop and since September, more than 250,000 customers have created their own online sites. And they have invited more than 1.3 million new customers to Big Fish Games, Thelen adds, more than half of whom came in March and April.
Analyze this investment
The company’s foray into social networking results from its business model. “Big Fish has a hardcore focus on analytics-based marketing,” Thelen says. “Every month we have 15 or 20 different ways to spend money, then once we’ve invested in some we analyze how the projects returned on the investment. If they produce, we expand them aggressively. If not, we either change them or cut them out completely.”
Big Fish also pays My Game Space customers for referring friends to the site and has an -affiliate or distribution partner plan for customers with their own web sites. Under the patent-pending program, individual customers and those with web sites can earn rewards such as free games or a 25% payment to themselves or a designated charity. When Big Fish realized some of the biggest reward payouts were going to customers using My Game Space as a pseudo web site, they developed new technology to exploit the opportunity.
Big Fish developed tools including XML feeds and turnkey game web sites that affiliates can easily deploy to get a game site on their URL, Thelen says. For its efforts, the last step—downloading or buying—goes through Big Fish and the company captures the customer information. The e-retailer then pays the site owner who generated the referral.
The program appeals to partners for several reasons. For one, the referral fees continue as long as a partner’s referred customer continues to buy games from Big Fish, as opposed to many affiliate programs that run for a set period of time, Thelen says.
A sound model
The company’s ability to pay such a high bounty is unprecedented, Thelen contends, and stems from its high gross margins. Thelen attributes high margins to Big Fish’s sales volume from customers who average 10 game purchases a year compared to the industry norm of 1.8. High-quality, reasonably priced games help keep customers coming back, which is critical to growth. “You can’t grow 180% a year with new customers alone. You have to retain many of them and we are very good at retaining customers and partners,” he says.
Big Fish Games has plans for new products this year, such as free games for price-sensitive customers. Other plans are under wraps. The 2007 financial outlook? Sunny, Thelen says. “Looking forward, the model is sound. The trick is acquiring new customers,” he says.
billb@verticalwebmedia.com
