June 1, 2007, 12:00 AM

PROFILES: The Top 500

These four Top 500 e-retailers caught our attention. Here`s how.

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%.

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