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Diamond in the Rough

By Mac Greer
November 15, 2006

Founded in 1999, Blue Nile has become the leading online retailer of engagement rings. The diamond retailer has more than half of the engagement ring market online and almost 4% of the engagement ring market in the U.S. The Motley Fool's Mac Greer recently talked to Blue Nile (Nasdaq: NILE) founder and CEO Mark Vadon about the business of hard rock.

Mac Greer: Blue Nile was born out of your own experience in looking for an engagement ring. Tell us that story.

Mark Vadon: Sure. I was, back in the late '90s, shopping for an engagement ring and, I think like a lot of male shoppers, I didn't really know what I was doing. I had spent a lot of my life trying to avoid going into a jewelry store, and then I was in the middle of it trying to do a good job and buy a great engagement ring. As I went to stores, what I was seeing was there wasn't a lot of information. I could look in the case and I pretty much had to make a decision based on the visuals of the product. I am the type of guy who, if I am going to buy a stereo, I am going to research it. I want to know what I am buying. If I am going to buy a car, I am reading all the magazines before I make a purchase. You couldn't do that with jewelry.

Born out of that experience, I had the desire to go out and do things differently. I actually went to the Internet when I was shopping and found a small store in Seattle that had a tremendous amount of content, and I ended up buying an engagement ring from that store, and in the process met the person running the store, and I bought his business in 1999 and built that small business into what Blue Nile is today.

But when you look at my shopping experience, it is not that dissimilar to how most men approach this experience, and Blue Nile really is our attempt to completely redefine that experience and make it a lot easier for men to make significant high-end purchases.

Mac Greer: And where did the name Blue Nile come from?

Mark Vadon: You know, in the early days we actually came up with the name Blue Nile just trying to find a brand name that would be flexible, because we didn't want it to be too focused on diamonds. We wanted to be able to expand the product line to other forms of jewelry. We wanted it to be simple, easy to spell, because you have got to remember it when you type it into the Internet, and we came up with that name, and it has worked great with consumers. Consumers really have taken to the name and feel it has got some good, high-end imagery associated with it.

Mac Greer: And were you at all influenced by Amazon (Nasdaq: AMZN)? Because I think people tend to think, "Amazon, Blue Nile" -- expansive names.

Mark Vadon: As crazy as it seems, we did not even think of Amazon when we were picking the name Blue Nile, but I do have to point out that the Nile is the only river (longer) than the Amazon. But we've got a lot of years to execute in front of us before we would ever get close to their size.

Mac Greer: And what was the initial response like when you first started sharing the idea for Blue Nile?

Mark Vadon: When I told people about this idea in 1998 or 1999, people frankly thought I was crazy when I said to people, "I am going to sell diamonds over the Internet." One of my key employees today, one of my senior-most people, when I told him what I was going to do, his first response was, "OK, now I know the world is crazy, because they are trying to sell everything over the Internet." It was just a very "out there" idea in 1999.

If you go back and read the pundits in 1999, the Jupiters and such, the experts, they were saying, "This is not a product line that will work over the Internet. It is too much money; people won't spend this much money over the Internet." But what we were seeing was, just like I went out and bought a diamond over the Internet, there were a lot of consumers who were doing it. It made sense to consumers and I think in the end, that is really what mattered.

Mac Greer: And talking a bit more about the history of the business, when did you first realize that you had a viable business, that you could make a living at this?

Mark Vadon: We launched the business in May of 1999, and within three months of starting the business, we were doing a million dollars a month in revenue without spending much on marketing. We were spending almost nothing on marketing.

What was happening [was], despite people looking at this business, investors and industry experts and jewelry experts looking at the business and thinking that it didn't make sense -- it made sense to consumers, which in the end is what really matters. So we saw that right out of the gate. If we could provide value and provide a great experience for people, they would buy from us, and they would tell their friends about it, and it would just keep growing.

So in our first year in business, we generated $14 million in revenue; our second year in business, it went up to $44 million in revenue, and it has just kept growing every year since then. This year, hopefully, knock on wood, we will surpass a quarter billion dollars in revenue.

Mac Greer: And Mark, as you were building the business, what companies influenced your thinking? Were there some specific companies out there that you looked to and said that they provide a pretty good road map for Blue Nile?

Mark Vadon: Yeah. The businesses that have inspired us over time have not come from the jewelry industry because, I think, by and large in the jewelry industry, people are pretty much doing the same thing. So the people we look to for inspiration are companies like Starbucks (Nasdaq: SBUX), which we absolutely -- our business is right down the street from their headquarters, but we think their approach to consumers is absolutely incredible. We love them. I am a big fan of Whole Foods (Nasdaq: WFMI), a company that has gone into a very competitive industry and just redefined the experience for consumers and by doing that, they have built up a fantastic growth business.

So those are more of the businesses we look to for inspiration. It is very customer-centric businesses that are willing to just redefine how you go about selling products.

Mac Greer: And Mark, looking back on your career, what was your best business decision and what was your worst?

Mark Vadon: Gosh, I think our best business decision was really coming into a business and being willing to go against the grain, being willing to redesign a buying process to be what consumers wanted and not just to be what was traditional in the industry.

Our worst decision: Back in 2000, we spent a heck of a lot of money on marketing. I would love to have those marketing dollars back today, because I think what we found over time is the Internet is not -- selling products on the Internet is not about splashy marketing. It is about incredible execution for consumers, having great products, competitive prices, and just tuning the website and the purchasing experience so it is great for consumers. If you do that well, marketing works, and simple, straightforward marketing works. So if I could go back in time, I would save many millions of dollars on marketing.

Mac Greer: And closing, Mark, I want to ask you, what is the greatest challenge for Blue Nile going forward? And you are not allowed to give us one of those non-answers like "maintaining our own greatness."

Mark Vadon: (Laughs.) I think when you look at our biggest challenge -- and I tend to look at it as both the biggest challenge and the biggest opportunity, if we can keep figuring it out over time -- the biggest challenge is awareness. We are today a relatively small business, and we offer amazing products, amazing value, but a lot of America doesn't even know about us. If you walk down the street in America and ask people, "Did you know you can buy your engagement ring over the Internet?" the majority of people are going to look at you quizzically and respond that they had never even thought they could buy that product online.

So I think that is the challenge, is continuing to spread the word that this is a viable channel for this product and that there is this great little company in Seattle that is going to deliver you tremendous products at phenomenal value.

If we can continue to execute our business really well over time, that awareness will keep growing and we will be a much larger business. It is always astounding to us that we are 4% of the market, closing in on 4% of the market for engagement rings in the United States, but our brand awareness in the United States is probably less than 10%. So when people know about us, we get the sale, and we have just got to make sure over time more and more people know about us.

Blue Nile is a Motley Fool Hidden Gems and Motley Fool Rule Breakers recommendation. Amazon, Starbucks, and Whole Foods are Motley Fool Stock Advisor picks.

Mac Greer doesn't own any of the stocks mentioned in this article. The Fool has a disclosure policy.