Thanks to companies like Amazon.com (NASDAQ:AMZN), buying online has become as simple as one, two, click. And whether I'm buying a book, DVD, CD, or one of Amazon's other countless products, I don't feel much need to physically inspect the wares before making my purchase. But if I'm plunking down thousands of dollars on a perfect -- or slightly imperfect -- diamond, then I want to see the merchandise first-hand. That's one of the reasons I've been a bit skeptical of online jeweler Blue Nile (NASDAQ:NILE), a company that's experienced real success thanks to virtual shopping. I recently asked Blue Nile founder and CEO Mark Vadon about his company's not-so-touchy-feely business.
Question: In a consumer study that Blue Nile commissioned back in 1999, consumers were asked to rank 21 different factors that influence their jewelry-buying decisions, and you found out that the most important factors for customers choosing a jewelry retailer were good value for the money, a knowledgeable salesperson, and a salesperson who didn't pressure them. Now to my surprise, Mark, you found that the lowest-ranking factor in a consumer's jewelry buying decision, I think it was 21 out of 21, was the ability to closely examine the diamonds and jewelry. So I've got to tell you, I am a bit skeptical of this study, as someone who would want to physically see the ring before buying. So is there any chance that that wasn't actually a survey of customers but . a survey of Blue Nile employees?
Mark Vadon: (Laughs.) It was actually a survey of a representative panel of customers done by the NPD Group, which is a very established research firm . and I think what you will find is every consumer is different. . And you can break that study down by men versus women, younger men, older men -- but across the board . what really matters to consumers is they want good value. They want to know when they are spending $5,000 or $10,000 that they are getting a lot of product for their money. They are getting really high quality product for their money, so they want value, and they want a good shopping experience.
I think the touch-and-feel aspect of this product, for some consumers, is very important. So if what you really need to do is pick up the product and examine it, I would say . buy it from us and use that 30-day return policy that we have. And what you will see with our consumers is, by and large, they are blown away by the quality when they receive it in the mail. Either do that or, frankly, don't shop at Blue Nile. If the product, looking at it, is so core to your experience, we are probably not the right retailer for you.
Fortunately, we are in a $50 billion domestic retail space, so if we find a model that really appeals to a segment of the consumers that are out there, we can build that into a tremendously large business over time.
MG: And I know you have said that your competition tends to be the offline retail jewelers. With that in mind, who do you regard as your primary offline competition?
MV: You know, when we talk to our customers about where else they are shopping, we obviously dominate the online market. In the engagement-product line, we believe we are 10 to 20 times the size of anybody else selling engagement rings on the Internet. What our customers tell us is where they are shopping is their local jewelry store. So where we are really competing is against 29,000 small, independent retailers who may own one store or, at most, two or three stores. And that is, I think, great news for Blue Nile and for its shareholders, because when you look at our ability to compete against a small retailer who doesn't have the buying power, who has very high overhead relative to the size of their revenue, it is really hard for those people to compete against us.
MG: So you're not losing sleep over Tiffany (NYSE:TIF) or Zale (NYSE:ZLC)?
MV: No. . We watch competitors a tremendous amount, but in the end, we feel like the only limit on this business is our own ability to execute on it. We look at a company like Starbucks (NASDAQ:SBUX), where I don't even think most people could identify who the No. 2 player in the coffee market in the United States would be. And that is what we feel we are building within the online part of this market. We are really building a dominant player who defines the market, and if we are successful at what we are doing, the business should just keep growing, despite what any other competition should do out there.
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Mac Greer does not own shares of Blue Nile, and he does not own any Blue Nile jewelry. He did, however, once own a mood ring. The Motley Fool has a disclosure policy .
