Group 4-Arpita Srivastava, Priyanka Kumari, Vasudeva NM Blue Nile Case

1. What are some key success factors in diamond retailing? How do Blue Nile, Zales, and
Tiffany compare on those dimensions?

As with most retailing, the key success factors in diamond retailing can be measured by customer
service factors and cost factors. Given the varied supply chain components and supply chain costs.
Blue Nile has a distinct advantage in product variety and
product availability since customers can “build their own ring” by choosing from an inventory of about
75,000 stones. Customers purchasing at Tiffany and, until recently, at Zales have been limited to the
inventory available at the store. Customers who are comfortable making large purchases online will
find the low-pressure purchasing experience at Blue Nile, supported by the educational Web site,
salaried sales support, and thirty-day return guarantee, appealing. Given that the jewelry is made to
order, clients at Blue Nile must be willing to wait to receive their orders, unlike at Tiffany or Zales.

The Tiffany brand is very strong and well established. It is associated with glamour, trust, and
customer service. These associations allow the company to sell at higher margins than its
competitors. Diamond and other high-end jewelry purchases are expensive, and many customers will
trade off other factors for the Tiffany customer experience when making such purchases. Moreover,
when spending thousands of dollars for a single item, customers often want to see and feel what they
are buying.

Zales does not have the product variety and availability that Blue Nile provides, nor does it have the
brand name advantage that Tiffany enjoys. The weaker brand is reflected in the firm’s margins, which
are lower than those of Tiffany. Blue Nile’s focus on low prices is reflected in the lower margins it has
relative to both Zales and Tiffany.
Blue Nile operates out of one warehouse, with its entire inventory at this facility. The inventories at
both Tiffany and Zales are disaggregated through their stores. High-end jewelry items are high-
priced, have relatively low demand, and have high demand variability. Such items realize the most
savings in inventory holding cost through lower safety stock inventory when the inventory is
aggregated. Further, since items sold through the Blue Nile Web site are customized, the inherent
postponement allows the company to keep inventory aggregated longer, thus reducing safety
inventory even more. While Blue Nile’s inventory-to-sales ratio is around 6 percent, the ratios for both
Tiffany and Zales are about 40 percent. Blue Nile’s supply chain structure also gives it a major
advantage in facility costs.

Blue Nile operates primarily from one warehouse in the United States. Both Zales and Tiffany operate
many stores, often in high-priced locations. In addition to stores all over the world, Tiffany has
manufacturing facilities, a retail service center that supplies stores, and diamond processing centers
in seven countries. While Tiffany has advantages from being vertically integrated, Blue Nile operates
on a very low fixed-cost structure. Blue Nile’s property and equipment to net sales ratio was 2.37
percent in 2007, while Tiffany’s was more than 25 percent, down from 35 percent in 2006, and
Zales’s was close to 14 percent. Blue Nile also has an advantage in facility operating
costs. Because customers design, select, and order jewelry on the Web site, the company does not
incur the level of human resources costs in the form of sales staff that Tiffany and Zales do.

Transportation costs, as with most e-retailers, are higher at Blue Nile than at Tiffany or Zales. The
outbound transportation distance and hence costs and time tend to be much higher when inventories
are aggregated, as is the case at Blue Nile. In the case of Tiffany and Zales, some economies of
scale can still be realized on inbound transportation at all downstream stages of the supply chain until
the merchandise hits retail stores, and the customer takes care of the last mile of outbound
transportation costs.
Group 4-Arpita Srivastava, Priyanka Kumari, Vasudeva NM Blue Nile Case

The companies do not seem to differentiate themselves from each other on any other customer
service components, such as time to market, order visibility and returnability, or cost of information.

2. What do you think of the fact that Blue Nile carries about 30,000 stones priced at $2,500 or
higher while almost 60 percent of the products sold from the Tiffany Web site are priced
around $200? Which of the two product categories is better suited to the online channel?

There are different reasons why these two firms carry very different types of items on their Web sites.
In the case of Blue Nile, the primary reasons could be the savings in inventory holding cost due to
lower safety stocks and the broad product variety and product availability that the firm can offer
customers. Stones priced at $2,500 or higher are unique, high-value items with relatively low demand
and high demand variability. The high demand variability necessitates carrying larger safety stock in
order to meet required customer service levels. Given the high price of the stones, the cost of holding
them in inventory is proportionally higher. Aggregating inventory reduces the amount of safety stock
required since the demand variability is less than in a disaggregated scenario. By aggregating the
inventory in the online channel, Blue Nile also broadens the product availability and variety available
to customers. It is a smart move for Blue Nile to aggregate and carry its high-priced products with low
demand and high demand variability on an online channel.

The Tiffany brand is built on the glamour, luxury, and quality that customers perceive when visiting a
Tiffany store. This perception is a result of both the products and the service. The company’s
inventory includes a wide variety of items ranging from very high-end diamond jewelry to basic but
elegant tableware. Tiffany has stores as small as 1,300 square feet, and in 2008 the firm began
opening stores of about 2,000 square feet selling high-margin products in affluent U.S. areas. Given
the strategic importance of the brand image, the breadth of inventory, and the push toward smaller
facilities and lower cost, it makes sense for Tiffany to position the high-end luxury products at the
store and move the D items to the online channel. This allows it to utilize the limited facility space to
highlight the high-end items and customer service and offer the lower-end items online, where
product substitution can be used as means of aggregating inventory and lowering safety stocks for
the D items. This structure, however, puts Tiffany at a cost disadvantage relative to Blue Nile because
Tiffany decentralizes its high-value items with low demand and high variety while centralizing its
lower-value items. Such a cost disadvantage can be justified as long as Tiffany can maintain its
strong brand and associate it with the store experience.

3. What do you think of Tiffany’s decision to not sell diamonds online?

Although on the surface, this strategy would seem to be an appropriate approach for better market
penetration and customer reach, Tiffany is in danger of exacerbating its inventory and property
expenses. Opening the smaller retail outlets will provide Tiffany’s an opportunity to reach out and
“touch” customers in these areas, a key success factor for them in the diamond business. It will
provide the opportunity for these customers to experience the Tiffany “service” and “brand” without
having to go the larger cities. However, opening these stores will require Tiffany’s to up the inventory
level throughout the supply chain. Not only will they have to have additional inventory at these stores,
but the overall safety stock will increase. In addition, Tiffany’s property expenses will increase as
stores are opened.

This is a strategy that seems flawed and should probably be reversed. Its model is better suited for
larger stores in cities that will draw significant traffic. Moving into smaller cities with smaller stores is
likely to raise costs far more than revenues.
Group 4-Arpita Srivastava, Priyanka Kumari, Vasudeva NM Blue Nile Case

4. Given that Tiffany stores have thrived with their focus on selling high-end jewelry, what do
you think caused the failure of Zales with its upscale strategy in 2006?

Zales’s upscale strategy was in response to fierce competition it was facing from mass merchant
department stores such as Wal-Mart, national chain department stores such as JCPenney, and home
shopping networks. Middle America had been Zales’s target market since its founding in 1924. A
large portion of the company’s revenue came from value-oriented customers who frequented malls.
The success of the Zales brand was built on the perception of the good value one got for the money,
but with that came the perception of being inexpensive. While one can see why the company decided
on the competitive repositioning, one must question the implementation. It takes much time and effort
to educate new customers and transform a brand. Zales tried to make too many radical changes in
too little time. The firm drastically changed its portfolio of products, 15 percent of the suppliers in the
supply chain network were new and included new overseas vendors, and holiday promotions and
monthly payment plans were eliminated, to name a few changes. All this resulted in the firm’s losing
not only its core customer base but also sales due to delays in bringing merchandise in on time and
not making inroads into new target markets.

The basic premise of its strategy to move into selling high-end jewelry through its stores is also
questionable. Given that it has a much weaker brand than Tiffany; Zales’s strategy of bringing high-
end jewelry to its stores raised its inventory costs without raising its margins enough to offset this
increase. Zales’s inventories in FY 2006, when it tried the high-end strategy, rose to 47 percent of
sales, even higher than Tiffany’s; its margins, however, remained lower than Tiffany’s. Poor execution
hurt it further, but given that its brand is weaker than Tiffany’s, one can question whether such a
strategy would have had any chance of success even in the long term.

5. Which of the three companies do you think is best structured to deal with weak economic
times?

Blue Nile has a distinct advantage in this regard with its very low fixed-cost structure compared to
Tiffany and Zales because of its lean structure. Asset to net sales ratios are 2.38, 13.93, and 25.46
percent for Blue Nile, Zales, and Tiffany, respectively. Both Zales and Tiffany are contractually tied up
in many medium- to long-term leases for their facilities. The selling, general, and administrative
expenses at Tiffany and Zales are about four times those incurred at Blue Nile owing to its centralized
system. This directly cuts on operating costs. Blue Nile also has a very low investment in inventory
compared to the other two companies. However, the cost of sales at Blue Nile is higher, due to the
lower margins and the higher cost of outbound distribution. The low cost structure at Blue Nile is well
suited for times when demand shrinks in the industry. Blue Nile should take advantage of its 4C
strategy, low-cost structure and lower-prices to get more market share.

Given the huge inventory write-off Zales has to take due to failed strategy, it is in the weakest position
to handle the downturn. With tightened credit and multiple long term lease and contract, Zales
situation is going to suffer further. Though, Tiffany certainly has the strength to survive the downturn
but it is hurt significantly by dropping sales as it fixed costs are relatively on the higher sides

6. What advice would you give to each of the three companies regarding their strategy and
structure?

Blue Nile’s current strategy focuses on lower prices for a large variety of high-end stones in a
centralized structure. Its marketing focus on convincing customers on the four Cs and third-party
validation are the key ingredients when valuing a diamond is also well aligned with its structure which
Group 4-Arpita Srivastava, Priyanka Kumari, Vasudeva NM Blue Nile Case

doesn't permit clients to contact and see the stone prior to buying. Given its significant cost
advantages and customers’ tendency to try to save money during difficult times, Blue Nile has a
significant opportunity in this downturn. Blue Nile can take an aggressive position, emphasizing its
lower prices with similar quality to very high-end diamond retailers.

Zales needs to get control of its inventories from a financial perspective this can be achieved by
centralizing more of its expensive diamond inventory (like Blue Nile), and making it available to stores
as needed. However, Lower-value diamonds can be stocked and sold from retail stores. For higher-
end diamonds, rings with imitation stones could be used to help customers select a style, followed by
having the real diamond installed later at a central location and shipped to the store for customer
pick-up or can be shipped directly to customer.

Tiffany is in a difficult position as it cannot centralize its high-end stones because that would not go
with its brand image. Due to recession, Blue Nile’s strategy at high end and Wal-Mart and Costco at
lower end, pricing pressure at retail will continue. Its move into the wholesale part of the diamond
business will provide multiple opportunities—it gives them better wholesale margin and also provide
some form of exclusivity on its stones- which as of now is very similar to what the competitors are
offering.