Blue Nile Case Study

Blue Nile Case Study Cristeen McPherson Student Number 326914 BUSA 506 Dr Terry Power November 11, 2012 1) The competitive forces confronting Blue Nile and other online retail jewellers are medium or weak in strength, with the exception of the strong rivalry between sellers. The potential for new entrants to the jewellery market is relatively low due to the high costs of inventory, the lack of differentiation of product and the brand recognition held by the industry leaders. Good substitute products for a quality diamonds are not readily available.There are synthetic gemstones, cubic zirconium and other jewellery options, but the general consumer does not see these as a true substitute for real diamonds. Supplier bargaining power is a mixture of strong and weak factors leaving this force with a medium impact on the industry. The diamond supply industry is more concentrated than the retailers but is having new entrants emerging. Like the Canadian diamond producers Ekati in 1998, Diavi k in 2003, Jericho in 2006 and Snap Lake-4 in 2007 making Canada now the third largest diamond producer in the world. 1] Two factors contributing to a stronger supplier power are that products are critical to the retailers’ success and there is a lack of good substitute products. In contrast, the commodity trading or buying process for diamonds contributes to a weaker supplier power as retailers have easy ability and low costs to switch suppliers. Industry members are also now integrating backwards into the supply of the product, Diavik mine is a joint venture between Rio Tinto and Harry Winston Diamond Corporation and the De Beers Group owns the Snap Lake-4 mine. [2] Buyer bargaining power is moderately strong due to: Low costs of switching between retailers ? Lack of differentiation of product between retailers – differentiation is more on quality provided than the style or presentation of the product ? Large and diverse consumer base ? Buyers ability to be well info rmed on product; information on quality, prices and costs is growing due to internet accessibility ? Buyers are price sensitive The strongest force is the rivalry between the competing retail sellers. Factors affecting competing rivalry: ? Buyer demand is growing slowly – jewellery market is mature, with a broad range of consumers ?Buyer demand had fallen off in recent years due to recession – many sellers found themselves with slow moving inventory ? Buyer costs to switch brands is low – the buyer has no costs to switch to another online retailer, it’s just a mouse click ? Products are weakly differentiated – diamonds and jewellery are similar offerings between the sellers ? High fixed or storage costs – the bricks and mortar (b&m) retailers and many of the online retailers have high inventory costs, which when not turning incur carrying costs (interest etc) negatively impacting cash flow and earnings ?High exit costs – the high inve ntory costs make it difficult to liquidate quickly ? Competitors are numerous – and diverse in their value proposition, with low value, high volume retailers like Walmart as well as high end prestigious retailers like Tiffany & Co. 2) Some key success factors that will affect the online jewellery retailers in the near future: Fine jewellery buyers are looking for a retailer that offers quality product at a competitive price. Retailers must rely on their brand recognition with consumers; they need to build awareness of their product offerings as well as their customer service.Retailers must prove they are reputable, reliable and trustworthy. Online retailers have to express this through capturing their online audience with an easy to navigate website, appealing to their emotional response and showing other consumers satisfaction and confidence with past purchases. Jewellery retailers must be able to provide exceptional customer service and support. Major purchases of jewellery items, especially a diamond engagement ring, are very emotional to the purchaser. Customer service that acknowledges the significance of the purchase and guides the purchaser hrough the transaction will be a necessity for success and gaining consumer loyalty. With the high costs of inventory, retailers need to manage costs of inventory and operations, keeping costs in line with sales and managing cash flow is a key capability for success. A successful retailer is able to match inventory purchases with their consumer sales at a similar rate, maintaining inventory turnover and cash flow through the business. Not updating and maintaining their awareness and a high level of market knowledge will put a retailer at a significant competitive disadvantage.If they are not recognizing the market trends, striving to achieve some product differentiation and preparing to meet customer needs and wants, they will fall behind and lose customer loyalty, sales and market share. 3) Blue Nile is emplo ying a best-cost provider strategy as their competitive approach in the online jewellery business. Their aim is to create competitive advantage by offering a quality product at a competitive price. Blue Nile is able to do this through their supplier agreements where the diamonds and other gems are not actually purchased by Blue Nile until they have a consumer order for that particular product.This limits Blue Nile’s exposure on inventory costs and the risk of non-selling product. Blue Nile also relies on strict control of their operating costs; expenses for employees, facilities and technology are continuously reviewed to ensure their efficiency and that low costs are maintained. These two components combine to allow Blue Nile to offer comparable quality jewellery at substantially lower prices than their competitors. 4) Blue Nile has a very deep and keen knowledge of their customer and market.This enables them to tailor their website to their customers’ needs, offer su perior service and educational aspects for the consumer, effectively establishing trust with their consumers. This knowledge also gave them the ability to strike very good supply agreements with multiple providers for the quality product they sell online. Many of the diamonds and other jewellery are only available via Blue Nile because of their exclusive supply contracts. In order to remain competitive, Blue Nile must be diligent in maintaining and updating their market knowledge.The ability to accurately predict market trends and proactively alter business strategy is vital to ongoing success. For instance, many of the online retailers are currently relying on their educational information to garner the customers trust and loyalty. With every retailer working to increase the knowledge of the consumer, this strategy will lose effectiveness over time as the consumer becomes more knowledgeable. The ease of switching retailers is very high and Blue Nile must be ready to offer another c ompelling reason to remain loyal.Blue Nile must also be aware of any changes in their suppliers and the diamond market, if new diamond suppliers reach similar supply agreements with any of Blue Nile’s competitors, they may lose their supply chain advantage and risk significant increases in inventory costs. 5) SWOT Analysis – Blue Nile – Table 1 [pic] Although Blue Nile has many company strengths that propel their current success, the many competitors in the online and b&m jewellery industry have many of the same strengths.Blue Nile needs to improve and expand their marketing campaign and strengthen their brand recognition. They also need to develop a program to offer more product differentiation. One suggestion to incorporate both these needs might be to develop a strategic alliance with a well-known jewellery designer and offer custom design service online using the designer name and reputation. 6) Blue Nile posted exceptional double-digit sales growth over the six years 2002-2007, the recession of 2008 interrupted their growth trend actualizing a 7. % loss on sales year over year. They have since achieved moderate sales increases ranging from 2. 3% to 10. 18%. Blue Nile shows a steady gross margin averaging about 21. 7% over the last ten years. They also show very steady levels of selling, general and administrative expenses that have a slight increase each year most likely due to inflation of salaries and input costs. Consequently, their EBT margin is also very healthy, averaging 7. 0% earnings return on sales. Blue Nile has large cash reserves and very little long-term iabilities, their liquidity ratios are very healthy. Their current ratio averages 1. 5:1 over the last ten years. With their cost control and supply chain management, Blue Nile has very positive results for the performance/efficiency ratios. Their cash conversion is excellent due to the payables terms of supplier agreements; they have a positive cash float of about 40 da ys from the collection of sales revenue to the payment for goods. 7) Weighted Competitive Strength Assessment – Table 2 Blue Nile does have enough strength to remain competitive against its rivals.Their main rival based on pricing, quality and market knowledge is JamesAllen. com. Blue Nile is the strongest in terms of cost control and inventory control/supply chain management. Currently Blue Nile does have a sustainable competitive advantage over its rivals. Their product offerings are very similar, as are their websites and customer service policies, but Blue Nile’s cost control is far superior giving the advantage of greater efficiency and lower costs as compared to the other online retailers. ) In order to develop a more sustainable competitive advantage; Blue Nile will need to use their market knowledge to develop a stronger marketing plan to drive their brand recognition, product differentiation and develop greater customer loyalty. Blue Nile also needs to address the future erosion of market share due to the growing strength of competitors, and the potential of the loss on exclusivity from their product suppliers. 9) Recommendations: [pic] The components of the marketing plan and the strategic alliance with a jewellery designer fit together very well and should be quite easy and quick for Blue Nile to develop and execute.The value that would be seen via the increased brand recognition, customer loyalty and product differentiation would increase their competitive strength and be sustainable for the near future. Blue Nile’s current geographic expansion has shown success, continued expansion will need to be founded on research into the jewellery customs of target locations, to use the website’s appeal to the emotional purchase of jewellery. Low costs of online expansion are advantageous, while care must be taken to ensure language and culture are respected.Selective expansion will help to retain competitive advantage for the medi um range future and grow market share internationally. With their keen market knowledge, Blue Nile is positioned to take advantage of the weaker competitors in their market and secure market share growth for the mid range future via acquisitions. The potential to acquire a competitor would take longer to evaluate completely but is still a viable option to gain large portions of market share and increased sales.Blue Nile does have positive cash flow, good cash reserves and available credit facility to use to accomplish the acquisition. While the strategic alliance with a diamond producer/mine would secure long-term guarantees of the supply of quality, exclusive product at very competitive costs, the timeline to complete such a project is lengthy. The cost could also be prohibitive to Blue Nile at this point in time. The potential for long-term sustainable competitive advantage is most beneficial with this strategy and Blue Nile should not rule this option out as a future long-term go al.Bibliography: CBC News, ‘Canada’s Diamond Rush’, http://www. cbc. ca/news/background/diamonds/, Last Updated September 20, 2007, accessed November 9, 2012 Case 9, ‘Blue Nile Inc. in 2010†¦. ’ Thompson, Arthur A. , Strickland, A. J. & Gamble, John E. (2012). Crafting & Executing Strategy: The Quest for Competitive Advantage: Concepts and Cases(18th ed. ). New York: McGraw-Hill Irwin Power, Terrance P. (2008). Power’s Case Study Analysis and Writers’ Handbook. Toronto: Nelson. Appendices: Current Strategic Group Map High | | | |Price/Quality | | | |Low |Few Locations |Geographic Coverage |Many Locations | Market Share Chart for Top 20 Jewellery Retailers [pic] Financial Information Growth Profitability and Financial Ratios for Blue Nile, Inc. | | | | | | | | |Financials | | | | Ratios downloaded November 9, 2012 | | | | | | | | | | | ———————– [1] CBC News, ‘Canadaâ₠¬â„¢s Diamond Rush’, http://www. cbc. ca/news/background/diamonds/, Last Updated September 20, 2007, accessed November 9, 2012 [2] Ibid ———————– WalmartSterling Jewelers Zale Corporation Costco, Target Blue Nile QVC, Sears, JC Penney, Fred Meyer Jewelry TV, HSN Macy’s East & West, Neiman Marcus Cartier Tiffany & Co. Walmart, 4. 83% Sterling, 4. 17% Zales, 2. 83% Tiffany & Co, 2. 50% QVC, 2. 33% Sears, 1. 50% JCPenney, 1. 50% Finlay Fine Jewelry, 1. 50% Macy's East, 1. 00% Neiman Marcus, 1. 00% Costco, 0. 83% Target, 0. 83% Fred Meyer Jewelers, 0. 67% Helzberg Diamond, 0. 67% Jewelry Television, 0. 67% Macy's West, 0. 67% Tourneau, 0. 67% Cartier, 0. 50% Blue Nile, 0. 50% HSN, 0. 50%