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How Blue Nile Delivered A Million Pieces Of Bridal Jewelry

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It hides in plain sight in a Seattle neighborhood. A building that would not attract even a hint of curiosity. Inside it’s a bit of a different story as this seemingly bare-bones structure serves as the fulfillment center for Blue Nile, the world’s largest Internet retailer of diamond jewelry.

It’s easy to view Blue Nile solely as an early eCommerce success story but perhaps its greatest feat is the ability to produce and ship jewels in a highly efficient manner  based on the individual requirements of an online order. This efficiency is one of the ways it earns the trusts of customers making a highly emotional purchase.

The nondescript nature of the facility is due to security concerns. The merchandise is highly valuable, consisting of diamonds, colored gems and precious metals. Inside, multiple doors are used to enter and leave certain areas for security purposes. Workers were not identified in the story for the same reason. My ability to take photos was severely restricted. Instead, I’m relying on extreme up-close photos taken by Blue Nile.

Hide Iba, fulfillment center director, told me the assembly and fulfillment operation employs about 90 workers who produce about 300 to 400 jewels per day. From mid-November to Christmas, the number of workers swells to 135 who produce 900 to 1,100 jewels per day around the clock. He said at its peak the company produces a finished product every 40 to 60 seconds.

The company has the ability to take orders as late as 4 p.m. ET for delivery by 10:30 a.m. the next morning, he said. More than 99 percent of orders are delivered on time, most within a 48-hour period.

It’s important to note the company is not making jewelry. Workers assemble the pieces based on the materials that arrive and the online orders received. It’s a circular assembly-line operation. The diamonds and precious metals come in at one end of the facility and are assembled, polished and cleaned. Each piece then goes through a quality control process, and then the finished pieces are packaged and shipped from the same entryway.

The assembly-line process is a major reason for its efficiency. A bigger reason is that each job in the assembly line is extremely specific. It also helps that more than 70 percent of the business is in engagement rings so there is some semblance of consistency in the orders. Each order is assigned a clear plastic bag that lists the parts to be placed together. The steps in the process of assembling an engagement ring include sizing the ring shank, soldering the mounting onto the shank, polishing the diamond and placing the diamond on the mounting. Each of these tasks is split into smaller job responsibilities.

Much of the work is done by hand, particularly the diamond mounting. The operation is quite resourceful as well. Several pieces of equipment were created or modified in-house with Iba claiming there are “seven patentable processes” in the operation. Another reason pictures were limited.

The workers have varying levels of skills and experience and this dictates their tasks. Some are skilled bench jewelers with up to 30 years of experience and they will do the more demanding work. There are currently 14 gemologists on staff. There are those who have never worked in a jewelry operation and others who have skills that can be transferred to jewelry making. For example, one polisher did the same job at a motorcycle factory. This is one of the reasons that jobs are much more specific than in most jewelry operations. Iba says training is a constant thing and once they learn one job they will be trained for another.

“The benefit of having very distinct small sections of responsibilities is that it’s easier to train them,” Iba said.

He added that there are not many highly skilled jewelers in Seattle so it’s another reason why they rely on training. It’s a problem not limited to Seattle.

The most experienced and skilled bench jewelers work on the largest high-quality stones and settings. Iba referred to them as the “super bowl team.” The largest diamond ever sold at Blue Nile was 12.5 carats.

For the final stage in a separate room, all jewels are dipped in an ultrasonic immersion tank that extracts lose particles of precious metal so they can be reused. Then the pieces go through quality checks before being packed and shipped throughout the country.

There is no waste in the process, Iba said, including the tanks of chemicals used for cleaning the jewels and the rhodium dipping tanks for white gold jewels. The water is either recycled or evaporated.

Blue Nile was founded in 1999 by Mark Vadon after he had a less than satisfying experience shopping for a diamond engagement ring through traditional retail routes.

The company was created during the infancy of the Web with the premise that choosing an engagement ring can be a simple process and can be done online. Education and disclosure helped consumers make informed decisions when choosing a diamond engagement ring.

Within 10 years it became one of the largest diamond and diamond engagement ring retailers in the U.S. and one of the early high-growth eCommerce darlings.

Another important characteristic of the company is an inventory of more than 200,000 diamonds with grading reports from the Gemological Institute of America or the American Gem Society that list all of the important diamond characteristics. They can be paired with more than 200 settings. The overall result is that, according to company officials, Blue Nile provides more options and sell their jewels for less than traditional retail jewelers.

Many agree. Since its founding the company says it has served more than 1.7 million customers and sold more than 1 million engagement rings and wedding bands, combined .

However, 17 years later Vadon is no longer with the company, and more recently it is showing signs that its robust growth in the U.S. is waning (The company sales are growing at a strong pace at its two international hubs in Europe and China). Revenues in 2015 totaled $480 million, a 1.4 percent increase year-over-year. In the second quarter of this year sales were flat year-over-year totaling $113.8 million.

Despite the slower growth, Harvey Kanter, Blue Nile’s CEO, president and chairman, isn’t prepared to say the company's business has matured. He notes that while Blue Nile is by far the largest Internet diamond jewelry retailer in the U.S. (and the world) with 50 percent of the market, he believes it has only 5 percent of the overall jewelry market. So from his perspective, there’s still plenty of room for growth.

Still, Blue Nile is working at ways to diversify both its business and the customer experience. One of Kanter’s charges when he arrived in 2012 was to grow the fashion jewelry business. He downplayed this in our interview.

“When I first arrived it was very much a strategic thrust of the company,” he said. “We still believe that fashion fine jewelry is important but it’s ebbed and flowed and we haven’t had overwhelming success but we’ve had a continued growth and we still believe it’s an opportunity.”

He added, “We have more females coming to the website than men and we believe there’s a lifetime value in becoming a more important part of the non-engagement part of the jewelry business.”

Blue Nile divides its non-engagement business into three segments:

* Non-engagement fashion, which includes pearls, sterling silver and gold jewels, and jewels made with precious diamonds and gems.

* Non-engagement bands (bands purchased for reasons other than weddings). “The reality is the wedding band business is everything from basic wedding bands to eternity bands and many things in between,” Kanter said. “Many of the bands we sell are not necessarily associated with getting engaged or getting married, such as an eternity band, which is often selected for anniversaries.”

* The third segment is diamond jewelry, which has three components:

- Build your own jewels, including earrings, pendants, three-stone and five-stone rings based on the company’s loose diamond business;

- Preset diamond jewelry, including studs and pendants;

- Fashion diamond jewelry, with a focus more on design rather than precious materials.

The company also has partnered with well-known designers inside and outside the jewelry industry to develop lines of engagement and non-engagement jewels.

The company has placed its efforts for the past three years on building its engagement band business, Kanter said.

“One of the important elements of our research is that consumers say they would like to buy a band where they bought their engagement ring we have been addressing that market,” he said. “We made a very definitive strategic and tactical plan to really develop that band business to go with the engagement side of the business. Eleven of the last 14 quarters we had a double-digit unit growth in wedding bands, which is really meaningful.”

Another area of diversification is in brick-and-mortar, where the company is rolling out what it calls “Webrooms,” small retail spaces with limited inventory where customers can walk in and touch and feel the jewels. It’s similar to what a few other eCommerce retailers are doing, such as Amazon and Warby Parker.

At first glance, it seems a bit unusual for a company that has proven you don’t need to see and touch jewelry before buying, but Kanter calls it a way to diversify the customer experience. Blue Nile has five of these stores and plans to open more.

“Today’s consumer or the millennial consumer really requires choice,” he said. “The way we look at our business, it is no longer an eCommerce business or an Omni-channel business. It’s a business about commerce.… The Webroom was really built around the concept to give the consumer the opportunities to see, touch and feel (the jewels).”

There are no direct sales at the stores, no cash and carry. People can either place a digital order through in-store tablets or their own mobile device. Or they can wait till they go home.

Kanter promoted the stores during Blue Nile's second quarter earnings conference call in February but otherwise he downplays it, calling it a learning experience.

“It’s really a very digitally enhanced experience in a conventional environment,” he said. “The interesting thing is they are purchasing as if they’re home on an iPad with the help of a consultant in the store.”

The company continues to try to enhance this diversification of choice by enhancing its mobile apps, Web presence and the way it digitally displays products.

“We believe that as we continue to engage the millennial customer, we can get more people to have the trust and confidence, and understand all of the benefits of buying from someone like Blue Nile online,” he said. “The Webroom is an example of that. Enhancements to the phone or tablet or PC, which is ultimately the digital experience, are examples of that. Those are all important elements that actually accelerate our business.”

He also stresses Blue Nile’s primary business is selling engagement rings (which accounts for 70 percent of sales) and that won’t change.

“It will come down as a percent, but is it going to go to 50 - 50? No. Could it go to 65 - 35? Yes.”

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