This article is a discussion of the history of the retail diamond market and its evolution towards selling online. If you’re looking for reviews of James Allen & Blue Nile, then click here: Blue Nile Review and James Allen Review.
Before there was Blue Nile
In the classic model of the diamond jewelry supply chain, De Beers sells rough diamonds for cash (Cash on Delivery — no credit allowed) to sightholders (a limited list of diamond polishers with rights to buy rough diamonds directly from De Beers) who manufacture the rough into polished diamonds. They sell diamonds to local wholesalers who, in turn, sell to local jewelry stores. This system leads to several disadvantages to the consumer.
Firstly, since De Beers demands of its sightholders cash payment, the sightholders are constantly struggling with cash flow. They have a commitment of several million dollars approximately every six weeks when De Beers sells its rough diamonds at what it calls “sights” (hence, sightholders.) Most diamond polishers don’t have that kind cash lying around, so they must have a constantly open large line of credit. Add to that the fact that it takes approximately 3 months to finish manufacturing a box of rough diamonds, and you see that even if the sightholder could miraculously sell all of the diamonds polished from one box on the first day they are available, the sightholder has still added three months of interest payments onto the cost of the diamonds. And that’s only if their customers pay in cash, which is extremely rare in the diamond business. Most diamond wholesalers agree to pay in 90 days from the time of their purchase, but on average, these diamond dealers will pay a month or two past their agreed upon time. And this doesn’t take into consideration the additional month (at least) it will take to send the diamonds for certification.
Another outcome of this cash requirement of De Beers’ is that sightholders are loathe to tie up their diamonds anywhere. Rarely will a sightholder agree to leave diamonds on a consignment basis with a customer. Sightholders need to constantly sell to clear out inventory — because whether they like it or not, a new batch of diamonds is always only 6 weeks away that they need to pay for up front.
Sightholders aren’t the only ones with a heavy burden of pressure in the marketing pipeline of diamonds. Diamond jewelry is generally a relatively low turnover business. But, on the other hand, it’s a business where one must maintain a massive level of inventory. If you just wanted to keep a stock of 100 loose diamonds for customers to chose from (which, considering all the different shapes and sizes and colors and clarities, 100 really isn’t such a large number), that could easily cost between $500,000 and $1,000,000. And this is just for the diamonds! Imagine all the gold and watches. Most jewelers can’t afford to maintain such a large inventory with their cash alone, so they generally must borrow heavily. In order to cover this enormous cost, jewelry markups have historically been quite large. There’s even a vernacular term for the standard markup in the jewelry business of 100% — it’s called a “keystone.”
How Blue Nile Addressed these Issues
As you probably already know, Blue Nile does not inventory any loose diamonds. All of the loose diamonds listed on their website are all sitting in tens, if not hundreds, of vaults all over the world belonging to just as many different companies. These companies send Blue Nile a constant electronic feed of their inventory including all details of each diamond along with their wholesale price of the diamond. Blue Nile adds on a standard markup (usually around 18%) and presents these diamonds to the web-surfing diamond consumer. When a customer purchases a diamond, the diamond is shipped directly from the supplier to the customer with a standardized invoice from Blue Nile that the supplier is able to print out. I’m not sure exactly how long it takes Blue Nile to pay the vendor for the sale, but it is almost certainly not longer than 60 days.
From the perspective of the sightholder, listing their diamonds on Blue Nile costs them nothing. These companies anyway have a constantly high level of inventory. So as long as the diamond is in their office, all they have to do is upload its details to Blue Nile and it immediately become available for sale. If the sightholder has a regular customer who wants the diamond, so they sell it to their customer, and simply remove it from their Blue Nile feed. No opportunities are lost, only new opportunities are achieved. And since there are no expenses selling diamonds through Blue Nile, the sightholder is motivated to offer lower wholesale prices in their feed upload to Blue Nile.
From Blue Nile’s perspective, they have none of the high inventory carrying costs of your typical bricks-and-mortar jewelry store, so they can survive, and thrive, on a significantly lower profit margin (18% versus 100%). Also, Blue Nile provides live data to all of its suppliers of how their prices compare to their competitors for similar items. This creates a true competitive market dynamic that ultimately drives prices down to their minimum.
Blue Nile vs. James Allen
Since Blue Nile came onto the scene, there have been an innumerable amount of imitators. Just about all of them, however, can’t match Blue Nile’s size of virtual inventory and ease of use and customer service. In this regard, Blue Nile truly carved out a significant first-mover advantage.
On the other hand, though, Blue Nile’s feature set is set and defined, it is easily replicable. Their first-mover advantage will never allow them to offer diamonds any cheaper. In fact, it can only hinder them, since they have a significant marketing budget they need to cover.
You see, for all of Blue Nile’s great innovation in how to deliver diamonds to the consumer in the most cost effective way, there was always one giant advantage the bricks-and-mortar stores had over them. In a store, you could actually see the diamond before you decided to purchase it! It seems silly and obvious, but it’s truly a major factor. Not everybody can afford a VS or VVS diamond where seeing the diamond is less important. Blue Nile tries to make the claim that loose diamonds are a commodity and you can learn all you need to learn about each one by reading its certificate. Not only is this not true, but most consumers already intuitively understand that it’s not true. As I explained in my article about clarity, no two VS2s or SI2s, or I1s are alike. For most diamonds VS2 and lower, you really need to examine the diamond before you buy it.
Jamesallen.com solves this issue with their “virtual loupe.” Now, you can buy a diamond online and examine it ahead of time. This not only will give you the peace of mind that you are going to receive what you expect to receive given the clarity you have chose, but now you can purposely look for a lower clarity diamond (that will still look great to the naked eye) because you can check it and see for yourself!
If you have any questions, please leave a comment below and I will usually respond within 24 hours.