When Buying a Diamond Starts With a Mouse

Correction Appended

Seattle

Mark C. Vadon’s eight-year-old Internet company, Blue Nile, already ranks second behind Tiffany & Company in diamond ring sales.

Diamonds being readied for shipment at Blue Nile’s warehouse in Seattle. Success was not expected as recently as 2001.

MARK C. VADON is one of the world's top diamond retailers, but wholesalers often decline to meet with him on the convention floor at jewelry trade shows. At the very least, many ask him to flip over his nametag so that no one knows who he is or what company he runs.

There was a time not long ago when pundits generally dismissed Mr. Vadon's company, the online jewelry purveyor Blue Nile, as one of the dot-com boom's more lamebrain creations. People might be willing to buy a book online, or a CD, and maybe a toaster, they said, but a ,000 diamond engagement ring? The jewelry industry - or at least the high-end jewelry trade - seemed impervious to the Internet.

Not any more. Only a decade after it was founded in the infancy of the Web, Blue Nile ranks behind Tiffany & Company and at least one other competitor, the Signet Group, in diamond ring sales, according to industry analysts. Experts also believe that probably only Tiffany's and the Zale Corporation, which operates more than 1,500 chain stores and an additional 800 kiosks, bought more diamonds from wholesalers than Blue Nile last year.

While Blue Nile has grown - and its stock has soared 54 percent, to .53 a share on Friday from when it was first sold to the public in May 2004 - Main Street jewelers have seen their profit margins shrink and many of their brethren shutter their store doors. As a consequence, many retail jewelers refer to Blue Nile as the "evil empire" - or worse.

So far, the Blue Nile effect has been felt mainly by mom-and-pop jewelers on Main Street and in malls; much bigger, high-end retailers like Tiffany have been affected only on the margins. And Blue Nile's influence is limited largely to diamond sales, particularly diamond ring sales, but those are often the cash cow for smaller jewelers, accounting for a disproportionate share of their revenue.

"Blue Nile is just busting the chops of everybody, especially in the sale of diamonds," said Ken Gassman, a former Wall Street financial analyst who runs the Jewelry Industry Research Institute. Diamond jewelry accounted for nearly half the .4 billion in jewelry, including watches and costume pieces, that United States retailers sold in 2005, Mr. Gassman said.

Blue Nile and other Internet jewelers are not solely responsible for smaller profits at traditional jewelers nor for the loss of more than 3,000 independent jewelry shops since 1999. Main Street jewelers, after all, have faced tough competition for decades, from the Home Shopping Network and other television creations beginning in the 1980s to, more recently, Wal-Mart, Costco and other big-box retailers that are grabbing a large share of the low-end jewelry market. A spike in the price of gold and other precious metals has also eaten into jewelry store profits.

Still, Blue Nile's influence has been big enough that many smaller jewelers have been threatening to boycott wholesalers that supply online retailers. At the same time, consultants have been earning a handsome living advising retailers struggling to compete with Blue Nile - teaching them to "romance the stone," as one consultant, Shane Decker, put it, using industry-speak for stressing the whole diamond-buying experience over merely the price.

Blue Nile operates no stores, so jittery men browsing its Web site in search of an engagement ring that matches their love and budget cannot compare diamonds side by side - or even see what they have bought until they tear into an overnight-delivery package.

But still they buy. The average diamond ring bought at the Blue Nile site costs ,500, twice the industrywide average of ,700, according to Mr. Gassman and other analysts. Blue Nile's finance chief, Diane Irvine, says that nearly every day, the company sells a ring costing ,000 to ,000. Last month alone, more than a dozen people bought diamonds that were so expensive - ,000 or more - that Blue Nile delivered them in armored trucks with armed guards. (All sales come with a 30-day money-back guarantee.)

"I don't get up every morning and curse Blue Nile, like some do," said Mark Moeller, owner of R. F. Moeller Jeweler, a three-store chain in St. Paul. "But the Internet has certainly affected profitability; there's no doubt about that."

Gary Gordon, chief executive of Samuel Gordon Jewelers in Oklahoma City, was more blunt. "Ours is an industry in big turmoil over Blue Nile," he said.

SHOP owners, if they wish to curse anybody, might better aim their invective at one of their own, Doug Williams, a Seattle jeweler who in late 1995 took to heart all the radio advertisements he was hearing that implored business owners to adopt an Internet strategy.

The personal computer boom had been very kind to Mr. Williams, who for years had made a good living selling jewelry to Microsoft employees and other newly minted millionaires. Yet when he paid a consultant ,000 to create a basic Web site he called Internet Diamonds, he did not even own a PC. "I was like a caveman looking at a television," he said of the first time he visited his online creation.

Correction: January 14, 2007

An article last Sunday about Blue Nile, an online diamond jewelry company, referred incorrectly to its relative standing among companies that sell the most diamond rings in the United States each year. Although jewelers do not provide comparable statistics about diamond-ring sales, Blue Nile does indeed rank behind Tiffany & Company. It also ranks behind at least one other competitor, the Signet Group, which operates Kay Jewelers.

The article also referred incorrectly to Mondera.com, another online jeweler. It is still in business; it is not defunct. And the article misspelled the city where the Zale Corporation, the jewelry retailer, has its headquarters. It is Irving, Tex., not Irvine.