and Applica on Networks ning Distibutio ee Internet Marketing and g, 2007. Kalyana, Kc amd Wad Hansa ring 207 jncinnati, OH: Sou g the Last Mile Commer seungiin Whang. “Wisslal i Lan oe Lee, Hau L., and Seungi nt Review (Summnel Sloan Manageme” e-Commerce. rs 54-62. on portfolio Chain in Dex tavson Thomas, Hau Lee, and Gast ONS py Rpprach to Supply, Chala Oey 27 we ‘Harvard Business School Case Raman, Ananth, and Bh onent Suppliers. 9-697-064, 1997. Ricker, Fred R., and Ravi Kalakota, “Orde, Hidden Key to e-Commerce Succes Management Review (Fall 1999): 60-70. Order Fulfillment: The ‘Supply Chain CASE STUDY Blue Nile and Diamond Ret ing ks into your jewelry store with printouts ‘of diamond selections from Blue Nile, a company that is the largest retailer of diamonds online. The list price for the customer's desired diamond is only $100 above your total cost for a stone of the same characteristics. Do you let the customer walk or come down in price to compete? A customer This is a dilemma that has faced many jewelers. w that jewelers should lower prices on stones to keep the customer, Future sales and add-on sales such as custom designs, mountings, and repairs can then be used to make additional margins. Others argue that Some s to compete sends a negative signal to loyal rs from the past who may be upset by the fact that they were not given the best price. * economy tightened during the holiday of 2007, the differences in performance ween Blue Nile and bricks-and-mortar retailers In January 2008, Blue Nile reported a its fourth quarter. Tiffany posted a2 percent drop in store sales, and Zales reported a9 percen operating officer of Blue Nile Diet This business is all in sales during \ " Diane re, We look at this ype of envingay akins market »pportunity of environment as one of King, “The internet Reulery” New Gon} oa ses scackin. “The €-Value Chain” g pew (Winter 2000); 63-70, 7 SE een pert Plant. “Pathways 10 hy slic esting from Bricks to Clicks.” sis Jerre (Spring 2001): 50-59, : 1 Varian. Information Rules: A Siay te io % LeadershiP: and Hal it Ral A Say siapito, CaFL erwork Economy. Boston: Harvard Bugg, Guide 10 th ess, 1999, ; : School Press. Chain.” Global Supplement, Supply apply x ~The emai peiew Fall 199) ‘Mana — Jae Lee, David King, and H. Michael Chg, ‘Turban, fa Commerce: A Managerial Perspective. Up lectronic COM Suan 3 Elecite Hal, 2000. The Diamond Retailing Industry in 2008 | For both wholesalers and retailers in the diamond | industry, 2008 was turning into a very difficult year. It was so bad at the supply end that the dealers’ trade association, the World Federation of Diamond Bo issued an appeal for the diamond producers to redt the supply of new gems entering the market in an to reduce supply. a However, the world’s largest prod appeared unmoved, refusing to give any commitn curtail production. The company had recently the Voorspoed mine in South Africa, which, operational, could add 800,000 carats a ‘already oversupplied market. Historically, D exerted tremendous control over the supf monds, going so far as to purchase large q rough diamonds from other prod European Commission forced De Beets 0 Sereement to buy diamonds from ALROSA, the! Second largest diamond producer, which most of the diamond pro i the second largest prod after Botswana, While discoun ‘ount retailers such as Wal- Costco continued to thrive: the a fa oa hrive, the situation was diffiedly August 1999,oc traditional jewelry retailers. Friedman's filed for Chapter 11 bankruptcy protection in January 2008 ‘lowed by Chicago-based Whitehall in June. Whea it hankruptey, Friedman was the third largest 455 stores, while filed jewelry chain in North America with all ranked fifth with 375 stores in April 2008. In White nore than February 2008, Zales announced a plan to close m stores in 2008. This shakeup offered an opportunity 100 rs to move in and try to gain market share for other playe With the weakening economy, the third and fourth quarters of 2008 were particularly hard on diamond Jers, Even historically successful players like Blue Nile, Tiffany, and Zales saw a decline in sales and a significant drop in their share price. As customers tightened their belts and cut back on discretionary pending, high-cost purchases such as diamond jewelry were often the first to be postponed. The situation worsened as competition for the shrinking number of tustomers became fiercer. In such a difficult environ ment, it was hard to judge which factors could best help ifferent jewelry retailers succeed Blue Nile In D Vadon, a young consultant nt ring and stumbled f D ant ‘4 + Designing Distribution Networks and Appl Customers selected the stone of their choice, followed by the setting they liked best. Blue Nile also allowed ‘customers to have their questions resolved on the phone by sales reps who did not work on commission. This low-pressure selling approach had great appeal to 4 segment of the population. In a BusinessWeek article’ in 2008, Web entrepreneur Jason Calacanis ‘was quoted as saying that shopping for his engage- ment ring (for which he spent “tens of thousands of dollars") on Blue Nile “was the best shopping experi- ence he never had.” ‘The company focused on providing good value to its customers. Whereas retail jewelers routinely marked up diamonds by up to SO percent, Blue Nile kept a lower markup of 20 to 30 percent, Blue Nile believed that it ‘could aftord the lower markup because of lower invento~ ry and warehousing expense. Unlike jewelry retailers who maintained stores in high-priced areas, Blue Nile had a single warehouse in the United States where it stocked its entire inventory. The company strategy was not without hurdles be= +s did not care as much about under- pricing the competition, For example, some customers preferred “a piece of fine jewelry in a robin’s egg blue box with Tiffany on it™ to getting a price discount, Also, it was not entirely clear that customers Would be willing to spend thousands of dollars on an item they, not seen or touched. To counter this issue, Blue Nile 1 30-day money back In 2007, the company launched Web sites in’ nd opened an offi mer service and fulfillment oper- Ja and the United Kingdom Houst jin office offered free shippi Western Europe 0 several The U.S. facility handled » some countries in the Asi pin International sales had increased from to more than $33 million in 2009 Nile had sold more than 70,000 arat with 25 orders te ng mot the company sold a sin. 1.5 million, Forbes called it per sum n Web history The stone, Ia 1 purchase unlikely er tha ameter roughly the size of a pna Applic Networks a 416 Chapter 4 + Desinine pistibution Net (Continued) Blue Nile did not hav’ network of suppliers from a dealer in Italy. The stone was reroul ters in Seattle and transport tarier to the buyer. ThE who inventory, but its ane on a plane to a retailer in en route Nile headauat- red in a Bri Je process 100! three days! In November ‘008, Blue Nile offered more thaf 75.000 diamonds on its site. OF these diamonds, more 75.080 ,000 were ne carat oF larger With PLES upto sna ation Almost 43,000 diamonds 00 12 Blue ie Web site were price higher than $2500 ip 2010, ue mpany CEO Diane Irvine was quoted $ty108 cre not positioned asa discounter. We are selling 2 vy high-end product but selling it for much less 1, 2007, the company had sales of almost $320 million with net income of more than $22 million. By November 17, 2008, however, its stock had fallen from a hish of more than $100 in October 2007 to less than $23, Inthe third quarter of 2008, the company saw its first decline in sales with its reported sales of $65.4 million beeing 2.9 percent less than the same quarter in 2007. In an upbeat announcement, the company stated, “Blue Nile 's well positioned to generate profitability and cash flow sven difialt mnit costo, We enain Sa i cr aility to continue arket share and to erge from this economic downturn in an even stronger Select Financial Data for Biue Nile). I Ine. (in thousands of dollars) 1 able Other accounts 1 receivable Total curent as Property and equipment, vases net Total assets ations 10 Ml ine Sales however, 2008 turned Out 10 be g ‘ sales dropping by just under j9 ‘ome falling by more than 25 9, however, both sales and income had, ie Nile (see Table 4-14). sition”: compesitive posts eeagins TaN arent and operating | roent. In 2 proved for Bl Zales er es Jewelers was established by Morris (MB) a Zale, ana Ben Lipshy in 1924. Their ma Zale Metegy was oof a red pan of a Penny down ret ara week” Their succes allowed them to pm to [2 stores in Oklahoma and Texas by 1941. Over the next fear decades, the company grew to hundreds of stores by buying up other stores and smaller chains. in. 1986, the company was purchased in a lever- aged buyout by Peoples Jewelers of Canada and Swarovski Intemational, In 1992, its debt pushed Zales into Chapter 11 bankruptcy for a year. It became a pub- lic company again in that decade and operated neatly 400 stores by 2005. The company’s divisions included Piercing Pagoda, which ran mall-based kiosks selling jewelry to teenagers; Zales Jewelers, which sold dia- mond jewelry for working-class mall shoppers; and the upscale Gordon's. Bailey Banks & Biddle Fine Jewelers, offered even pricier products ‘out of fancier malls, was sold by Zale in November 2007. 2008 nee 295,329 302,134 235,333 236,790 59,996 65,344 44,005 45,997 15,991 19,347 —_ ae 34451 7eqag 984 fea 75 a oe 755 : $58 2 ae 29,665 145 130,415, | |Chapter 4 + Designin cee years of declining market share, lost mostly ors such as Wal-Mart and Costeo, put pressure 10 Zales to decide on a makeover by 2005. Zales dumped the lower value 10-karat iry and modest quality The goal was to make the jeweler more upscale and f yy from its on.driven, lower end reputation. Unfortunately, Jays in bringing in Thn todiscounte «diamonds. promot The move was a disaster. There were de ; c sales dropped. The rew merchandise ny of its traditional customers without fas soon passed by t ‘and same-ste company lost m the new ones it desired. It w A (a subsidiary of the Signet Akron, Ohio-based Sterling ( gest jeweler in the United States. The Group) as the I chief executive officer of Zale Corporation was forced (0 resign by early 2006. In August 2006, under a new CEO, Zales started a sition to return to its role as a promotional retailer jamond fashion jewelry and diamond rings nearly $50 million in fox The transition involved selling Jiscontinued inventory from its upscale strategy and a expenditure of $120 million on new inventory. As a result of the inventory write-downs, Zales lost $26.4 million in its quarter ending July 31, 2006. The company had some success with its new strat but was hurt by the rise in fuel prices and falling hom 1007 that made its middle-class cus f Its core customers hesitated to Applications to Online Sales 1177 ng Distribution Networks and ending July 31, 2007, but same-store sales fell by 0.5 percent. In February 2008, the company announced plan to close approximately 105 stores, reduce inventory by $100 million, and reduce staff in company headquar~ tars by about 20 percent. The goal of this plan was to enhance the company's profitability and improve its Gverall effectiveness. However, the company lost more than $200 million in 2008 (Table 4-15). Tiffany opened in 1837 as a stationery and fancy goods ‘emporium in New York City. It published its first catalog in 1845. The company enjoyed tremendous success, ‘with its silver designs in particular becoming popular all over the world. In 1886, Tiffany introduced its now famous “Tiffany setting” for solitaire engagement rings. The Tiffany brand was so strong that it helped set diamond and platinum purity standards used all over the world, In 1950, Truman Capote published his best seller Rreakfast at Tiffany's, which was released as a success {ul film in 1961, After more than a century of tremen- ous success with its jewelry and other products, the company went publi¢ in 1987. Tittany’s high-end products included diamond rings, stone jewelry, and gemstone bands with diamonds as the primary gemstone, The company also sold non-gemstone, gold, platinum, and sterling silver Other products ineluded watches and high-end wedding bands, g Zale Corporation July 2009 79,744 3,572« Distribution 418 Chapter4 * esigning Di (Comimued) items for the serving trays. Bes velry designed by Jean Schlumberger 3d a By 2010, Tiffany had cover the world with - jobal outlets, Sates OF teres AS Japan and atom 1,300 t0 18,000 square Stores ranged rom 1.30010 TS 9 FT tre in New average of 7,100 square fee! i +s sales 3 cent ofthe company York contributed about 10 pere' bei 2007 Besides retail outlets, Tiffany also sold produc a = = any, ver, 4a Web site and catalogs. The companys se . agement jewelry through its Wel end products, including jewelry, syere sold primarily through the retail stores, The direct Channel focused on what Tiffany referred to as D’ items, which consisted primarily of non-gemstone, sterling silver jewelry with an average price of $200 in 2007. Category D sales represented about 58 percent of total sales for the direct channel. In contrast, more than half the retail sales came from high-end products such as. diamond rings and gemstone jewelry with an average sale price in 2007 higher than $3,000. a iis maintained its own manufacturing facili- ae a! es oat od New York but also continued © source from third parties. In 2 eS 'S jewelry from internal les its own feet with an though did not offer any engi site as of 2010. Its hi (in thousands of dollars) iffany & Co, Net sales on = eee 2.848.859 > Gross profi ened 2,709,704 Selling, general 202,417 1 eral, and administ 1,646, 9,485 Operating incom ative expenses 646,442 ‘ at : 530,219 1,153,944 9 noe 304653 tae : equivalents 440,492 ade accoun Ie UM Feceivable rventories, Total curent assets Property ‘and eq Other assets Toal wipment, net assets Select Financial Data forTi from jewelry, with sales coming from products various sizes.° Products ¢ monds of one carat or larger percent of net sales in 2007. Select Tiffany's performance over this Table 4-16, ae Tiffany brand’s association and exclusivity was an imy p cess. No other diamond and jewel a ‘margins anywhere near those enjoyed by Tiff un 158,706 1,427,855, 2,445,666Chapter 4 + Designing Distribution Networks and Applications to Online Sales 119 annual reports, the company listed the strong brand as ‘or risk factor because any dilution in its brand se would have a significant negative impact on its maj margins. study Questions 1. What are some key success factors in diamond retailing? How do Blue Nile, Zales, and Tiffany compare n those dimensions What do than 30,000 ou think of the fact that Blue Nile earries more ones priced at $2,500 or higher wi most 60 percent of the products sold from the Tiffany Web site are priced at around $200? Which of the two product categories is better suited to the strengths of the online channel? 3. What do you think of Tiffany's decision to not sell diamonds online? 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? $8. Which of the three companies do you think is best structured to deal with weak economic times? ‘6. What advice would you give to each of the three compa- nies regarding its strategy and structure?