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Blue Nile CEO Sees Changing Shoppers, Smarter Consumers

By Markets Fool.com

Blue Nile (NASDAQ: NILE) has been on the leading edge of changing how consumers shop not just for diamonds, but ultimately for nearly anything.

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The company has been a disruptor in a very traditional business bringing in $113.8 million in sales during its second quarter. That's a small piece of a multi-billion dollar business, but it's a very impressive number when considering that Blue Nile has managed to get consumers to change how they buy diamonds, engagement rings, and other jewelry.

This has always been a field where the purchaser went to a store and handled the merchandise, but Blue Nile has created a pure-digital sales operation. Even in its five webrooms -- physical locations where consumers can actually touch the jewelry -- the transaction is completed digitally.

It's an evolving model that will almost certainly impact industries well-beyond jewelry. Now, Blue Nile is changing how it operates. The company will move from public to private after being bought out by an investor group comprised of funds managed by Bain Capital Private Equity and Bow Street LLC.

That deal, which brought shareholders a 34% premium over where shares had been trading, lets the company focus on continuing to innovate without feeling the pressure to deliver on a quarterly basis, as public companies have to do. The deal is expected to close in early 2017 and after it does Blue Nile CEO Harvey Kanter will still be running the show.

He called The Motley Fool to speak about his company and the future of shopping in general on Cyber Monday just after he finished ringing NASDAQ's opening bell.

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Blue Nile sells diamonds and engagement rings. Image source: Blue Nile.

Consumers are changing

Kanter told the Fool that he has seen an increased willingness for consumers to make big purchases digitally. Most notably he has seen a lot of business move from desktop to mobile devices.

"We've had over a dozen orders over $100,000 made on a mobile device recently," he said. "The largest orders was $240,000 on an iPhone, which is pretty amazing"

The CEO also noted that his company sold out of 10 carat diamond tennis bracelets (roughly $20,000-25,000 each) over the early part of the holiday weekend. "Most of that was done mobily," he added, noting that traffic to the company's webrooms was up as well. "Consumers are much smarter in the way they are approaching the business. They are choosing how to shop rather than letting us choose it for them," Kanter said.

Shoppers are shoppers

Blue Nile has gone a long way toward showing other luxury retailers that online shopping can work. Part of that has been demonstrating that it's possible to sell an intimate item like an engagement ring without having returns well in excess of normal industry ratios (about 8% annually and 10% during the holiday season, according to the National Retail Federation).

Kanter said that in its engagement business, which accounts for 70% of it Blue Nile's revenue, return rates are in the high single digits. In its fashion business, the number climbs to low double digits. Overall, he added, the total comes within overall retail norms -- which is stunning when you consider the advantages physical stores have in letting people handle, try on, and otherwise examine product.

Millennials are different/the same

Younger shoppers, the Millennials who grew up in a world with online shopping, have different habits than older generations. But, while they may buy differently, their wants are similar.

"What they shop for is the same," Kanter said of Millennials. "They are very oriented around traditional engagement rings -- single-stone center engagement rings."

Younger shoppers, he explained, want the rings their parents did, but they shop for them differently. "They're much more digitally oriented and much more comfortable buying online," Kanter said.

While Millennials may be driving online luxury-item shopping, older generations are clearly getting on board as well.

"The higher ticket items, the 10 carat tennis bracelets and the higher-priced items are probably not Millennials," Kanter acknowledged.

Will digital end sales holidays?

Blue Nile does about 35% of its business in Q4, according to Kanter. The company runs some promotions, but in general it avoids the major sales that have become traditional from Thanksgiving through Cyber Monday.

"We have really evolved the experience for the consumer," Kanter said. "We bring everyday value to the marketplace. About 85% of what we do is priced at an everyday value with no promotion whatsoever."

Kanter acknowledged slightly increased promotional activity in Q4, but said that's not how the company operates. "Our promotions are nothing like traditional retail," he said. "It's really about being 20%-40% below traditional retail everyday."

The CEO said that model "resonates with consumers" who "don't have to wait for a sale." He explained that the company's model always offers "demonstrably better value over traditional retail," which allows it to not have to chase customers during the holiday shopping season. That's a model that other digital retailers could embrace and ultimately something that could help flatten out the sales calendar, changing how people shop, and lessening (but not eliminating) the importance of Q4 for many retailers.

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Daniel Kline has no position in any stocks mentioned. His wife of 16 years has a really nice engagement ring she has only worn a few times. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.