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June 2004

Are the heady days of the Internet IPO back? Seattle-based retail jewelry web site Blue Nile recently went public, raising $76 million in an IPO. After the IPO, the shares jumped 32% to $27.14.

Good news for the company, but we wonder what that new capital will be used for. Part will go to the venture capitalists who have loaned it money—and part will go to advertising and marketing, in which they excel. Overhead expenses are 14 percent of sales — lower than many jewelry retailers but far above many diamond businesses.

One thing the money likely will not be used for is inventory. According to Blue Nile’s financial statement, it does not own all of the diamonds it lists. Instead, the stones are owned by its suppliers, Blue Nile only buys the stone once the order is placed and it‘s drop-shipped for them. Obviously, there is a large market for instantaneous diamond sales on the Internet. Last year the company sold $128 million last year and the market is growing, as more people grow more accustomed to Internet shopping. Other internet retailers will surely follow suit.

But we’ve noticed two types of Internet customers. One is the customer that just wants to point, click and buy. That’s the Blue Nile customer. Then there’s the customer who takes his time, who wants a diamond expert to look at the diamond and explain the intricacies of diamond to him. Answering questions like, “where is the inclusion located?” Just like you might see a potential spouse on the Internet— but you wouldn’t want to marry them until you meet them.

That’s why diamond professionals shouldn’t worry that sites like Blue Nile are going to take over the business. Sure, millions will be sold on the click, on Blue Nile and sites like it. But there will also be billions sold by diamond professionals.

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