Jewelry is generally sold as an emotional purchase to mark life’s milestones such as a birthday, anniversary or some other similar event. Most jewelers’ advertising evokes an emotional pitch. De Beers’ campaign, A Diamond Is Forever, is based solely on the emotional appeal of a diamond.

 

What happens when jewelers stray from this core “emotional” advertising message? They often end up with results similar to those posted by Zale for the three-month period ended January 2009. Sales were down and the company posted a loss for the quarter.

 

The November-December-January period is the most important selling period of the year for jewelers. If they can’t build sales and generate profits in that period, the rest of the year could be bleak.

 

Neal Goldberg, Zale’s CEO, acknowledged that the company strayed from its core message, a message that he has been trying to strengthen. Originally, Goldberg said, Zale’s strategy for the holiday period was to emphasize emotion and item specific promotions. As Christmas came closer, the company adjusted its strategy to emphasize store-wide discounts and urgent calls to action. This last-minute change in strategy cost the company dearly.

 

Here are Zale’s results for the holiday period, and they are disappointing:

 

Goldberg and his team say they’ve learned their lesson: it’s back to basics and the appeal of an emotional advertising message. He said, “The emotional part of [our advertising] is still right on [target].” He went on to say that the response that Zale gets from its emotional advertising message is much more positive than the response that the company gets by putting the whole store on sale.

 

Not only were sales weak during the quarter ended January (total sales were down just under 18 percent), but the company’s gross margin fell by 530 basis points to 44.0 percent from the prior year’s 49.3 percent. Cindy Gordon, Zale’s interim chief financial officer said, “We believe we gave up approximately 500 basis points in gross margin due to an aggressive promotional stance over the holiday.” And look what it got them: sales that were extremely weak. That knife has a double edge: weak sales also drove up the company’s operating cost ratio, since overhead costs were inefficiently absorbed.

 

There was one other interesting financial metric that fell out of the holiday selling period: the average ticket was about flat with last year, but the number of transactions fell in line with the sales decline. What this says is very important: those people who planned to buy jewelry had a budget – a set amount they were planning to spend. They would have spent that much, even if Zale had not engaged in such heavy discounts. In short, price discounting hurt Zale’s both gross margin and total sales.

 

The lesson for jewelers: cutting prices is a very dangerous game for jewelers; just ask Zale.

 

Who else is focusing on the all-important emotional appeal of jewelry? De Beers dumped millions into advertising during the 2008 holiday selling season, and none of it mentioned “discounted diamonds” or “deal of the day.” In a recent issue of Vogue magazine, Tiffany took out a two-page spread; the only copy was as follows: “Hold on to those fleeting moments that matter most. An important anniversary, a proud accomplishment, a new arrival. A Tiffany Celebration Ring captures your feelings, for all time.”

 

Switch Back to Original Strategy Has Produced Results for Zale

Immediately following the disappointing Christmas selling season, Zale returned to its original strategy – an emotional appeal and specific item promotion. What has been the result?

 

• The company’s gross margin has returned to about 50 percent, up from the very weak 44.0 percent for the holiday period.

• Same-store sales have improved notably, though they are still running negative, except in the kiosk division – Piercing Pagoda – where they are running positive.

• The average transaction value has risen.

Zale’s Strategy

We continue to believe that Zale has implemented a strategy that will be successful over the longer term, despite a very tough economic environment. Goldberg summarized elements of his team’s strategic plan, as follows:

 

• The company has three key objectives:
• Focusing on its value-oriented customer with a price-appropriate assortment
• Operational efficiency in its supply chain and stores
• Aggressively managing cash and capital expenditures

• The company has announced the second phase of its cost reduction plan. After implementing a plan in early 2008 which identified $175 million in inventory and cost reductions, the company has now identified a further $140 million of additional inventory and cost reductions, including the following:
• About $34 million in costs will be eliminated due to the closing of about 115 under-performing stores (mostly Zale’s and Gordons, but almost no Zale Outlet units)
• About $21 million from staff reductions throughout the organization, including 245 positions representing 170 people (the balance of the positions were unfilled)
• About $10 million through store-level and in-store efficiencies
• An additional $75 million in inventory reductions through improved inventory management

• Zale’s capital expenditures will be about $30 million in the new fiscal year, a 65 percent reduction from the prior year.

• Since the beginning of 2008, the company has reduced its vendor base by two-thirds. It is seeking further vendor efficiencies, and management says it will create stronger relationships with those who remain.

• Zale’s replenishment system will run on a “real time” basis in an effort to boost supply chain efficiency.

• Regional directors will now be required to live in the markets that they supervise. This will help build local expertise of the market, and increase training efficiency. Further, communications should be enhanced.

• Zale will continue to sell clearance goods, but they will be a much smaller portion of total sales. This should help boost the company’s gross margin.

• New goods – many exclusive to Zale – have been generating a gross margin of 500 to 700 basis points higher than the company average, including during the holiday selling season. Clearly, customers want something new and different.

• Zale’s Pacesetter stores continue to perform above average, both in terms of sales levels and margins, according to management.

• Zale is aggressively challenging its rents, especially as leases renew, and they are proactively renegotiating existing leases with landlords. There’s an old adage that jewelers should heed: “If you don’t ask your landlord for a rent reduction, you surely won’t get it.”

• Like most retailers, Zale underwent a re-valuation of its inventory during and after the holiday selling season. During the holiday selling season, the inventory per store was lower, the inventory turn was up and total inventories fell 11 percent from last year.