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THINKING OUTSIDE THE JEWEL BOX

TIFFANY'S NEW SUCCESS STRATEGY INCLUDES SMALLER STORES AND LOWER PRICES

By Jesse Serwer

In October Tiffany & Co. opened one of its grandest stores to date, on Wall Street, in an 11,000-square-foot space at the base of the former Trust Company of America building. The opening, heralded with the hanging of a Tiffany-blue banner at the nearby New York Stock Exchange, was doubly significant, because it marked a return to Lower Manhattan for the ultra-luxe jeweler, which opened its first store in 1837 on Broadway, several blocks away. (The company moved several times before settling at its famed flagship location on Fifth Avenue.)

At a breakfast for analysts and investors inside the Wall Street store one week after its opening, Tiffany announced an even more significant development: the creation of a smaller-size concept to bring Tiffany-style luxury to a broader consumer base. The 2,000-square-foot store model, tentatively called Tiffany & Co. Collections, will be aimed squarely at the self-purchase customer. No engagement rings or high-priced statement jewelry here, just women's jewelry priced at about $100 to $15,000.

This smaller store and the lower price points will enable Tiffany to go deeper into several existing markets as well as enter some attractive smaller ones, CFO James Fernandez said during Tiffany's third-quarter earnings call. "The addition of this new format should ultimately increase the number of Tiffany stores in the U.S. from our previous objective calling for at least 100 stores to a new objective for as many as 170 stores," Fernandez said.

Analysts anticipate that the Collections format will boost profits and returns. Tiffany shares rose nearly 4 percent immediately after the new concept was announced. "Given the exclusion of the lower-margin engagement product, these stores stand to be accretive to gross margins over time," wrote Dana E. Cohen, a Banc of America Securities retail analyst, in a note to investors. "The exclusion of [engagement rings] and statement jewelry also means a reduced required inventory investment. Furthermore, these stores should require lower capital investment and overhead expenses."

The growing importance of less-expensive silver jewelry was reflected in the retailer's December 2007 sales results. "There was some sales softness above $50,000," vice president of investor relations Mark Aaron said on a post-holiday conference call. "On the other hand, the best increases were in the $10,000 to $50,000 range, which includes a significant portion of engagement jewelry, as well as in the $500 to $1,000 range, which is comprised primarily of silver jewelry."

The Collections concept is slated to make its debut in the fall, though the company has specified no locations just yet. Tiffany will then open three to five Collections units per year beginning next year, according to a news release. The retailer, which currently operates 68 stores in the U.S., will continue to open its core 5,000-square-foot Tiffany & Co. stores at a rate of about half a dozen per year.

"The Collections business not only allows Tiffany to extend into new markets but also to expand their customer base while maintaining their core franchise of being the premier luxury goods jeweler in the U.S.," said Dana Telsey, CEO and chief research officer of New York City-based Telsey Advisory Group. "The price point certainly allows the concept to travel, and the small size of the box creates more opportunities for the company to grow."

Tiffany would not comment for this story, but Chairman and CEO Michael J. Kowalski told Women's Wear Daily last year that the Collections concept represents "a new way" of looking at the company. "We believe there is a much larger Tiffany universe," Kowalski said. "A more modern design will allow us to showcase jewelry, so you can interact with it and explore."

Designed by Tiffany's in-house architects, the Collections stores will make use of both freestanding and wall displays, and the merchandise will be based on trends rather than categories, to highlight styles that may be overlooked in Tiffany's larger stores. The new stores will also emphasize Tiffany's watch collection. Watches account for only about 3 percent of the company's current sales, but Tiffany intends to raise that profile through a venture with Swatch Group, which will produce and distribute some new collections of Tiffany's Atlas, Tiffany Grand and Tiffany Mark watch lines next year.

But will this mass-market approach diminish the prestige of the Tiffany name in the eyes of big-ticket consumers who value exclusivity over accessibility? "Some people are concerned that this dilutes the brand," said Stacey Widlitz, a specialty retail analyst at New York City-based Pali Research. "I don't think that just because you have smaller stores with a smaller range of price points, it alienates the [traditional] customer. They are still capturing the high end at the $15,000 range, and that's where the majority of their sales are anyway. If the customer wants an engagement ring, they can go to a nearby Tiffany's store that offers that."

Telsey agrees. "I think that as long as it's done gracefully and carefully, we've seen these plays to be brand enhancing," Telsey said. "There's a compatibility between [Tiffany's] flagship stores and these stores. The jewelry market is expanding and there's more self purchase, so this is really an opportunity to gain market share."

In her note to investors, Cohen pointed out that Tiffany is not offering different or lower-end product at the new Collections stores. "[They] will carry a subset of the core Tiffany mix," she wrote. "Although the focus will be primarily on the company's exclusive, contemporary lines, the stores will carry largely the full Tiffany line with the exclusion of engagement rings and statement jewelry, and will probably also exclude tabletop."

Widlitz insists that rather than expose Tiffany to new competition, this repositioning for a broader audience will help solidify its market share. "A lot of different retailers are going into the jewelry business - Coach has $150 bangles, Hermès has bangles for $400," Widlitz said. "Right now [Tiffany] competes with everyone from Cartier to DeBeers to your local regional jewelers. But I don't think they're inviting in new competition. The items they will be selling are the same as what they already have, they'll just be in smaller formats, and the price points are more introductory. It won't change who they're competing with."

Widlitz says further that locations are unlikely to be concentrated in any one particular region or market type. "It doesn't have to be all new markets, either," Widlitz said. "The 70-store total is probably going to include fill-ins as well, in markets where they already have the 5,000-square-foot store."

There are silver opportunities everywhere, it would seem.

Have an opinion about this or any other story in SCT? Send feedback to emander@icsc.org