Tiffany and Co Case study

Case Agenda

Is blue box packing a great strategy? Given that spending in the luxury retail market has demonstrated resilience during and post recessionary times, how can Tiffany continue to grow? Will it be able to maintain a prominent brand in future?

Company HistoryTimeline 1837: Founded in New York by Charles Lewis Tiffany and John F. Young: The Blue Box introduced1910-1940s: 57th street and Fifth Avenue Flagship store2000: Tiffany and Co. foundation establishedThey sell jewelry, timepieces, silverware etc using their key stores in high profile locations. 90% of their revenue is from jewelry.Out of 90%, 57% revenue is generated from their affordable line collection.

PORTERS V FORCES

Competitive Rivalrya) Market is fragmented with Tiffany having the second largest market share after Signetb) People can go to other retailers such as Cartier, Signet or Blue Nilec) Even the chain stores, like Costco is posing huge competition not because of cheap cost and good quality but also good return policy.Customers can get bigger carat diamonds of next to similar quality at half a price; the only difference is the brand and bi big blue box packaging.

Supplier Powera) Few diamond suppliers in the world, so they have power to dictate prices.b) Moreover they do diamond cutting and polishing on their own

Buyer Powera) Buyers have high disposable incomeb) They feel connected with the brandc) Able to choose from retailers and easily switch, so emphasis on experience

Threat of Substitutesa) When buying engagement rings, there are few substitutesb) When buying other designer pieces and accessories then wide range of options and retailers.

Barriers to Entrya) High cost of capital to start a luxury jewelry businessb) Consumers likely to shop from a brand that they know

Analysis of external factors

Political: Government plays a key role in mining practices, so there is an ease in getting raw material at cheap prices.

Economic Factors:a) Asian markets are growing extensively especially China. It is the fastest growing and second largest luxury market in the world.b) America is the largest diamond market followed by China.

Social factors: a) Spending on luxury goods has increasedb) Brands are more important to customers than products.

Technology:All jewelry designers use Computer Aided Design

Analysis of Internal factors: Resources

Intangibles:Brand name and image i.e. high quality, sophisticated, classic Moreover their CSR activities add to their image.

Human Capital:a) Sales trainingb) Design team, which includes leading designers Elsa Peretti, Frank Gehry and Paloma Picasso.

Tangibles:a) Inventoryb) Real Estatec) Prestigious store locationsd) Metal and gemstone mines.

Core Competencies and Competitive AdvantageCore Competenciesa) Design and innovationb) Marketing and excellencec) Brand developmentd) Customer servicee) Quality and craftsmanshipf) Distribution

Competitive Advantagea) Product differentiationb) Brand loyaltyc) Online retail presence

SWOT ANAYLYSIS OF TIFFANYStrengths

Majority in-house production(60% production and 70% diamonds sourced directly from mines) Strong brand in the highly fragmented market (2.1% market in the real jewelry market and ranks 2nd in market share) Strong direct selling channels (21.7 M catalogues in the US in 2006 and 0.7M sales via telephone, internet or US mail) Broad offerings (About 3,500 products-jewelry, timepieces, sterling silverware, china, crystal, fragrances, stationary, precious and semi-precious stones, titanium etc.) CSR initiatives (Bristol Bay Protection Pledge to preserve salmon fishery and surrounding wilderness and uses 100% recyclable paper and blue bag etc)Weaknesses

No Promotion model(Average engagement price range $10,000 three times the market average, never offers any discounts or promotions, etc.) Increase in debt and interest payments($4,00 M long term debt since Dec 2008, increase in interest expense to $26M from $4.2M in 2008)

Opportunities

Economic Recovery (Jewelry market grow by 4%, even in economic troubles market was $48 billion in US) Bridal jewelry (2009-2025, About 80M people are reaching marriageable age) The Asian Factor (Growing high net worth individuals in Asia Pacific. 2.9 M millionaires in NA, 2.8M in EU and 2.4M in Asia Pacific) Small Store Format (From 15,000 sq ft, attain high productivity of $1,000 per sq ft) Tiffanys for Men (Mens toiletries segment is $2.4 B and growing at 3%)

Threats

Margin Pressurized (Jewelry price inflation at producer level by 6.7% and retail price decline by 0.4% due to economic conditions, thus shrinking profit margin for jewelry retailers) Counterfeit crime hurting brand image(Australian Customs and Border Protection Service seized 10,778 fake Tiffany items generating loss of $8.5 B and damage to brand) Disappointing performance in JP market(Low customer confidence in JP market, 2005 and 2007 revenues dropping by 22.3% and 18.6%, closed 7 store in Japan)

COMPETITOR SWOT

BLUE NILE

BULGARI

Key Success Factors and Core Capabilities

Key Success Factors

Introduction and execution of e-commerce Understand economic conditions and reacting Aspects of consumer spending

Core Capabilities

Ability to select and display high-end jewelry to create a sustainable advantage Constantly strive towards innovation Commitment to the highest standards for social and environmental responsibility

Cost StrategyThere are three types of cost strategy:Cost LeadershipDifferentiationFocusThe main cost in the jewelry industry, and thus experienced by Tiffany and Co. is the cost of raw materials: diamonds, gold, platinum etc.Tiffanys offers a broad product range to several types of markets.Their main focus is in the fine jewelry and bridal markets.The signature blue box which Tiffanys is known for differentiates it from all other companies.However, Tiffanys is more focused on separate markets and target groups within them suggesting a more focused cost strategy.Tiffanys main source of capital is through external investors, not debt financingAs previously stated, the main cost is the cost of raw materials.The stronghold over diamonds by companies like DeBeers and Aber Corp. Have forced Tiffanys into long term contracts for raw materials purchasing.This reliance on diamond is also placed on Tiffanys competitorsTiffanys used the LIFO method for inventory costing for years, but recently switched to the average cost method.Most of the jewelry industry, and Tiffanys main competitors use FIFO instead.This inflates competitor financial statements by portraying a smaller number for inventory expenses

Strategic Issues and Problems

The main strategic issues that Tiffany and Co. must consider involves: The state of the economy And whether they should take a short-term or long-term approach to stabilizing their current condition.

Realistic Options/Choices

There are few basic options:Option 1: Broaden Scope Through Lower-Priced JewelryOption 2: Focus on Brand Image and ExclusivityOption 3: Expand distribution channelsOption 4: Expand into Europe and Asia

Option 1: Broaden Scope Through Lower-Priced JewelryTiffany & Co. is known for being innovative, and this would be a good opportunity to differentiate themselves from their high-end discounting competitors.Discounting a price is never an option for TiffanysTiffanys could introduce more high quality, yet appropriately priced, lines of jewelry to accommodate this volatile time period.This option focuses on stimulating short-term sales to stabilize the company during the recession.Advantages Increases sales and market share Preserves the missing segment of aspirational buyers Stabilizes the company during the recession

Disadvantages Only a short-term fix May compromise the integrity of the brand Could drive away the upper-class consumers Creates long-term profit loss

Option 2: Focus on Brand Image and ExclusivityInstead of broadening their scope, this option proclaims that Tiffanys should focus on building and maintaining their high-end identity. This can be done through having consistent product assortments that are symbols of quality, prestige, and value.This options focuses on maintaining long-term success and profitability. Thus, it requires riding out the recession.Advantages: Consistent with the brand image Maintains long-term success Upholds the companys exclusive reputationDisadvantages: Risk riding out the recession Short-term loss of profits and market share

Option 3- Sell through distribution channelsAdvantages Ability to access broader market base through increased availability of Tiffany and Co. products Retain high-end brand exclusivity by sharing store space with established, recognized, high-end retailers. Allow for great accessibility and marketing of lower-priced Tiffany products through expanded distribution channels

Disadvantages Risk of perceived brand dilution from top-tier Tiffany consumers Increased cost of operations to expand distribution network. Cost of contract with department stores

Option 4- Expand in Asia and EuropeAdvantages Demand Condition in Europe Prestige of fashion/image/designers Fill out Tiffanys demand curve-Absorb wider range of diamond inventory-i.e., supply of different carat sizes filled Related and Supporting industries: Antwerp diamond market is located in Europe (Belgium) Europe itself is a huge market (e.g., 1% of raw diamond market is 20% of Chinas market) By 2016 Asia-Pacific growth is anticipated at 25% By 2016 Europes anticipated growth is only 9% however, this is outweighed with the relative size of the European market. Average luxury consumer age China is 20 years younger- huge potential market.

Disadvantages Many countries trends indicate a lower tendency to buy engagement rings with diamonds-only the bands are purchased Further expansion in Asian market can increase counterfeiting, which can lead to brand dilution.

FINAL THOUGHTS

To ensure profitability, Tiffanys top management must create a strategy to grow with this market trend: customers are spending more money in the luxury retail market.It should go with a strategy mix where it focuses on brand image and broaden its market share to an extent, by low medium priced jewelry and via distribution channels. Moreover in near future it should plan to grow its business by focusing on opening new stores in Asia and Europe. So a policy mix that suits its financial strength and goals should be used.

IMPLEMENTATION STRATEGY

Determine best locations within Asia-Pacific by income levels Design should be aligned with local culture (Chinese and Indian designs) Promotion through high end launch parties Promotion through international and local celebrities.