Zale Corporation 2008 Case Analysis # 4 Submitted by: Pauline Mae L.

Naranjo

Submitted to: Prof. Rose Lacerona 8/19/2013

About Zale Corporation Zale is multifaceted. One of North America's largest specialty jewelry retailers, Zale sells diamond, colored stone, and gold jewelry (diamond fashion rings, semiprecious stones, earrings, gold chains); watches; and gift items at some 1,125 stores and 655 kiosks, mostly in malls, throughout the US, Canada, and Puerto Rico. The firm, which targets the value-oriented customer, has a trio of large chains aimed at different jewelry markets: Gordon's Jewelers, flagship chain Zales Jewelers, and Piercing Pagoda. Zale also operates about 130 jewelry outlet stores, run more than 200 stores in Canada under the Peoples Jewellers and Mappins Jewellers names, sells online, and offers jewelry insurance. For nearly 90 years, Zale Corporation has provided extraordinary ways to say "I love you." As a leading specialty retailer in North America, the Zale family of brands provides our customers with fine jewelry, watches and gift items that offer great value at more than 1,930 locations throughout the United States, Canada and Puerto Rico, and online at www.zales.com and www.gordonsjewelers.com. With an exceptional assortment of jewelry and gifts, including diamonds and an exclusive wedding collection, our brands are famous for helping turn important milestones and celebrations into priceless, life-long memories. (http://www.zalecorp.com/AboutZaleCorp.aspx) The Zale Corporation Story From a single Zales Jewelers store in 1924, to six retail brands with approximately 1,900 stores throughout North America and online at www.zales.com and www.gordonsjewelers.com, Zale Corporation has stayed true to its original vision: Provide customers with quality merchandise at the lowest possible price. After decades of growth, we are now more passionate than ever about being the jeweler people turn to for the perfect expression of love.

Time Context 1920s Morris and William Zale have a vision: Provide customers with quality merchandise at the lowest possible price. The vision becomes reality with the opening of the first Zales Jewelers store in Wichita Falls, Texas, on March 29, 1924. Inventory includes small appliances, cameras and cookware, in addition to jewelry. 1925 The Zale brothers launch a revolutionary marketing strategy with a credit plan of "a penny down and a dollar a week," making jewelry and other merchandise affordable to the average working American. 1938 The success of the credit policy, coupled with friendly customer service, leads to a period of tremendous expansion, with roughly one new store each year for a total of 12 stores in Oklahoma and Texas by 1942. A cooperative buying system is established to centralize the purchase and distribution of merchandise for all stores, which enables the company to buy in larger quantities at lower prices. Centralized buying marks the beginning of the chain store concept for Zales. 1941-1944 Zales Jewelers responds to the limited production of consumer goods during World War II by maintaining its current prices on jewelry, limiting expenses and looking for growth opportunities. Zales acquires Corrigan's of Houston, its first "carriage trade" (fine jewelry) store in 1944, eventually leading to the launch of the Bailey Banks & Biddle brand.

1946 Zales Jewelers moves its headquarters from Wichita Falls to Dallas. 1950s The company installs one of the country's first computer systems and is among the first major jewelers to institute management training. 1957 Zales Jewelers broadens its reach, opening the first store in a shopping center a major shift from operating only in downtown locations. The same year, Zales announces the initial public offering of its stock (ZLC) and begins trading its public shares on the American Stock Exchange the following year. 1960s Following the discovery of synthetic diamond technology, the company diversifies, branching out into shoes, sporting goods, drug stores, furniture and catalog stores. Reflecting this diversity, the company name becomes Zale Corporation. 1970s M.B. Zale retires as company chairman in 1970. The company's sales triple during the decade to $1.04 billion in 1980. 1984-1985 Zale Corporation unveils acquisition of the 890-carat "Incomparable Diamond," the largest internally flawless diamond in the world. In 1985, Zale moves its world headquarters to Irving, Texas. 1986-1989 The leveraged buyout of Zale Corporation by Peoples Jewellers of Canada and Swarovski International of Austria is completed. Gordon's Jewelers, a 469-store chain, is acquired in 1989.

1990s In 1992, Zale Corporation files for Chapter 11 bankruptcy, but emerges the following year as a financially stronger company after restructuring its debt. Five years later, annual sales top $1.3 billion, showing profit in all four quarters for the first time since the reorganization. 1998 Zales Outlet is launched, giving the corporation 13 locations in premier outlet centers nationwide. Online shopping is launched at www.zales.com. 1999-2000 Zale expands with two major acquisitions: Peoples Jewellers of Canada and Piercing Pagoda. 2007 Zale expands its e-commerce business with the launch of www.gordonsjewelers.com. To better focus on the core business and increase returns on capital, Zale divests the Bailey Banks & Biddle brand. 2008 Zale Corporation creates a new management team under the leadership of CEO Neal Goldberg that includes veteran Zale executives and new talent with significant retail experience. The JCK-Harrison Group Consumer Jewelry Study also ranks Zales #1 in unaided brand awareness. 2009 Zale Corporation marks the 85th anniversary of the opening of the first Zales Jewelers store with a donation to the M.B. and Edna Zale Foundation, presented to Donald Zale, son of company founder M.B. Zale. Zales Outlet unveils its e-Commerce site with the launch of zalesoutlet.com.

2010 Zale continues to expand its e-Commerce business with two significant launches: pagoda.com, providing an online presence for Piercing Pagoda, and peoplesjewellers.com, bringing multi-channel shopping to consumers across Canada.

Summary of the Case Zales is an organization that has shown significant increase and decreases over its lifetime. Zales is a specialty retail jewelry corporation that only focuses on the best of jewelry. A lot of Zales ups and downs have to do with the economic situation. When the economy is booming the jewelry is on the rise but, when the economy is struggling, jewelry is usually the first to be hit. In this case, Zale should try to reach out to some of the less fortunate folks. Zales operates stores in the U.S., Puerto Rico, and Canada. They employ approximately 16,900 employees in 2,394 of their stores. Although Zales is the largest specialty retail corporation, they have suffered to maintain their dominance in the industry. There are several reasons why Zales is not leading their competition. One reason is because of their organizational structure. They lack with consistent leadership because of the often changes of CEOs. They also lack on their focus strategy. Before they become the most dominating jewelry corporation they must first figure out which way they are going to lead their company and who is going to lead them. They are going in a new direction when Neil Goldberg became CEO in 2007. Along with the leadership problems Zales also have external and competitors to deal with. Externally the jewelry industry is gaining and sustaining market share, and is growing international competition. This can become a problem because most jewelry are created or come from international waters. This should encourage Zales to expand their company more across the globe. They should take a chance in the growing market to earn more revenue. Also when the economic situation is horrible jewelry takes a hit. A study has shown that more people would take synthetic diamonds or natural diamonds, only because of the bad economy and to reach consumers that are not able to spend an arm and a leg for jewelry.

Zales have 3 major competitors, which are Signets, Tiffany, and the Surging Blue Nile. With Signet leading in revenue at $3,403,500,000 they come second with its profit margins in at 11.20%. While Tiffanys leads in profit margins with 15.20% with only 8,120 and 3rd in revenue at 2,395,000,000 right behind Zales at 2,439,000,000. While all the top competitors in specialty jewelry, Zales will have to expand their product line and service to continue to compete and have a chance to lead their competitors.

With Zales being in a tight competition, they are doing some good things such as supporting organizations that oppose the mining of dirty gold. Zales are primarily pursing a direct sale strategy, offering products throughout all segments from basic to fine jewelry.

Vision Statement Provide customers with quality merchandise at the lowest possible price. After decades of growth, we are now more passionate than ever about being the jeweler people turn to for the perfect expression of love.

Mission Statement The Mission of Zale Corporation is to be the best Corporation is to be the best specialty retailer in North specialty retailer in North America. Our goal is to America. Our goal is to develop and maximize the develop and maximize the finest collection of jewelry finest collection of jewelry brands in order to build lasting brands in order to build lasting customer relationships that customer relationships that will generate solid returns for will generate solid returns for our shareholders.

Improved Mission Statement The mission of Zale Corporation is to be the Corporation is to be the best specialty retailer in the World. Our goal is to enhance our merchandise assortment to ensure that we offer styles that inspire and reflect the lifestyles of our customers.

Honors / Awards / Recognition 1. Linz Award Part of the Zale corporate culture is to recognize exemplary leadership and volunteerism that enhance the life of fellow citizens. Each year we reaffirm this commitment through our sponsorship of the Linz Award - one of Dallas County's oldest and most prestigious civic honors. The Linz Award was created in 1924 by Simon Linz, one of the founders of Linz Jewelers, acquired by Zale Corporation in 1989. The award has recognized Dallas County citizens whose civic or humanitarian efforts have created the greatest benefit to the community. Now in partnership with The Dallas Morning News, Zale Corporation is proud to continue the legacy of this award.

I. Central Problem The main problem of Zale Corporation in this case study is how they will recover from its below average performance of the past six years. This happened due to having of unfocused strategy, lack of consistent leadership, and uncertain economy. Zales is competing but must find ways to advance their corporation either by expanding globally or product line.

II. Objectives To be a world class jewelry provider to all classes To provide customers with quality merchandise at the lowest possible price To regain its once stellar performance in the jewelry retailing industry To improve from its below average performance for the past six years

III. Areas of Consideration SWOT Analysis STRENGTHS 1. They have decades of experience and expertise in the diamond industry. They have great knowledge regarding diamonds. 2. They have over more than 1,930 locations throughout the United States, Canada and Puerto Rico, and online at www.zales.com and www.gordonsjewelers.com. 3. The company has comprehensive wedding, bridal, engagement and anniversary collections, which gives it a competitive edge over its competitors. 4. Another competitive advantage comes from a large variety of mens, womens and childrens jewelry.

5. Financing options through Zales credit card. The revolutionary marketing strategy with a credit plan of "a penny down and a dollar a week," was introduced in 1925 for making jewelry and other merchandise affordable to the average working American. 6. Its the first company to use Institute management training in 19506. Has a strong workforce of nearly 13000 employees 7. On line purchase has been a great experience for the people and thus increases in sales. Large retail network of Zale Corporation in North America. 8. The companys trademarks and trade names help to sustaining its competitive position in the jewelry industry. 9. Diverse brand portfolio is also one of the strength of the company.

Weaknesses 1. Poor financial performance in 2008, 2009, and 2010 shows the company has suffered from the financial crisis more than any of its competitors. 2. The company has a very high debt-to-equity ratio compared to industry average, which means Zale uses a lot of leverage and does not have a very strong equity position. 3. Zales ability to generate internal funds and its borrowing capacity has weakened the last couple of years. 4. Zale has a very concentrated customer base. The locations of the companys stores are limited to North America. This is a disadvantage because most of Zales competitors are more geographically diversified. Although the company has expanded its business online, it has mostly expanded its business in North America. Competitors, such as Blue Nile and Tiffany, now operate in countries in Europe and Asia through a web portal, which makes it easier to reach a broader specter of customers. By focusing mainly on regions in North America, the company increases its risk and limits growth at the same time.

Opportunities 1. Strongly performing e-commerce business. Through its website, customers can get information about various stones, maintenance advice, and help on product purchases. The website also allows consumers to design their own jewelry, such as rings and wedding bands. Internet sales accounted for 3 percent of Zales revenue in 2009. 2. Cost-reduction initiatives would help to reduce SG&A expenses and thus help the company to become profitable again. 3. Changing demographics. The number of Americans aged 45 to 64, the segment of the population that typically has the highest income, is forecast to increase by about 4 percent between 2010 and 2020 compared to a 10 percent increase in the population overall. Many jewelry stores rely on higher-income customers for much of their business.

Threats 1. If the general economy performs poorly, discretionary spending on goods that are, or are perceived to be, luxuries may not grow and may decrease. 2. Increased competition can affect the sales of the company in future 3. Increased minimum wages also put a threat in front of the company 4. The concentration of a substantial portion of Holidays, Valentine Day and Mothers Day) means that disruptions. 5. Sudden decrease in cash flow and earnings makes the company more vulnerable in the sense that the company is not generating enough money 6. The Diamond Trading Company, which is the number one supplier of diamonds, can affect prices and supply of diamonds. 7. Zale is more vulnerable to discretionary purchases, such as downturn and consumer spending slows. Since a majority of the store brands under Jewelry segment targets

the middle economic downturns and consumer spending slows. Since a majority of the store brands under the Zales Fine Jewelry Segment targets the middle-income consumer base, the company is also more vulnerable to economic downturns than the higher-end jewelry sellers.

IV. Alternative Courses of Actions Alternative course #1: They should start business in Europe to capture a market opportunity, because competitors of Zale are doing business globally, SIGNET is doing business in London, Tiffany in Japan and earning profit their market share more than Zale. Advantage: Externally, the jewelry industry is gaining and sustaining market share, and is growing international competition. This can become a problem because most jewelry are created or come from international waters. This should encourage Zales to expand their company more across the globe. They should take a chance in the growing market to earn more revenue. Disadvantage: Risks of failing since they have problems when it comes to brand awareness. The acceptance of people in North America may not be the same in Europe since they have a lot of competitors.

Alternative Course # 2: Zale should do backward integration because it is not manufacturing jewelry by itself, they purchase finished good from Italy, due to problem in external factor of Italy Zale also suffers in shape of late delivery of Goods. Advantage: When they do this it will lessen the problems of having late delivery goods. Disadvantage: Large amount of money are needed for investments in this kind of plan.

Alternative Course # 3: Zale should target high-income group, they are currently targeting mainly middle- class, but they can earn a lot from high-income group because Zale have more innovative styles in jewelry. Advantage: Through this, they are expanding their target markets and it will help in increasing sales and income. Disadvantage: Even though Zale already has this established brand name, still people belonging to high-income group will not risk to buy with Zale Corporation due to its below average performance for the past years.

Alternative Course # 4 Zale should do diversification in Bridal dresses, as they are specially known for Bridal jewelry so they have an opportunity to diversify that business. Advantage: This will attract more customers since they are not only involved in jewelries but also with gowns and dresses that could be compliment products. Since they are already known with Bridal Jewelry, it could be a stepping stone of expansion. Disadvantage: When they add this Bridal dress, it will need a lot of requirements since Zale Corporation will have a different kind of business.

V. Strategy Formulation / Recommendation I therefore conclude that the best solution to the problem is alternative course of action #1. Zale should consider the recommendation to start a business in European market. Externally the jewelry industry is gaining and sustaining market share, and is growing international competition. This can become a problem because most jewelry are created or come from international waters. This should encourage Zales to expand their company more across the globe. They should take a chance in the growing market to earn more revenue.

VI. Plan of Action 1. Expand more international and explore the growing market overseas. Like Zales competitors, it must expand its business not only in America but also in other place in the world. Through this, they could gain more market share and in effect will strengthen their profitability. 2. Marketing-Led Strategy and Special Programs. Increase direct marketing efforts dramatically to create brand awareness while investing in store updates and new product lines. Also, repositioning Zale brand. 3. Zales should reach out to more to customers in this time of economic struggles. While they sale fine jewelry, they should add low-moderate priced jewelry as well. 4. Zale should continue to build a strong organizational structure because without a strong organization, the company will fall again. 5. Clearing out old inventory.

VII. Potential Problems 1. What if the expansions may lead to failure? 2. What if people in other countries will not patronize products of Zale Corporation because of its perceptions in the past? 3. What if the economy in relation to diamonds becomes uncertain frequently?

VIII. Contingency Plans 1. Close Down Unprofitable Stores. Zale should consider closing down its underperforming stores. Specifically, at least 20% of its current stores are operating at significant losses without reasonable hope of improvement. For

example: Stores with declining sales and a soon-expiring lease term should be closed first. 2. Focus on Few Brands, Divest Others and Increase Designer Jewelry. BCG Analysis shows the company should concentrate only on profitable brands and divest unprofitable brands. This will also help the company to increase its brand value. 3. Implementing recommended cost-reduction plan, Zales SG&A expenses as a percent of sales would decrease, but would remain higher than the industry average. For example, SG&A expenses as a percent of sales to be 35% for the next five years and then 30% in the terminal year. 4. Zale could pursue range from selling off its Canadian stores or its Piercing Pagoda chain to merging with its rival, Signet Jewelers Ltd., owner of Kay Jewelers and Jared, The Galleria of Jewelry. It could also sell its Gordon Jewelers division. Due to the demographic changes and increase in the proportion of the wealthy population, Zale should consider introducing high-end designer jewelry similar to what Helzberg Diamonds sells at a few locations. Designer jewelry will help the company to drive sales up.