Zale's spent 2011 seeking to turn the company around. With falling incomes and several consecutive years of losses, Zale's has been forced to reconsider its strategy in the marketplace. In general, terms, the company's strategy appears to fit somewhere in between cost leadership and differentiation. While Zale's seeks to differentiate itself based on the brands that it has, the company's large retail presence hints at a strategy that should emphasize cost leadership, as it seeks to "re-establish the price/value proposition." Overall, Zale's is probably in a difficult position because it excels neither as a high-end diamond retailer or a low cost retailer, instead falling somewhere in the middle ground that Porter's warns is a recipe for failure in the long run (QuickMBA, 2010). The company does not appear to publish a mission statement or a vision statement.
Porter's Five Forces
The five forces analysis seeks to determine the desirability of an industry based on the different factors that affect a company's ability to earn profits. The forces should be considered in the context of overall industry attractiveness and in the context of the firm's position within the industry. The first force is the bargaining power of suppliers. In jewelry the bargaining power of suppliers is moderate. Diamonds are an interesting input because they are somewhat commoditized but at the same time each diamond is unique. Buyers like Zales do a high volume, they command some power over the wholesalers, but the wholesalers have a number of large companies to sell to. Another factor is that there is intermittent overcapacity in the diamond wholesale market, bringing the cost of diamonds down (diamonds are the most important input in the jewelry business).
The bargaining power of buyers is relatively low. Most buyers have a low level of information, and rely on the jewelers to provide that information. Buyers are also not the end users of the jewelry for the most part either, so they are buying more to expectations than to personal need. The threat of substitutes is generally low. This is why diamonds are the most important component of the industry -- the customers can substitute other jewelry, because it is mostly gifts, but it is more difficult to substitute diamonds. The threat of new entrants is high. There are many small jewelry stores and the capital requirements to scale up are relatively low. There are few barriers to entry to prevent new entrants, and all but the most established names in the business have relatively low brand value because most customers are one-offs. There is a large component of the business that is not repeat.
The intensity of rivalry within the industry is moderate. Firms compete on brand, price and service, and there is often little to choose between them. However, the industry is usually profitable. At present, however, there appears to be overcapacity in the industry as some diamond-selling has gone online, and this may have increased the level of competitive intensity in recent years. Overall, this points to a moderately attractive industry. As long as pricing power over buyers remains high, the industry should be a good one in which to operate but as the Internet threatens to increase the level of buyer knowledge, the bargaining power of buyers increases, and that will remove the strongest aspect of the business.
Zale's has a few strengths with which it can earn profits. The first is that the company has a healthy amount of buying power. As one of the larger jewelers, Zale's has the bargaining power to get better deals with diamond suppliers. This buying power derives from Zales' extensive retail network. This network brings Zales to the customers -- the more stores it has the easier it is for buyers to deal with Zales. While buyers do shop around a little bit, they are not likely to go too far out of their way just to go to Zales, so the company benefits from having a large number of stores. Another strength lies in the company's brands, several of which have been established for years. Brand strength is important in attracting customers, who rely on the jeweler for information and therefore need to trust the jeweler. Larger brands are often more trusted.
There are some critical weaknesses for Zale's, however. The first lies in a relative lack of differentiation. Other than at the luxury end (e.g. Tiffany's) or the cost leadership end, most jewelry firms simply fit into the middle of the market, and the average consumer would be hard-pressed to discern the differences between them. This means that for most consumers, there is nothing special about Zale's that would attract them over any other established brand. This lack of differentiation reduces the firm's competitiveness. The company's balance sheet is another source of weakness. While the company is liquid, its equity value has been declining for years, dropping from $902 million in 2007 to $212 million today. This has been met with a rise in long-term debt, weakening the company in the long run (MSN Moneycentral, 2011).
For Zale's there are a few opportunities. A significant portion of jewelry-buying in moving online, and this is something that is both a threat and an opportunity, depending on how Zale's management wants to look at the issue. Another opportunity is to start building repeat customers buy focusing on other jewels, reducing the company's dependence on diamonds. The company could double down on its existing strategy by building out its network of stores, or it could even consider expanding into markets overseas that have good potential for jewelry sales despite being different culturally (Asian and Middle Eastern markets in particular are strong for all things luxury). In addition to the Internet, other competitors are also a threat. The emergence of firms like Wal-Mart in the industry threatens margins, for example. The state of the economy is also a threat, since people are likely to buy less jewelry in a down economy, or spend less when they do buy. Lastly, buyer knowledge is a threat -- jewelers rely on being the source of knowledge and steering customers to the jewels that are best for the store. Increased buyer knowledge will increase the bargaining power of the buyers.
Zale's current financial struggles would imply that the company needs to craft a strategy to manage any area where the threats would exploit its weaknesses. For example, competition and buyer knowledge are threats that would hurt Zales because of its insufficient differentiation. As a result, it is recommended that Zales start with the start -- set a vision for the company and communicate that to the customers. Zales needs to be more clearly differentiated, and it needs to decide if it wants to pursue a high-volume low margin strategy or a low volume, high margin strategy. Once the company knows what it wants to be, it can communicate that to potential customers, increasing the differentiation between Zales and other jewelers.
Flowing from the first recommendation is the second -- the company needs to improve its financial situation. With three consecutive money-losing years (and a fourth at breakeven), the company's balance sheet has taken a beating. Zale's needs to focus on returning to profitability. According to the 2011 Annual Report, the company has made a number of tactical moves to make this happen, but none of those moves is particularly compelling. It is recommended therefore that the company bring in new management in order to generate some creative ideas about how to turn the company around.
Lastly, a strategy based on strengths and opportunities is also recommended, to help build the firm back up. It is recommended that Zales expand overseas, taking advantage of its buying power. The jewelry market has significant potential in many parts of the world, but unlike many other industries, there are few American jewelers going overseas in order to drive growth. Zales can make the first move, starting either in Asia or the Middle East, where luxury goods are popular. Zales does not need a luxury strategy -- it is recommended that it avoids that -- but instead needs a presence in markets that have little competition in selling to the middle class.
These strategies first need to be enacted at the corporate level. It appears that for the past few years the company has not had strong leadership and as a result has seen its focus decline, bringing revenue and profits with it. The company has had no response, for example, to the economic crisis. Thus the turnaround strategy needs to start at the top, with senior management buy-in, and then be disseminated throughout the organization from there.
Like almost every other company, Zale's has not any major corporate governance issues in recent times. The biggest issue for Zale's is more leadership, in that the company has been somewhat rudderless in recent years. The board of governors has allowed the company to falter financially, and this is something that needs to change…