Zale Corporation Strategic Analysis: SWOT and Porter's Five Forces

Mission, Vision, and Strategy Overview

Zales spent 2011 seeking to turn the company around. With falling revenues and several consecutive years of losses, Zales was forced to reconsider its strategy in the marketplace. In general terms, the company's strategy appears to fall somewhere between cost leadership and differentiation. While Zales sought to differentiate itself based on its brands, the company's large retail presence hints at a strategy that should emphasize cost leadership, as it sought to "re-establish the price/value proposition." Overall, Zales was likely in a difficult position because it excelled neither as a high-end diamond retailer nor as a low-cost retailer, instead falling somewhere in the middle ground that Porter's generic strategies framework warns is a recipe for long-run failure (QuickMBA, 2010). The company did not appear to publish a formal mission statement or vision statement.

Porter's Five Forces Analysis

The Porter's 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 both 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 the jewelry industry, this power is moderate. Diamonds are an interesting input because they are somewhat commoditized, yet each diamond is unique. Buyers like Zales operate at high volume and therefore command some power over wholesalers; however, wholesalers have a number of large companies to sell to. Another factor is intermittent overcapacity in the diamond wholesale market, which periodically brings the cost of diamonds down — diamonds being the most important input in the jewelry business.

The bargaining power of buyers is relatively low. Most consumers have a limited level of product knowledge and rely on jewelers to provide information. Buyers are also often not purchasing for themselves but as gifts, meaning they are buying to meet expectations rather than personal need. The threat of substitutes is generally low as well. Customers can substitute other types of jewelry since purchases are mostly gift-driven, but it is more difficult to substitute diamonds specifically.

SWOT Analysis

The threat of new entrants is high. There are many small jewelry stores, and the capital requirements to scale up are relatively modest. There are few meaningful barriers to entry, and all but the most established names carry relatively low brand value, since a large portion of the customer base consists of one-time buyers rather than repeat customers.

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. The industry has historically been profitable; however, the growing shift of diamond sales to online channels appears to have increased 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 remain viable — but as the Internet increases buyer knowledge, bargaining power shifts toward consumers, undermining one of the industry's strongest structural advantages.

Zales possesses several strengths with which it can compete for profits. The first is meaningful buying power. As one of the larger jewelry retailers, Zales has the bargaining leverage to negotiate better deals with diamond suppliers. This buying power derives from Zales' extensive retail network, which also brings the company closer to customers. While buyers may shop around somewhat, they are unlikely to travel far out of their way for a specific jeweler, so a large store count is a genuine competitive advantage. Another strength lies in the company's portfolio of brands, several of which have been established for many years. Brand strength is important in attracting customers who rely on the jeweler for information and therefore need to trust the source. Larger, more established brands tend to inspire more confidence.

There are, however, critical weaknesses. The first is a relative lack of differentiation. Aside from retailers at the luxury end — such as Tiffany & Co. — or those pursuing clear cost leadership, most jewelry firms occupy the middle of the market, and the average consumer would be hard-pressed to distinguish meaningfully between them. This means that for most shoppers, there is nothing particularly compelling about Zales that would draw them in over any other established brand. The company's balance sheet is another source of weakness. While the company remained liquid, its equity value had been declining for years, falling from $902 million in 2007 to $212 million at the time of writing. This decline was accompanied by a rise in long-term debt, further weakening the company's financial position (MSN Moneycentral, 2011).

For Zales, several opportunities exist. A significant and growing portion of jewelry buying is moving online, which represents both a threat and an opportunity depending on how management chooses to respond. Another opportunity lies in building repeat customers by expanding beyond diamonds into other jewels, reducing the company's dependence on a single product category. The company could also double down on its existing strategy by expanding its store network, or consider entering overseas markets with strong potential for jewelry sales — particularly in Asia and the Middle East, where luxury goods enjoy broad appeal. In addition to the Internet, other competitive threats include the entry of mass retailers such as Walmart into the jewelry category, which pressures margins. The broader economic environment also poses a threat, as consumers tend to spend less on jewelry during downturns. Finally, increasing buyer knowledge is a structural threat — jewelers have traditionally relied on information asymmetry to guide customers toward higher-margin products, and as buyers become better informed, this advantage erodes.