One of my favorite movies is 1984’s “The Terminator,” the tale of a cyborg assassin sent back in time to kill Sarah Connor, mother of the as yet unborn leader of the future human resistance, and Kyle Reese, sent back in time by her son to protect her. Attempting to describe to her the true nature of the killing machine that has been sent to terminate her, Kyle explains, “It can’t be bargained with. It can’t be reasoned with. It doesn’t feel pity, or remorse, or fear, and it absolutely will not stop…EVER…until you are dead!” It’s a moving scene, as poor terrified Sarah is forced to come to grips with the extremely unfortunate reality that she has been targeted by the ultimate killing machine. But in recent viewings of the movie, I must confess that as I hear Sergeant Reese explain Sarah’s precarious scenario, I have increasingly come to hear his words as prophetic regarding the dynamic between Sterling and independent jewelers.
You really need to understand this. In Sterling’s relentless drive for market share, they have become very much like the Terminator. Day after day, week after week, month after month, year after year… they can’t be bargained with. They don’t feel pity, or remorse, or fear, and they absolutely will not stop…ever…until your company is dead! So, now that Zales has been acquired by Signet, Sterling’s parent company, the question of how that acquisition will impact your future, and the future of your business, deserves your attention. Here are some thoughts on the subject.
I. The end of generic jewelry
You must recognize that in the same malls, using the same labor pool, and in many cases using the same vendors, and attempting to sell to the same set of consumers, Sterling has consistently beaten Zales during the past 10 years in every conceivable performance metric. There are quite a few sources for this asymmetry in performance, but I am inclined to believe that one of the most significant has been a major difference in merchandising philosophy that can be summed up by former Sterling CEO - and current Zales Chairman - Terry Berman’s policy statement from about eight years ago. Berman said that moving forward, Sterling “would no longer sell undifferentiated, commodity products.” This is a really big deal, and will have major implications as Zales now moves forward as a division of Signet.
Recognize that ten years ago, only about 15 percent of Sterling’s linear showcase space was devoted to branded collections. Today, that percentage exceeds 50 percent! And you - and your customers - know the names! The Leo Diamond, The Jane Seymour Open Heart, Love’s Embrace, Tolkowsky, Artistry, the list goes on and on. And during the same 10-year period, what meaningful branded collections did Zales launch? None! Zip. Zero. Nada!
So what merchandising direction do you think we’ll now see from Zales? Branded Collections, that’s what! And how is Beryl Rath at Helzberg likely to respond? She already has! Just walk into a mall, and ask the sales associates in the chain stores how the “stuff” is selling - the items that don’t have a name, and don’t have a story. It’s not a pretty tale. And what do you learn if you ask the vendors who service the majors what the buyers are looking for? They’re looking for collections that have a story, and therefore a reason to be bought!
So as these companies with massive advertising Share of Voice move their merchandising and advertising strategies away from unnamed “stuff” and into cool little collections that have built-in reasons to be bought, what do you think your customers will be looking for?
And please don’t misunderstand. I’m not suggesting here that overpriced brands will suddenly rule the jewelry landscape. In the case of these branded collections, there’s no added premium that a consumer needs to pay. What we’re talking about here is generic jewelry that has been de-commoditized by attaching a name and a story to the product, and furthermore has a built-in sales pitch in the form of a compelling reason to be selected by the low information consumer.
II. More margin pressures
An Indian friend who owns a significant jewelry company supplying the majors recently said to me, “George, you have no idea the power of Sterling in the marketplace!” As he said this, he grew nearly as pale as I am. The truth of the matter is that for the truly big boys in the jewelry business, if you’re not selling Sterling, you’re not in the game. And part of the challenge in trying to sell to Sterling is having the production efficiencies and fulfillment capacity necessary to handle their price and delivery requirements. You must realize that Sterling’s buyers tell their vendors what they will pay for the products they want - not the other way around. And Sterling has historically been able to squeeze more margin out of its suppliers than any of the other majors.
So now, as you see Zales accomplishing the same kind of price and delivery targets with its suppliers, the result will be ever more pressure on margins to deliver competitive value to the consumer. Yes, Walmart also delivers value, but it’s at a quality level that is probably so far below what you sell that the comparison is meaningless. But Signet knows that going down in quality means challenging Walmart, whereas going up in quality means challenging you. So which way do you think they’re headed?
III. Consolidation in the Supplier Community
Count on it. Right now, there are Zales suppliers who are totally freaked out, wondering if they will be able to withstand the new era with both Sterling and Zales under the same corporate umbrella. And as Darwin would predict, there will be a coming wave of supplier extinctions. Companies that aren’t incredibly efficient, vertically integrated, exceedingly well capitalized, and just plain awesome at what they do are likely to be weeded out.
And the extinctions won’t be limited to companies that are not superbly efficient and massively capitalized. The name of the game in selling to the majors has always been about individual skus, but now, as they increasingly desire branded collections, it won’t be enough to make incredibly good, innovative products cheaply. It will now also be necessary to develop total merchandising ideas that can become branded collections in order to obtain production orders, and the merchandising and marketing skill set that will now be required isn’t universally held by the majors’ vendor community.
Many will perish, but a few who won’t die willingly may give a try at the independent sector. And, as this places added pressure on the supplier community to independents, you are likely to see a similar Darwinian contraction among your existing vendors. In short, at every level of the supply chain, it’s going to get ugly.
IV. A Stronger Internet Presence for kay.com
While it’s true that Sterling has consistently beaten Zales for sales, market share, and profitability in the brick and mortar environment, folks in a position to know tell me that the same is not true of the two companies’ internet sales. And if zales.com ends up teaching a thing or two to the folks in Akron, then the internet as a selling vehicle for jewelry may ratchet up another notch even more quickly.
V. Increased Importance of Access to Consumer Financing
It’s no secret that consumer financing is the key to making engagement ring sales to Gen Y consumers. During the past decade, Zales has been trying to find the right balance between approval rates, delinquencies, and profitability, while Sterling has been absorbing massive market share with an internally financed program. Guess what Zales is likely to clone now that they’re under the Signet umbrella? Which means more intense competition for the engagement ring business - and if you don’t figure out the whole credit issue and develop ways for consumers with less than perfect credit to get financing, be prepared to be left behind.
In summary, we live in an era of extremely rapid change in the retailing environment, and events like the Signet acquisition of Zales will only serve to put additional pressures on the supply chain. Fortunately, it is by no means inevitable that sheer size alone will produce a preemptive advantage. The lessons of the past several decades clearly show that while big has an advantage over small, big does not always vanquish small. Fast, on the other hand, will always beat slow. So focus on speed, and identify suppliers who can help you meet the inevitable challenges listed above. The life of your company will depend on it!