Tiffany and Company is still a work in progress, but its leadership is confident it has a strategic plan in place that will lead it to prosper over the long term.
Tiffany’s 2019 Q1 results disappointed, with worldwide sales declining 3% to $1 billion and comparable sales off 5%. Net earnings disappointed too, down 12% from previous year.
Yet while CEO Alessandro Bogliolo, CFO Mark Erceg, VP of investor relations Mark Aaron, and treasurer Jason Wong announced the sobering news in the earnings conference call, their enthusiasm and confidence about the path ahead was clearly evident as well. This team is on fire to make their dreams for the Tiffany brand real.
Citing the negative effects on first-quarter performance to the strong dollar, reduced tourist traffic and the impact of higher tariffs for Chinese imports, Bogliolo is determined to lead the company forward based upon the strategic plan put into place in the middle of 2018.
“We remain focused on the strategic priorities which are within our control,” the CEO said in the earnings call. Bogliolo added that his team is “aggressively pursuing numerous ways we can enhance the excitement and relevance of this amazing brand. We strongly believe that effectively executing our strategic priorities, first and foremost, will be what takes this company to new heights of success.”
In the call, Bogliolo gave examples of accomplishments toward the company’s long-term strategic plan, but he didn’t lay it out specifically.
However, Erceg and Aaron presented details of the strategic plan ahead of the earnings call in an exclusive interview with Cowen’s Oliver Chen, managing director of retailing/department stores and luxury. Thanks to this behind-the-scenes view, Cowen gives the company an outperform rating.
Cowen declares, “We continue to like TIF’s long-term growth opportunities and management’s keen focus on driving innovation and newness across collections.”
And Cowen believes the results of these innovations will begin to show by the second half of 2019, with an estimated 2.7% Q3 and 5% Q4 uptick modeled in Cowen’s system. In fiscal 2020, Cowen is projecting sales to reach $4.7 billion, 3.3% over projected $4.5 billion in 2019.
Here are the six strategic priorities described by CFO Erceg and investor relations vice president Aaron in their conversation with Cowen’s Chen. Of note, during the earning call, it was announced that Aaron will be leaving the company at the end of July, after which treasurer Wong will be taking over the investor relations responsibilities.
Building Tiffany’s brand relevance
Tiffany enjoys prestige as a luxury brand, but it has recently lost some of its luster. Interbrand valued the Tiffany & Co. brand at $5.6 billion in 2018, but it declined from its peak of $6.3 billion in 2015.
Worse, it trails Cartier, which is valued at $7.6 billion. And the kicker, between 2007 and 2010, both brands’ value tracked level, but in 2011 Cartier started to pull away and it continues to put distance between itself and Tiffany.
Further, Tiffany is a no show on Forbes World’s Most Valuable Brand list in 2019, but Cartier ranks No. 64.
And Tiffany trails Cartier in the Kadence International survey among nearly 6,000 consumers in 13 markets as well, where Cartier tops the list of the world’s most luxurious brands. Tiffany comes in sixth.
In the pantheon of global luxury brands Tiffany doesn’t shine as bright as it once did. In the discussion with Cowen’ Chen, Aaron shared how the company has increased marketing spending to evolve its messaging. That is showing results in social media buzz, but not yet in increased sales.
He and Erceg believe the next two priorities in the company’s strategic plan will deliver those extra sales.
Bring newness to the product range
For too long Tiffany has languished in new products with a distinctive edge. Erceg describes its past new product introductions as “derivatives of similar things” in the product line, which tended to “cannibalize” sales, rather than add incremental sales. He points to the new Paper Flowers and Love Bugs collections as being meaningfully different from other product lines in the range.
To bring more new product lines to market, the company has launched a “product innovation funnel.” Thanks to the more disciplined approach to new product development with the design and merchandising teams working collaboratively, Erceg says the company has “good visibility” for new products through 2021.
“We want to ensure that our product innovation funnel is robust, and that we’re driving distinctive newness across all the categories in which we compete,” he told Cowen’s Chen.
He and Aaron also reiterated that the company is now satisfied with its current product mix—Jewelry Collections (54% of 2018 sales), Engagement (26%) and Designer Jewelry (12%). But in the most recent quarter, a 4% increase in fashionable Jewelry Collection sales on a constant-exchange rate basis (e.g. Paper Flowers and Love Bugs) were offset by a 2% drop in Engagement and 11% in Designer Jewelry.
New shopping experiences online and in store
Tiffany’s omnichannel strategies were a major focus on the discussion. These strategies will enhance and support shoppers wherever and however they want to engage with the brand.
When Chen mentioned that Cowen expects global online luxury sales to reach over 20% penetration in the next few years, Erceg said he doesn’t believe that is a level that Tiffany is likely to achieve anytime soon.
“We finished 2018 with 7% of our global revenue coming online,” he said. “But when you are buying a $20,000 bracelet, people really want to see it in person.” Therefore, he expects Tiffany’s e-commerce sales to top out at 10% to 15%.
“The real power [of the internet] is to market to the customer and to drive them into the stores,” added Aaron. “The vast majority of customers coming into our stores have already looked online, but the average transaction on our website is much lower than in the store.”
Nonetheless, the company has recently revamped its 13 global websites and opened up to take online orders for engagement rings. In addition, it is launching an e-commerce enabled website in China, which represented 17% of global sales in 2018.
China figures prominently in Tiffany’s plans, both to capture Chinese tourist spending when they visit the U.S., as well as when they are shopping at home, with 34 Tiffany stores and the new e-commerce website to support them.
“We just need to win with the Chinese wherever it is that they choose to shop—whether that’s in store or online, whether it’s when traveling on holiday, whether its domestic. We just need to make sure we cater to that,” Erceg said.
When those Chinese tourists land on U.S. shores, a remodeled Tiffany flagship in New York City, set to open in 2021, will be waiting for them. “We like to think that flagship renovation is [everything thing we are doing] but on steroids. We’re going to take the entirety of that iconic building and make it all work for us and the consumer,” he said.
The company is placing big bets on the renovated New York City store. “We are thinking about it in a totally transformative way. We want to make it one of the top three things every consumer, or every tourist, has to see in the City. It will be the beacon for the brand and the flagship among flagships across our entire network,” Erceg said.
Better clienteling and customer service
When the new flagship opens, Tiffany will greet them with greatly enhanced customer service—and what Erceg calls clienteling.
“Right now, much of that building was designed as office space and wasn’t customer facing. Now we’re going to make sure that every square inch of it is either for direct selling, or for clienteling with high-end consumers,” he explained.
“We want to make it much more productive. We need to make sure that we can move much more sales through that store and make it a lot easier for our sales professionals to provide a seamless shopping experience,” he continued.
The aim is to make the NYC flagship Tiffany’s most experiential place to shop, with its Blue Box Cafe and gift and home furnishings departments, and with selling space in every floor.
The NYC flagship will present a new face of Tiffany customer service, which will set the model for the rest of the company’s 320 other stores.
Focus on key markets with cost discipline
Improving the company’s operating margin is another priority in the strategic plan. “Our operating margin peaked back in 2014,” Erceg explained. “This past year we finished at around 18%. We see no reason that structurally we can’t move our way back to the mid-20s at some point.”
To do that, the company will focus on topline growth in key markets, like China, where opportunities are high. “This isn’t a business that can cost cut its way to glory,” Erceg said. “Cost cutting needs to be there, but it needs to be a mechanism and a means to provide additional dollars for investment and topline growth.”
A new supply-chain order and inventory management system is giving management better control of its high fixed costs, as well as the ability to better tailor the product mix to specific markets, like China where silver is in less demand than gold and diamonds.
Create an agile, aligned organization
Erceg gives much credit to CEO Bogliolo for reigniting passion throughout the organization for the brand and the company. “Since we had been underperforming for five-six years, everyone was walking around a little timid with their heads down,” Erceg described.
“Alessandro has come into the company with great energy and in a very short time infused a winning culture and winning ethos across the brand,” he said.
Bogliolo has put into place much needed discipline to execute against defined goals and objectives. At the same time, he has given permission for staff to take risks and fail if they must.
“He is forward-thinking, contemplative with a positive attitude for strategic risk taking. If you try something and it fails, it is met with the right spirit. If something doesn’t work out, we just move on,” Erceg said and continued, “It is a very different company than the one I joined two-and-a-half years ago.”
“Of all the six factors we have spoken of, I think this is the biggest one that drives an inflection point and a real difference in how we operate throughout this dynamic organization,” he concluded.