Price Management of Tiffany & Co - Essay Example

Company Analysis Executive summary Organisations have established a system of sharing their operations, revenue and profit margins which is to be applied across a strategic framework. The study analyses the company, its future earnings, corporate performance and political and economic environment. According to Frelinghuysen (2006) Tiffany & co. has eliminated about 80 percent of waste for example in California it has promoted environmental care. It has also partnered with SoftBank which is a mobile phone operator in Japan in order to provide cell phones with about 400 diamonds whose cost was estimated to be 100 million yen. Tiffany & co.’s prices are relatively low. One factor that made prices to be low is because the company had a direct buying relationship with many producers of the national brand name merchandise and therefore would sell the items at low prices. Some of these producers’ stocked sufficient quantities of merchandise as the management believed that if one of its suppliers would be unavailable, then the company could change its purchases to an alternative manufacturer without any business disruption (Zapata 1999). This has enabled the company be associated with low prices and has improved the company’s image. The company therefore aims at ensuring that employees participate in attaining these goals. The major business objective of the company is ensuring that sales volumes are always increasing. The company also ensures that its growth rate is not stable but increasing. The other goal is to introduce ways of sustaining company’s competitive advantage for example through developed promotions (Mulcaster 69). Some of the factors that have contributed to the success of Tiffany & co. over the past years include great strategy, superb strategy implementation and execution and great leadership. However the major factor is its great strategy for example the company’s international strategy is to remain local in terms of the process of offering goods, the use of local suppliers and its way of operation. The company’s standard of operation has also contributed to its success for example by responding to local communities and cultures. The company also maintains the needs and preferences of the local communities and suppliers (Frelinghuysen 2006). Though Tiffany & co. is the price leader, the stores locations make it convenient to its customers. This is a strong marketing mix and other retailers may compete with the company by increasing their number of stores but this does not compare to the low price strategy used by Tiffany & co. Tiffany & co. has been a powerful retail brand and therefore has a good reputation for its value for money. Its convenience and the provision for a wide range of products have contributed to its strengths in the market. Tiffany & co. has also grown substantially over the recent years therefore has experienced global expansion. The company has a core competence which involves the use of improved information technology that supports international logistics systems for example the company carries out a market research that enable the company to see hoe the products perform countrywide and store by store. 2. Review of company and its business The company was the first to win an award in excellence in US for its silverware. This was in 1867 and in 1877 the company released its logo of cross which was rare as it could only be offered to combat awards. Tiffany & Company also is said to be among the largest private employers having about 9,000 employees as at 2009. Sandra and Roy (1997) shows the company generates revenue of more than $2.86 billion. percent of sales from the grocery business and has therefore focused in opening stores for example in 2007, the company was operating about 64 stores in US which was a total of 480,000 gross square feet. There are also 104 international stores totaling to 300,000 gross square feet. Fairfax Square located in Tyson’s Corner opened in 1990 is the largest outside New York. The most profitable location was the store in Costa Mesa in California then the New York store and Boston Copley Place. The company’s social responsibility is to plan and develop a program that will promote community development and to enable more people to improve their life. It also advocates for zero rate waste (Dietz et al. 1997). Tiffany & co.’s mission involves enhancing and integrating supplier diversity programs where it will be categorised in procurement practices. These practices advocate for minority people in the society especially enabling women to open their own businesses. Some of the ingredients that have contributed to the success of Tiffany & co. include the strengths and virtues of the company’s founder. This is due to his overriding vision and unchanging values. He also had the courage to take several business risks and strength in motivating and inspiring employees and partners (Chase 2005). Jewelry Industry Competitors Threat of New Entrants Substitute products Customer Power Supplier Power Moderate Very Low Relatively High Low Very High 3. Economic Forecast Years 2010 2011 2012 United States GDP growth % change +0.4 +0.1 +0.5 World GDP growth % change +4.3 +4.4 +4.7 The US has its GDP forecast increasing averagely over the years apart from the slight drop in year 2011.However, the economy’s forecast as compared to the averages of the world are much low. This means that other economies beyond the US have their economies doing considerably much better than of the US. This could be due to reasons such as inflation rates being higher than that of the other world countries. Economic forecasting involves making predictions about the economy in terms of GDP and inflation. Stock market forecast Years 2010 2011 2012 United States % change +0. 3 No change +0.5 World % change -0.5 +2 +1 The forecast above shows a positive increase in 2010 ,stability in 2011 and a further positive increase in 2012As compared to other stocks, Tiffany is forecasted to do much better than other stocks for the year 2010.However as from 2011 Tiffany’s performance is forecasted to be way much dismal than other stocks. This gets even worse in the year 2012 ,with the world’s average being expected to double that of Tiffany. 4. Sector & industry forecast Years 2010 2011 2012 United States % change -2 -1 -2 World % change -5 -3 -1 This shows that the US has its jewellery sector performing much better than the industry’s average; this does not mean that because the US performs better as compared to the industry its better placed. Its forecast is still facing a downward trend. 5. Ratio Analysis Gross profits margin 62.9% Current ratio 5.3 Quick ratio 0.9 Leverage ratio 1.7 Inventory turnover 0.7 Debt/common equity ratio 0.23 Price/book ratio 3.73 Price/ Cash flow ratio 15.0 Ratio analysis is used in qualitative analysis to show the company’s financial statements. The ratios are therefore calculated from the current years and comparing those of the previous years or with other companies and the industry. The Company’s business model involved generating high sales volumes and rapid inventory turnover for example through offering low prices to customers on limited selection. Most of these items selected included nationally branded and selected private label products. The products chosen had been placed in a wide range of merchandise categories. The company’s management believed in rapid inventory turnover. This is where combining this turnover to operating efficiencies that were achieved through volume purchasing and efficient distribution of goods and through reduction of handling for merchandise in no frills and self service facilities. The company believed that these factors combined would yield a profitable business with significant low gross margins that would be lower than other stores in us and other states in the world. Comparison with competitors The competition in the industry is low as in jewelry shoppers, there is less price sensitive consumers and therefore the cost is not a purchaser’s decision. This means that Tiffany has set itself as a monopoly as compared to other units in the sector. It could also be inferred that Tiffany is a price leader in the jewellery market. However, there is competition on service, quality and image and therefore smaller specialized jewelry are compete store-by-store against other companies. Tiffany’s direct competitors include Signet Group (SIG), Zale (ZLC) and Blue Nile. The company also faces upscale competition from its suppliers such as Cartier and Bulgari. SEE PRICE HISTORY Top of Form Company Name  Symbol: Market Last Sale Net Change Volume Today's High/ Low 52 Weeks High/ Low P/ERatio Market Cap Birks & Mayors Inc. BMJ: AMEX $ 1.19 unch 1,170 $ 1.19 $ 1.19 $ 1.72 $ .90 NE 4,370,870 Blue Nile, Inc.11111111111111111111111 NILE: NASDAQ-GS $ 38.76 0.20   165,132 $ 39.72 $ 38.24 $ 64.45 $ 30.32 43.55 552,872,640 Central Garden & Pet Company CENT: NASDAQ-GS $ 8.51 -0.08   52,007 $ 8.74 $ 8.44 $ 11.378 $ 6.42 17.73 116,646,570 Central Garden & Pet Company CENTA: NASDAQ-GS $ 8.72 -0.04   158,227 $ 8.97 $ 8.63 $ 11.29 $ 6.60 18.17 332,109,920 Charles & Colvard Ltd CTHR: NASDAQ-GS $ 2.60 unch 28,490 $ 2.64 $ 2.54 $ 3.99 $ 1.58 260 50,889,800 Cross (A.T.) Company ATX: NASDAQ-GM $ 11.15 -0.03   16,939 $ 11.30 $ 10.6599 $ 16.20 $ 8.501 17.42 117,543,300 DGSE Companies, Inc. DGSE: AMEX $ 7.68 0.08   5,691 $ 7.88 $ 7.52 $ 10.53 $ 3.52 85.33 86,169,600 Educational Development Corporation EDUC: NASDAQ-GM $ 5.3492 0.02   4,433 $ 5.3492 $ 5.19 $ 7 $ 3.80 17.26 20,840,483 Fossil, Inc. FOSL: NASDAQ-GS $ 89.09 -0.82   1,209,306 $ 92.63 $ 88.60 $ 134.98 $ 66.05 21.16 5,621,489,910 Jarden Corporation JAH: NYSE $ 31.37 -0.11   651,626 $ 32.20 $ 31.12 $ 37.50 $ 25.60 12.11 2,848,364,630 LJ International, Inc. JADE: NASDAQ-GM $ 2.32 0.13   110,133 $ 2.32 $ 2.22 $ 4.38 $ 2 7.03 70,050,080 Movado Group Inc. MOV: NYSE $ 19.13 0.49   234,147 $ 19.34 $ 18.84 $ 18.97 $ 10.93 NE 349,447,710 Signet Jewelers Limited SIG: NYSE $ 45.50 0.84   694,486 $ 45.96 $ 44.99 $ 48.30 $ 30.93 14.49 3,954,223,000 Tiffany & Co. TIF: NYSE $ 67.89 0.29   2,478,350 $ 69.48 $ 67.52 $ 84.49 $ 54.58 19.79 8,640,767,640 Zale Corporation ZLC: NYSE $ 3.70 0.23   665,806 $ 3.73 $ 3.56 $ 6.90 $ 2.0599 NE 118,999,400 Bottom of Form 6. Technical Analysis Symbol % Change Market Cap TIF  1.14% 9.92B SIG.L  3.21% 2.33B LVMH.MI  3.40% 59.02B MC.PA  2.79% 58.75B RAJESHEXP.NS  1.94% N/A Source: S&P Capital IQ 2011 Tiffany has its market capitalization index increasing; however as compared to other companies its index is lower though being the company that could be doing the best in the market. This means that Tiffany is not doing equally well as other companies in the stock market. This could possibly be due to having very high prices of its shares making it impossible for the public to buy its shares. The public ends up buying shares of its competitors especially those competitors that are involved in providing the public with substitutes. This is evidenced by LVMH.MI and MC.PA that have high market capitalization and their relative index is similarly high. SWOT Analysis Strengths The improved technology is also necessary as it supports the company’s efficient procurement. (Mulcaster 70) the other strength that enables the company to survive in the competitive market is having a focused strategy for human resource management and development. The major key factor to Tiffany & co. business is people where the company invests time and money in training, development and in retaining employees. Tiffany has also managed to be a price leader, this is evidenced by the fact that its are about the highest in the sector. When a company has few or no competitors, it develops a niche that gives it considerable advantage over other companies. Tiffany has a good policy when dealing with its suppliers. Its evidenced that the suppliers deliver their supplies in good time, their raw materials and products could also be of very high quality. It’s also possible that Tiffany has good payment terms for its suppliers and thus keeps them off from straying to its competitors. It this puts Tiffany at an edge as compared to other companies. Weaknesses Tiffany has a great threat when it comes to customer/consumer power. This is because; its customers have very limited say when it comes to determining issues such as price determination. Tiffany has failed to involve its customers in giving suggestions in regards to what should be done to improve its products. The company fails to consider customers due to reasons of monopoly. Opportunities Tiffany has a great chance of success if it were to introduce products that cut across all social classes. Currently, it produces products for only the elite that cannot be bought by the lower class individuals. The company has already monopolized the market and its product has faced a lot of acceptance by the people. If it were to introduce products that also aim at lower classes, then it would be in a position to curb the competition evidenced by the production of substitutes. Some of the opportunities that has enabled the company to position itself in the retail market include taking over, merging with companies and forming strategic alliances with global retailers for example in Europe and China region. The stores are available in small number of countries and therefore there is an opportunity of future business expansion to other consumer markets. The availability of new locations offers opportunities for exploitation of market development where the company diversifies in large centres and malls. Threats Being the market leader means that you are the target of competition both locally and globally and also a global retailer is exposed to various political issues the operate in different countries. These factors include the threats the company faces while trying to market and position its stores globally. The intense price competition which results from reduced cost of production and manufacturing cost is also a threat to the company. Every business is analyzed by the factors that affect its functions and these factors are attributed for the success or failure of the business. In light of this, certain techniques are considered to contribute to improved competition in the market. These include customer orientation and coordinated marketing and profitability. In market penetration, Tiffany & co. focuses on its market and the products its offers to the public. It also has good information on competitors and customers needs. Tiffany & co. marketing mix Product This is a top priority in the marketing mix for example companies selling real innovative products attracts more customers into their stores. The company host products such as diamonds, fragrances, tableware, silver items and many more according to the needs of its customers. There is also a huge facility of online shopping as well as provision of safe shipping. The company uses a reliable and warranted system of shopping. The company has taken initiatives for valuable gifts and accessories and the use of environment friendly technologies (Bradley 2010). Price Tiffany & co. does not produce any brand but is an exhibitor as it produces groundbreaking designers as well as glamorous collection. It is therefore a huge network globally is as a result of discount packages that are attractive and tempting to its royal customers. It is an economic force as it runs the pricing policy where it provides low rates which are not available in any other store. The universal barcode is also the bench mark of the company and a major achievement of the company as it provided power shift from designers to retailers. The prices offered by Tiffany & co. are as low as 15 percent that of the local market which include that of renowned collection and spectacular jewels. Place These chains has been operating at a loss since the company was founded till the company announced in 2009 that it will not continue Iridesse as result of the economic climate prevailing at the time. Its huge networks covering about 197,000 square feet enable the company to effectively market its products world wide (Nelson, 2009). In 2010, the company also opened another store in Bogota in Colombia. Promotion Advertising is important in marketing mix as people have to know the kind of products offered. It is therefore necessary for companies to find an effective way of advertising for example by conducting little market research and learning from big market sellers. Tiffany & co. advertises its goods and services through its official website or through popular TV series such as Ugly Betty and Gossip Girl where characters such as Daniel Meade and Blair Waldorf acting in the series have been mentioning Tiffany jewelry for their shopping. 6. Company financial forecast and valuation Tiffany & co. high sales volume and rapid inventory turnover was necessary as it allowed the company to sell and receive cash for inventory before it could pay many of its merchandise vendors. The company was therefore able to finance large percentage of its merchandise inventory for example through the payment terms used by vendors. This reduced the problem of having to maintain sizable working capital used to facilitate timely payment of suppliers. Trend analysis 2010 2011 2012 2013 Liquidity Working capital turnover 2.55 2.75 2.89 2.99 Profitability 67.8% 69% 68.8% 70.1% Capital structure 0.7 0.9 0.98 1.01 According to the table above, current ratio as evidenced by the capital structure has increased. Current assets in the latter years and therefore the ratio seem promising in future. The inventory turn over has also been increasing over the past three years as a result of high profit margins per inventory. This shows that Tiffany & Co. is adequately profitable as the gross profit margin remains fairly high at an average of 60.2 percent which is not common to companies competing though differentiation. The reason for this is due to the outstanding reputation as well as brand recognition. The company however spends much on selling and administrative expenses as its ROE has been increasing over the years. The business model used by Tiffany & co. was therefore appealing because it reduced the problem of maintaining capital and it also enabled the company to operate at lower gross margins. The above forecast is used in helping the company to determine the direction of the company in future. It also turns public information into important insight of future expectations. In 2011, Tiffany & co. has significantly picked by S&P of capital IQ’s which is the highest investment or a strong buy. Though the economic growth is still moderate, there is the return of the luxury shoppers in the U.S. the company has therefore reported a 20 percent growth in all store sales. It is also believed that the company has benefited from increased consumer demand for particular brands. The establishment of quality, value and style as used by the company has also led to the increased growth. Tiffany & Co. is therefore in a good position to deliver strong sales and earnings growth. This is though leveraging capital investments for the past years as the company holds a significant market position in the jewelry industry and is said to benefit from enhanced geographic accessibility. The demand for luxury items has also improved and the company also plans on facilitating the expansion of more stores worldwide. The balance sheet is therefore healthy as the company becomes more committed to long-term objectives which include having more than 15 percent return on equity and about 10 percent return on assets. The earnings per share have increased in the second quarter of 2011 from 25 to 28 percent. According to Bradley (2010) the major elements of Tiffany & co. strategy included low prices, limited selection and gaining a treasure- hunt shopping environment. In pricing, Tiffany & co. is known for selling top quality national and regional brands at prices consistently below what was being sold by the traditional wholesalers and retailers. The company therefore aimed at selling goods that could be priced at bargain levels therefore providing customers with cost savings. This strategy was good though an item had to be requested by customers. The major element of the pricing method was to cap the company’s markup on brand name merchandise to get to 14 percent which was less than other stores. The philosophy of Tiffany & co. was to maintain its customers by wowing them with low prices. The company always looks to see the gulf created between the company and the competitors. He also says that the company maintains its value and that’s the reason why most people shop at the stores. The company also used product selection in its strategies for example by stocking few goods for example while other stores stocked about 40,000 items to 150,000, Tiffany & co. only had a selection of about 4000 products in its stores (Tillman3). The company also elected the fast selling models, sizes and colours. The explanation for the product selection was intelligent loss of sales where among ten customers; two of them would not buy a product since the store only has one size. The company says that is better to give up on one or two customers than sell many sizes which will be difficult to manage. The product selection of the company also included appliances, equipment and tools used for commercial and professional activities. 7. Technical Analysis Tiffany & Co. Common Stock  (NYQ: TIF) After Hours: 0.00 N/A (N/A) 10:00PM EST Last Trade: 78.54 Day's Range: N/A - N/A Trade Time: Nov 3 52wk Range: 54.20 - 84.49 Change: 0.00 (0.00%) Volume: 0 Prev Close: 78.54 Avg Vol (3m): 2,940,190 Open: N/A Market Cap: 10.00B Bid: N/A P/E (ttm): 24.87 Ask: N/A EPS (ttm): 3.16 1y Target Est: 83.17 Div & Yield: 1.16 (1.50%) This chart shows that Tiffany & Co. is adequately profitable as the gross profit margin remains fairly high at an average of 60.2 percent which is not common to companies competing though differentiation. The reason for this is due to the outstanding reputation as well as brand recognition. The company does enjoy a competitive advantage over other companies since competition among warehouse clubs had been based on factors such as price, quality and selection of merchandise, location of the stores and the service offered to members. SIG also sold most of its items at low prices. Tiffany & co. enjoys competitive advantage for example through treasure-hunt items w here at the SIG’s case the items carry lower price tags unlike in the company where the price tags are high. The percentage of soft goods and service businesses is also lower at SIG. According to Zapata (1999) Tiffany & co. enjoys a competitive advantage over SIG’s sale for example by offering fewer items which are 4000 as compared to others which are about 7500. Among these items about 70 percent are found in other competitors. The category has the highest percentage which is about 60 percent. 12 percent include private label products which are of premium quality and are priced at a price below the brand products. Some of the features that differentiated SIG from other competitor stores such as Tiffany & co. offered a wide range of products choice. One of the social responsibility issue is that Tiffany & co. had about 10,000 fulltime employees and its employees receive too much as compared to other stores for example the starting wages range from 10 to 12 dollar per hour plus other benefits. The Company’s low prices and its reputation for example for treasure-hunt shopping enabled it to get to extensive advertising and sales campaigns. This therefore made marketing and promotional activities limited to direct mail programs. The pricing strategy is to beat their competitors and to increase the market share of the company and at the same time maintaining great values. The employees under a salary were also eligible to benefits in their first month after 90 days probation. Some of the benefits offered to employees include health and care plans. These included freedom of choice health care plan, managed choice plan and three dental plans which were offered to full time employees. The part time employees received a managed choice health care plan and a core dental plan. In total the company paid about 90 percent of employee’s premium for health care which is on the higher side as compared to other retail stores that pay about 50 percent for health care (Tillman 3). Social Responsibility The other benefits include pickups at the company’s pharmacies with lower prices. The company also offered a program for optical exam and had allowances for purchase of glasses and contact lenses. Other benefits included counseling services, disability cover, generous life insurance, accident and dismemberment cover. Jason Asaeda believed that compensating his employees well was significant as they are in a better position of executing company’s strategy successfully. He however believed that paying good wages and offering good benefits was contrary to conventional wisdom in discount retailing. The reason for paying high wages to his employees was that he wanted them to speak well about the company (Birnie 2003). The other social responsibility issue is the reason for the company having the lowest cost producer and getting better productivity it should use its returns in formulating new strategies of beating the competitors and offer about 50 percent of benefits to its employees because it does not make much sense offering 90 percent for employees’ health care. According to Freeman & Daniel (2009) having almost the same strategy as the Tiffany & co. yet paying lower wages and offering skimpier benefits to its employees, compensating employees with so much does not make any business sense for Tiffany & co. Tiffany & co. should strike a balance between the company’s future and the employees maintenance for example it reducing the number of employees who had signed up for health insurance to 50 percent form 85 percent would save the company come money for formulating new and better competitive strategies which would sustain the business. The reason for offering huge benefits includes selecting people for open positions. Top management as Tiffany & co. wanted to motivate its employees by making them feel that they could improve their career at the Company. The company for example made the employees fills about 86 percent of higher level openings for promotion within the retail store. The company also offers executive compensation to its top level executives. Asaeda gives the principles that should be followed in business which include obeying the business laws, taking care of all business members and employees, respecting business suppliers and rewarding shareholders (Freeman & Daniel 2009). In conclusion, Tiffany & co. Company has been driven by improved technologies which have enabled the company to introduce new service delivery systems. I therefore think it is good to buy the stock. This is because the stock has been increasing with the increase in the economic conditions. From a strategic perspective, Tiffany & co. is performing well in the retail market. This is shown by the 55 percent market share it has as compared to its competitors which include SIG which had 36 percent and ARC wholesale club had 9 percent market share. The company should aim at offering high quality, brand name merchandise at lower prices than those found in other house ware manufacturing, collectibles, commemorative products and fragrance manufacturing. The company should also have a business objective in developing creativity and innovation and a master investor would compare my analysis as having a strong momentum. The third objective should be maintaining market positions and developing new techniques of attracting potential customers. The company is valued as a strategic community partner as well as social responsibility due to its mission of enabling people to save money to better their lives. The company should also aim at maintaining the aspect of availability. This is by opening series of stores in different locations of one country. This improves convenience and company’s image and has therefore contributed to the reasons why the company is doing very well in the industry. Alternative Gure from 2010-2007 Period Ending: Trend 12/31/2010 12/31/2009 12/31/2008 12/31/2007     Total Revenue $158,335 $110,277 $87,488 $54,249     Cost of Revenue $80,255 $61,403 $52,302 $32,108     Gross Profit $78,080 $48,874 $35,186 $22,140     Operating Expenses               Research and Development $2,200 $500 $515 $268     Sales, General and Admin. $7,007 $6,133 $4,094 $1,847     Operating Income $68,873 $42,241 $30,577 $20,025     Add'l income/expense items $467 ($448) $90 $168     Earnings Before Interest and Tax $69,339 $41,793 $30,668 $20,193     Interest Expense $1 $17 $60 $162     Earnings Before Tax $69,338 $41,776 $30,607 $20,032     Income Tax $18,055 $11,184 $8,212 $7,799     Net Income-Cont. Operations $51,283 $30,591 $22,395 $12,233     Net Income $51,283 $30,591 $22,395 $12,233     Net Income Applicable to Common Shareholders $51,283 $30,591 $22,395 $12,233       Works cited Birnie, Michael, Tiffany Medal of Honor Comes to Navy Museum". U.S. Navy Museum. United States Navy, 2003.  Bradley, N. Marketing research, Tools and techniques. Oxford University Press: Oxford, 2010. Chase, J. A. Operations management for competitive advantage. New York: McGraw-Hill, 2005. Dietz, Grant. Jenna, Weismann. and Kevin J. Smead. The Glitter and the Gold. Fashioning America’s Jewelry. Newark: The National Endowment for the Humanities, 1997. Freeman, B. & Daniel, L. Science and engineering careers in the United States, An analysis of markets and employment, University of Chicago Press, 2009. Frelinghuysen, Cooney. Louis Comfort Tiffany and Laurelton Hall. New Haven, Connecticut: Yale University Press, 2006. Loring, John. Tiffany Diamonds. New York: Abrams, 2005. Mulcaster, W. Three strategic frameworks, Business strategy series 10, 1 (2009): 68 -75. Tillman, Barrett. Above and Beyond: The Aviation Medals of Honor. Washington, D.C.: Smithsonian Institution Press, (2003): 3. S&P Capital IQ.  S&P Capital IQ Picks Tiffany & Co. Focus Stock of the Week, McGraw-Hill, 2011. http://finance.yahoo.com/news/SP-Capital-IQ-Picks-Tiffany-prnews-1749194594.html?x=0. 2 November 2011. Zapata, Janet. The Jewelry and Enamels of Louis Comfort Tiffany. New York: Harry N. Abrams Publishers, 1999. Read More