Signet and Zale: What the Trade Is Saying

For something that has been speculated on for so long, the pending acquisition of Zale by Signet took many by surprise. But perhaps, given all the consolidation we have seen in this business, it shouldn’t have.

Among the points I have heard from vendors and others in the industry:

This will be good for Signet. This deal increases its market share by about 50 percent (from about 10 percent to 15 percent), eliminates the only competitor that presented even a remote threat to it, and gives it the dominant position in a new market (Canada). Not bad for a day’s work.

The new chain will have 3,600 stores and do about $6 billion in business annually, making it the largest jewelry retailer in the industry—and possibly ever. I don’t believe any jewelry chain has ever had more than 3,500 stores. (I welcome corrections on this point.) [See clarification below.]

That said, while many people have brought up the antitrust issue, it would be surprising if regulators blocked a deal that would comprise only 6 percent of the overall jewelry market. (If they do object, the company might agree to shed some stores.)

This will be good for Zale. For all the strides Zale has made in the last few years, Signet is considered the best merchant in the business. The people there know how to sell jewelry, they know how to brand, and they have the financial resources to see their plans through. (It’s also had plenty of experience with acquisitions.) Some of Zale’s biggest successes lately—particularly its embrace of proprietary brands—have followed a path blazed by Signet.

Of course, there is the question—which CEO Michael Barnes admitted he’s still working through—of how to handle the flagship mall chains. Zale’s and Kay both target similar customers, and are in many of the same malls. If they become too alike, it wouldn’t make sense to have them so close by, or even keep them as separate entities.

In the last few years, Zale’s—which still has extremely strong consumer recognition—has seemingly sought a younger, hipper, more fashion-oriented image than Kay; in conference calls, CEO Theo Killion regularly mentioned how it uses the coolest new bands as advertising background music. That is needed in our business and could be the two chains’ point of differentiation going forward. I also hope Zale continues on its current advertising path, since for the last few years its commercials have been among the freshest in the industry.

Zale has always had an issue—which it never quite solved—on how to differentiate Zale’s from Gordon’s. Signet has a similar issue with its regional chains. This throws even more names into the mix. However, Tim Jackson of the Jewelry Industry Research Institute suggests having so many old names out there could work to the company’s advantage:

There has been significant store rebranding from the regionals to Kay, and Gordon’s to Zale’s, in the past. But for both, this has gone as far as it can without two stores of the same logo being in a mall. Following the completion of the acquisition, there will be lots of new opportunities opening up. For example, the regional brands in Sterling are strong in the Northeast and Midwest, where the Zale brand is underrepresented, while Kay is not particularly strong in Texas, Oklahoma, and other parts where Gordon’s has stores.

Some aren’t sure if this is good for the industry. For one, this deal will give Signet more pricing power. But vendors complain retailers already have plenty of power as it is. And if they don’t want to deal with Signet, there are not many places left for them to go. One banker predicted this could spark a wave of (further) consolidation on the manufacturing side, if only to balance the equation somewhat.

Some are also uncomfortable with the industry putting so much of its eggs in one basket. This deal is mostly financed by debt, and while Signet has done a good job with its acquisitions in the past, big takeovers have often proved problematic to other retailers (including one particularly star-crossed takeover of Zale).

Even so, people I spoke to think that Signet will figure out a way to make this work. They certainly hope it does—because the alternative would be too scary to contemplate. For the jewelry industry, Signet has now become too big to fail.

CLARIFICATION: As Avi Krawitz points out, Signet will be the largest jewelry retailer in terms of stores, but the second largest in terms of revenue. Chow Tai Fook does $7.4 billion in business a year.

JCK News Director