‘Cornerstone Principles’ Will Guide Zale Growth, Says Raff

Zale Corp., the world’s largest specialty retailer of jewelry, has a new boss, and her name is Beryl B. Raff. She’s the first woman to head Zale and one of the few top female execs in the male-dominated jewelry industry.

Raff, Zale Corp.’s former president and chief executive officer, was named chairman and chief executive officer of the company on Aug. 30 by Zale’s board of directors. She received the appointment following the retirement of her mentor and friend Robert J. DiNicola, who guided Zale back to industry leadership and profitability after its bankruptcy in the early 1990s. Alan Shor, formerly executive vice president and chief operating officer, replaced Raff as president and chief operating officer. In 1999, DiNicola announced his intention to step down to facilitate an orderly transition while positioning Zale for continued growth. During the following year, he prepared Raff and Shor to run the corporation. They and Zale’s management team also critiqued company performance; tested new products and merchandising concepts; solicited customer feedback; and, as Raff puts it, “tweaked our approach as the business dictated.”

Growth. Raff takes the helm at a moment when Zale is again asserting its dominance in the retail jewelry industry. It ended fiscal 2000 (Aug. 31) with $1.79 billion in sales, a 38% gain in net earnings (to $111.5 million) and a comparable store gain of 11.6%-its best year ever. Also in August, Zale bought the Bethlehem, Pa.-based mall jewelry kiosk giant Piercing Pagoda for $201 million in cash. The acquisition added 940 units (and $280 million in sales) to Zale’s approximately 1,400 locations, making it the largest jewelry retailer in the world, a title it had held until the early 1990s.

But Piercing Pagoda was only the latest foray into new markets by the Irving, Texas-based retailer. Last year, it acquired Peoples Jewellers, Canada’s largest jewelry retailer (and co-owner of Zale in the late 1980s and early ’90s) for $75 million. Zale has also made a big push into e-commerce with a strong Web site (redesigned last fall) and several partnerships with key Internet firms.

Something for everyone. Today, Zale’s reach extends across the jewelry-buying spectrum with several strong core brands as well as new brands. These include low-priced, youth-oriented merchandise (Piercing Pagoda); a discount chain (Zale Outlet); an Internet division (Zale.com); a promotion-driven, moderately priced national mall name (Zales); an upper-moderately priced regional format (Gordon’s); and a national luxury chain aimed at affluent consumers (Bailey Banks & Biddle).

In fiscal 2001, Zales Jewelers and Zale Outlets will add more than 30 stores each, including the first Zales Jewelers in New York City. Bailey Banks & Biddle will add 10; Gordon’s, five; and Peoples, three. The company will probably close 10 to 15 stores overall.

“The last six years [for Zale Corp.] have been phenomenal,” said Raff in a recent interview, “and we want to continue that by focusing on our core brands [Zales, Gordon’s, and Bailey Banks & Biddle], which are our more mature brands, and by growing our newer brands like Zales Outlet, Peoples, Piercing Pagoda, and Zales.com. We think we have more growth opportunities now than ever before.”

Building on cornerstones. Because of Raff and DiNicola’s long professional history-they have known each other since their days as executives at R. H. Macy’s almost two decades ago-don’t expect Raff to make many major changes in how Zale Corp. operates. “Bob and I are really of one mind when it comes to running the business,” she says.

According to Raff, that means “a strong focus on merchandising, first and foremost; differentiation of our brands; a full understanding of the customer; tight financial discipline and a broad view of the future; keeping an eye on the next opportunity and on improving returns.” These were the cornerstone principles laid down by DiNicola in engineering Zale’s revival, says Raff, and are “the only principles I have ever practiced” as a retailer.

However, she does have some specific plans and goals for Zale Corp., which she discussed in recent interviews with journalists and financial analysts.

Two-pronged plan. To maintain momentum and increase market share, Raff and her team moved into fiscal 2001 with what she says is a “strategic and focused two-prong approach.”

One prong is merchandising. Zale merchants intend to “stay in front of the consumer [with] more powerful ‘key item’ drivers, priced to ensure volume growth,” says Raff. In the gift and fashion sectors, especially, the company’s stores will roll out “many new test-proven items in every price point” to keep its brands “fresh and forward in all current trends.” Pricing is also being “sharpened strategically.”

At the same time, traditional signature items and customer must-haves-like diamond studs and pendants, bracelets, channel bands and “perfect hearts”-are being updated for the new year. For example, Zale’s popular .5-ct. diamond Millennium band (in platinum and 18k yellow gold) inscribed in the shank with the year “2000” set in diamonds, will have the third diamond “0” replaced with a baguette to create “2001.” That gives the concept “legs to continue into the future,” says Raff.

Diamonds certainly will continue to be the focus of much of Zale’s merchandising and marketing attention. (Zales Jewelers, after all, calls both its brick-and-mortar and online outlets “Your Diamond Store.”) Capitalizing on opportunities created by De Beers’ holiday 2000 campaign-designed to create stronger demand for diamonds than last year-Zale strongly promoted the diamond line bracelet, three-stone anniversary band, and princess-cut diamond studs featured in the campaign. “We have developed line extensions to capture all we can from the demand created,” says Raff. (See sidebar on p. 139)

The other half of Zale’s two-prong strategy for fiscal 2001 is, as Raff puts it, “getting our hands around the expense side” of the business. There, “every line had been scrubbed, and smart savings opportunities identified which allow us to fuel the expense lines that drive volume while ensuring the bottom line,” she says.

That includes continuing benefits from the sale of its credit card receivables last summer, which “significantly strengthened the balance sheet with serious resources freed up to help us more profitably expand the business.”

Integrations. The business strategy for the new fiscal year also involves integrating some recent expansions, especially Peoples Jewellers and Piercing Pagoda, as well as increasing Zale’s use of the Internet.

Peoples Jewellers. Zale bought Peoples Jewellers-Canada’s largest jewelry retailer and former co-owner of Zale-in 1999. The acquisition made Zale the largest retail jeweler in North America. Since then, it has implemented marketing and merchandising strategies at Peoples mirroring those that rebuilt Zale itself in the late 1990s. Zale also moved much of Peoples’s back-of-the-house operations from Toronto to Dallas.

The effects are most clearly seen in Peoples’s average volume per store, “the key dynamic driving productivity,” says Sue Grove, Zale’s chief financial officer. When Zale acquired Peoples, its per-store average was $700,000 (in U.S. dollars). In 2000, it was up to $872,000, a significant increase that enabled Peoples to end its first year under Zale with a 110% gain rather than breaking even, as originally had been expected.

After DiNicola and his team took over in 1994 and introduced their new initiatives, it took four years for Zale to become profitable in all four quarters, notes Grove. “I would use the same barometer for Peoples and say we’re looking at a three-to-four-year time frame there, too.” Still, Peoples seems to be improving slightly faster than did Zale: The corporate goal for Peoples was $1 million per store by 2003, but, says Raff, “We could conceivably hit that mark in the next year or two.”

Piercing Pagoda, the largest kiosk retailer (following several years of expansion and mergers) of popular-priced 10k and 14k jewelry in U.S. malls, was bought by Zale with cash that came largely from the sale of Zale’s accounts receivables.

Acquisition of Piercing Pagoda had been one of DiNcola’s goals and “was on our radar screen for a long time,” notes Raff. She cites a couple of reasons. First, it operates “within our core competency-the malls-in real estate and an environment we understand. They complement our brands very well without any cannibalization or overlap.” Second, the purchase extends Zale’s reach “in a dominant way into a consumer segment we didn’t have: teens and young adults. It would’ve taken us a long time to build a presence in this market on our own; now, in one fell swoop, we’re the major player.”

But “the real benefit,” Raff continues, is that it enables Zale-now established in every major jewelry segment-“to capture jewelry consumers at the very beginning of their jewelry-buying life cycle and retain them through every important stage and jewelry buying event in their lives, from adolescent to adult.”

It should take a year to integrate Piercing Pagoda into Zale, about as long as it took for Peoples. There will be no real changes in merchandising or operations until spring, says Raff.

For the moment, Zale is “learning to understand the franchise and looking at construction, design, and real estate,” she says. Despite Piercing Pagoda’s obvious benefits, it is still “a different business for Zale, and we really want to learn it” before devising specific merchandising or marketing schemes.

Zale does have some general plans in place for Piercing Pagoda, as it had for Peoples. Those include “a key item program, enhancing its diamond program, adding more color, and broadening their product categories,” says Raff. She also believes Zale can raise Piercing Pagoda’s productivity level. Its kiosks now average $300,000 a year, with an average check of $29. “We think we can have a significant impact on those numbers,” she says, noting the effects of growth strategies on volume at both Zale in the late 1990s (from $700,000 in 1994 to $1.3 million this year) and at Peoples in the past year. Zale projects break-even earnings for the first year and a conservative 5% to 8% growth over the next few years.

Raff also sees possibilities for growth through expansion. There are 431 U.S. shopping malls with a Zale store but no Piercing Pagoda kiosk, creating “a significant opportunity” to expand the company’s reach to younger consumers, she says. Also, Zale may “take this format into the Canadian market and perhaps vacation/destination locations.”

Meanwhile, Zale is reviewing the viability of Piercing Pagoda’s multiple concepts. The company operates kiosks under the names Piercing Pagoda, Plumb Gold, Silver & Gold Connection, and Diamond Isle and has several mall jewelry stores. In 1999 it began testing kiosks in train stations and airports. “It’s not yet clear to us if those concepts are clearly differentiated or make sense for us,” says Raff. “We’ll evaluate each and every location for profitability and future potential before we make any decisions.”

Up and dot-coming. Meanwhile, says Raff, Zale is “keeping our eyes very much on the efficiencies and advantages today’s technology can offer us and looking to [its use in] the future as an important piece of the puzzle for the organization.”

That includes dot-com retailing. Last fall, Zale was “working fast and furious” to revamp its Zale’s Jewelers Web site and develop a new site for its affluent Bailey Banks & Biddle national chain.

“We would like to see [Web sites for] Gordon’s and Peoples go up in the spring 2001 season,” says Raff. “But that depends on many factors, including how.the Zale and Bailey Banks & Biddle sites are doing and what tweaks and improvements we want to make to them first. There’s also the question of whether we tackle Peoples or Gordon’s first. Peoples will be far more complex because of the Canadian duty [on purchases]. If we choose to do Peoples first, it will take all of the spring season, and we wouldn’t get Gordon’s up until later [in the year].”

Last year, the Zale Web site did about $6 million in business, about 1% of its total volume. Even with steady growth, Zale doesn’t expect the site to produce more than $15 million annually in the near future. But Raff believes that, for now, volume is not a critical factor. “The objective is to position ourselves for the future. We want to understand the online environment, extend the brands appropriately on it, and make sure we can execute that well. Then when that foundation is well placed, we can start to put on volume as the industry matures.”

All told, then, says Zale’s new chairman, with business strategies built on proven concepts, “the flexibility to shift gears quickly to alternative strategies as business dictates, and our hands firmly on our expense structure, we feel well prepared for fiscal 2001.” The retail giant’s “competitive edge, aggressive approach to advertising, and unparalleled marketing, coupled with the leverage ability of our size,” predicts Raff, “will keep Zale’s momentum going and continue to gain market share.”