The Dark Side of Consolidation

Consolidation is a key issue driving the volume-jewelry business today—on both the retail and manufacturing sides. Megamergers, Supplier of Choice partnerships, store nameplate conversions, and new strategic alliances have dominated industry headlines in recent years.

Participants and proponents of consolidation point to benefits such as economies of scale, enhanced efficiencies, accelerated growth, and expanded business opportunities as the rationale behind the moves.

But challenges—including corporate culture clashes, competing executive egos, training gaps, incompatible technology/operational systems, brand/identity dilution, loss of autonomy and control for the acquired company, financial and legal issues, bad leases, problematic retailer-vendor partnerships—can arise from consolidation and stymie prospective advantages. Many of these are “soft” issues that due diligence may not reveal; yet they’re critical factors that companies considering an alliance should weigh carefully.

“Whenever you have a large consolidation like Federated-May, Kmart-Sears, or even Zale–Piercing Pagoda, there are a number of hidden issues that always need to be considered,” notes Jeffrey W. Taraschi, president of Interactive Group Ltd./Eurobrands Ltd., a St. Petersburg, Fla., consulting firm that helps companies develop brands and concepts for TV and Internet retailing.

“There’s the culture/style issue, which includes the personality and merchandise rhythm of the two companies,” Taraschi says. “There’s the market issue, which involves relationships with key suppliers and how they will be dealt with going forward. There’s the homogenization/loss of brand identity issue, as inevitably, the acquiring company imposes its own stamp on the acquired company. There is the people issue—whether the employees of the acquired company accept the acquiring company and can be retrained and integrated into that business. And there is the customer experience issue, that is, the relationship with customers that each company has fostered and nurtured for many years, and how this will be impacted by the consolidation.”

Other experts offer similar assessments. According to Steven Kaiser, president and chief executive officer of Kaiser Time Inc., a New York firm that provides merger and acquisition advice and other consulting services to jewelry and watch firms, making the financial issues work in a consolidation is the easy part; it’s the people and cultural issues that determine whether a consolidation is successful.

“Every company has an informal system dictating how things work and really get done, and an acquiring company needs to consider this system of the company being acquired,” Kaiser observes. “A lot of things that sound good in the boardroom are very different in practice, such as dealing with the ‘people part’ of a merger or alliance. The key to evaluating the success of a merger is to determine whether you have truly increased your business or whether you have spent so much time on integration issues that it has taken the focus away from your core business.”

Terry Burman, chairman of Sterling Jewelers, believes the two biggest issues that can cloud any acquisition are cultural fit and technological compatibility. Sterling, based in Akron, Ohio, has worked through a number of integrations over the years, most recently following its purchase of the 137-unit Marks & Morgan chain in 2000.

“Other issues you can work through, but how you handle the cultural issue is critical,” Burman says. “You can always retrain the people, but you have to approach them with sensitivity and an open mind. You need to try to accommodate them in terms of benefits and compensation. It’s in your best interests to retain as many of the acquired company’s people as possible.”

To illustrate some of the pitfalls that major retailers face when consolidating, JCK looked at the cases of two companies that pursued an aggressive acquisition strategy in the late 1990s: Samuels Jewelers and Fred Meyer Jewelers.


From 1999 to 2000, Samuels Jewelers was on an acquisition tear. The retailer, based in Austin, Texas, purchased four chains in less than a year, including five-store Hart’s Jewelers, 30-store Henry J. Silverman Jewelers, 40-store C&H Rauch in 1999, and 11 Musselman Jewelers stores in 2000. In the process, Samuels beefed up to 196 stores, but the Rauch acquisition, its largest, was difficult and costly.

For the first six months after acquiring Rauch, Samuels ran retirement sales at the locations. Business boomed, and everything seemed to run smoothly, recalls Randall N. McCullough, president and CEO of Samuels. It wasn’t until the sales ended, and Samuels closed the Rauch home office in Lexington, Ky., that the “skeletons came out of the closet.”

“After the retirement sales ended, we really got a chance to see how weak their people were in the stores,” he says. “The culture of our people had always been to work hard to establish a level of professionalism, and we were very astute and focused on store profit. The Rauch salespeople didn’t have a clue—their only focus was on driving sales, even when they were not profitable. They did trade-in deals and lots of other things that weren’t part of our culture. We had to put together a whole program to get them to handle things in a professional manner.”

Samuels also discovered that Rauch stores had inflated profit-and-loss statements and margins. McCullough calls the integration of Rauch’s operations people “a nightmare,” as the Rauch staff couldn’t adapt to Samuels’s systems. Samuels brought in its own people to integrate the operations.

Ultimately, Samuels conceded that a large block of the Rauch stores would never be profitable and closed more than half. Today, 18 or 19 remain, and Samuels has slimmed down to 98 locations.

McCullough wouldn’t say whether the Rauch acquisition played a role in Samuels’s own financial troubles and subsequent bankruptcy filing in 2003. But it’s clear the merger had a major negative impact. “It’s a drain on your current resources to fix these stores,” he says. “It pulls you away from your other stores and they drop off. We lost ground as a result of the Rauch acquisition.”

Samuels endured another difficult acquisition when it purchased the 11 stores from Musselman Jewelers, based in Camp Hill, Pa. The stores had been sold to liquidator Bobby Wilkerson, who did an “unbelievable job” running closing sales for six months, McCullough says. Samuels took over the physical locations without inventory and merchandised the units from the ground up. But the “going out of business” sales were so successful, consumers took advantage of the bargain prices and bought all the jewelry they’d need for the year. This “chewed into” Samuels’s future sales in those stores and cannibalized its market share, according to McCullough.

“Those stores were squeezed so hard, they had nothing left by the time we took them over,” he says. “After six months of liquidation sales, it was so difficult to try to pull life back into those stores. In many consumers’ minds, they had made all their purchases, those stores had closed, and they were ready to move on.”

Of the 11 Musselman stores, Samuels kept only one.

For McCullough, the lesson to be learned from these experiences is that the company needs to do much more due diligence before committing to any mergers. “We also learned that you need to do a lot more work in the field, putting your people in the stores to look at their people, their inventory, and their systems,” he added. “You can’t just look at it from the home office—their management won’t necessarily give you the complete picture.”


In the second half of the 1990s, Fred Meyer Jewelers went on its own acquisition binge in its quest to shift from a Pacific Northwestern powerhouse to a major national player. In 1996, the Portland, Ore., retailer acquired 22 California stores from Sterling Inc. and the 49-unit Merksamer Jewelers chain. In 1997, Fred Meyer bought 44-store Fox’s Jewelers. In 1998, the company purchased 123 Littman Jewelers and Barclay Jewelers stores from Elangy Corp.

While most of these acquisitions went relatively smoothly, the integration of Merksamer, based in Sacramento, Calif., took on nightmarish proportions and prompted Fred Meyer to rethink its acquisition strategy and instead focus on internal growth.

Ed Dayoob, who retired in March 2005, was president and CEO of Fred Meyer Jewelers during the Merksamer acquisition. “First of all, Merksamer had been through bankruptcy a couple of times, and over the years, they developed a culture that wasn’t focused on selection or replacing merchandise in a timely manner,” Dayoob recalls. “They didn’t have a big merchandising budget, and their stores were suffering. Meanwhile, with the company in frequent financial straits, the employees had to pay a large portion of their own health insurance. They weren’t happy, and we ended up having to get rid of most of them.”

Another issue was systems integration. Merksamer had one small computer system, while Fred Meyer Jewelers, with some 380 stores at the time (and more than 440 today) was on a big mainframe system. Dayoob says integration took about a year. Also, Merksamer was a credit-oriented company, while Fred Meyer had a third-party credit system. Merksamer was much more aggressive in offering credit than Fred Meyer was, and as a result, it had a very high ratio of credit delinquencies.

“Merksamer was overinventoried in some areas, underinventoried in others, and they had the wrong merchandise, the wrong prices, and the wrong systems in place,” Dayoob says. “Integrating them was a real nightmare.”

As a distressed company that had trouble paying its bills, Merksamer wasn’t getting the product it needed, when it needed it, Dayoob notes. When it could get product, it wasn’t always of the best quality. And because it couldn’t get good deals from vendors, it routinely paid too much for merchandise.

Many of Merksamer’s vendors were different from Fred Meyer’s, and they supplied a lot of product that Fred Meyer doesn’t carry. In addition, many of Merksamer’s vendors were too small to service a chain as large as Fred Meyer and had to be cut loose. “A lot of vendors got hurt, but we really couldn’t do much about it,” Dayoob says. “I ended up running a tremendous amount of clearance sales to get rid of the Merksamer product, and years later, I was still trying to get rid of it. But the hardest part was making sure the Merksamer customers were being taken care of—repair and custom orders, complaints. We went out of our way to satisfy them; it was like advertising and helped us to convert them.”

Merksamer also had numerous ongoing lawsuits for sexual harassment and other issues, which Fred Meyer inherited and had to resolve when it purchased the company. The California retailer also had a different union, and Dayoob says it took eight to nine months of negotiations to resolve the situation.

But the biggest integration issue probably concerned store leases. According to Dayoob, Merksamer had been owned by L.J. Hooker, a real estate company, throughout the 1980s, and Hooker overexpanded and overleveraged Merksamer, leading it to bankruptcy. Hooker “set a bad example for everyone” by paying exorbitant rates to get retail space for Merksamer, and Dayoob says he tried to “buy his way out” of numerous bad leases. It took three to four years to fix the lease problem.

As a result of the Merksamer headaches, Dayoob says the company changed its focus to internal store growth, which was easier, more manageable, and more cost effective.

“Everybody wants to be big and grow, and there’s a lot of excitement generated from acquisitions,” he notes. “You do get some synergies and immediate volume added to your bottom line. But there are a lot of issues that can come up with people, systems, culture, and product that you just can’t foresee and prepare for. Nobody talks about these kinds of issues when they discuss acquisitions.”