Fiscal 1997 was another banner year for Zale Corp. The Irving, Texas, jewelry chain – the nation’s largest with 1,065 units – saw total sales for the year ended July 31 increase 10.2% to $1.25 billion. Earnings jumped 15.3% to $50.55 million. Same-store sales rose a strong 5.5%.
Now in its third year of impressive growth, the retailer seems to have maneuvered all the key elements into place to ensure its ongoing success. Its once overlapping, under-performing divisions have been restructured into three profitable, distinct, autonomous operating units – which in early September included the 640-store Zales, 310-store Gordon’s and 113-store Bailey, Banks & Biddle divisions.
An ambitious growth plan calls for an additional 100 stores a year over the next few years. Zale continues to refine a definitive key item approach that in just three years has grown to more than a third of total sales. An already solid management team was further strengthened with the promotion of Beryl Raff to executive vice president and chief operating officer of the company in July. Long-time Macy’s East jewelry executive Pam Romano replaced Raff as president of the Zales division in August. Zale even managed to shed its non-core Diamond Park leased department business by selling the bulk of it to Finlay Enterprises in September.
The man at the helm of this juggernaut is Robert J. DiNicola, chairman and chief executive officer. Analysts and industry observers give him much of the credit for bringing the company from the retail doldrums only four years ago to its current dizzying heights. In this exclusive interview, conducted at Zale headquarters by Glen Beres, editor in chief of JCK’s High Volume Jeweler, DiNicola offers his perspective on Zale’s present success, past struggles and future opportunities. The article originally appeared in the November issue of HVJ.
HVJ:You’ve really repositioned Zale Corp. since you took control of the company in 1994. What have the changes meant for your store divisions?
RD:As we’ve built stores and renovated and remodeled during the last three years, we’ve not only fixed the business, but repositioned our divisions so that each has a point of view and a differentiation from the other formats. Consequently, the Zales division is designed as a traditional, moderately-priced, middle-America, highly productive, national mall store jeweler, while Gordon’s has gone from its very promotional base to an upper-moderate jeweler with tailored assortments by region. Bailey, Banks & Biddle – which will become a national chain in the full sense of the word since all the [division’s] stores will become Bailey’s by the end of the year – covers the upper-moderate to better to designer ends of the business, with a higher check and a different customer profile. The average ticket is $250 in Zales, $275 in Gordon’s – up from $200 two years ago and on the way to $300 this year – and $450 in Bailey’s, which were our targets. So as we put these formats in our current or new markets, there’s a nice coverage of the whole spectrum of the jewelry customer profile.
HVJ: Zale Corp. has aggressively expanded its store base in what many say has been a stagnant retail jewelry market. How many more stores do you expect to open?
RD: We’re planning to open 100 new stores a year for the next couple of years. We have three divisions to work with. You have to remember, during the Chapter 11 [January 1992 – July 1993], Zale closed more than 700 stores. In many cases, the stores we are opening now are simply replacing those that were closed in key malls and markets. These were spectacular locations Zale Corp. gave up because it couldn’t pay the rent. To a certain extent, this store “re-rollout,” as I call it, is really a recapture of the lost market share Zale once had.
HVJ: How are you balancing this growth among your divisions?
RD: Our first objective has been to stabilize and grow the Zales division. Eighty percent of the stores we’ve opened have been Zales stores, and will continue to be over the next year or two. Beyond that, we will shift gears and rapidly expand one of the other two divisions. Eventually, one could envision a chain under the Zale umbrella which would embrace 850 or so Zales division stores, 500 Gordon’s stores and approximately 250 Bailey, Banks & Biddle stores.
HVJ: You seem to be somewhat under-represented in the Northeast. Is that an area you’re targeting for expansion?
RD: During the Chapter 11 process, Zale Corp., and the Zales division in particular, abandoned a number of markets, particularly in the Northeast. Over the past year, our real estate strategy has taken us up the I-95 corridor and we’ve been positioning stores between Washington, DC, and Boston. We’ve just about completed our penetration in the New Jersey market, and we’re on the verge of entering the New York City metropolitan market with reopenings in key malls on Long Island, beginning with the Roosevelt Field Shopping Center. We’re finishing the process this year in the Zales division. At the same time, we’ve positioned some key Bailey, Banks & Biddle stores in the market, including openings in Paramus, N.J., and Westchester, N.Y. We’ll also open a Bailey’s store in Roosevelt Field this year.
HVJ: Most of your recent growth has come through opening new stores. Are acquisitions part of your growth strategy as well?
RD: Occasionally, an opportunity arises, like a Karten’s [a 20-store New England chain Zale acquired last year], that makes all the sense in the world in a tight real estate market. It was an operation with spectacular locations that was fairly well-run, although they had some difficulties. We were able to move in there and position ourselves in a fairly quick and efficient manner. Opportunities like that don’t happen all that often, but when they do, we take a very careful look at them. We even allocate a certain amount of money in our capital plan to use should such opportunities arise. However, to guarantee our sustained effort to recapture all the lost market share we once enjoyed, our capital plan calls for the continued roll-out of our own new stores until we reach our target numbers.
HVJ: Everyone talks about the “overstoring” of the industry. Is that a real concern for you when you’re so large already, yet have such aggressive future growth plans?
RD: It’s always a concern when you look at the landscape and see so much competition out there. On the other hand, we’re not in the business of opening any store, any place, any time. We go through a very strenuous process of identifying, challenging and editing those mall locations we feel we should be in. It’s not just an issue of putting a store someplace and hoping it succeeds. The cost of doing business is so high that a selective process is required. Also, I would say we’ve closed 75-80 stores over the last four years that under-performed or didn’t fit into our future strategy. We believe that, after a careful survey of mall opportunities around the country, the numbers I said earlier – 850, 500 and 250 for each of the divisional formats – are appropriate for us, and we would feel comfortable running [that many stores] long-term.
HVJ: You’ve been in the midst of a major remodeling plan. Has that been completed?
RD: Renovations are always ongoing. By the year 2000, there won’t be a store in the portfolio that hasn’t been newly opened, remodeled or renovated since fiscal 1995. Our capital plan is divided into two parts: approximately 35% is devoted to renovations, remodels and relocations, which are primarily lease driven. The other 65% has been devoted to building new stores. Over the last three years, those are the averages we’ve achieved. As we move forward, those percentage rates will shift slightly based on leases coming up and new store opportunities.
HVJ: Your “key item” approach has been very successful. How did you develop the strategy?
RD: I can remember coming here in April [1994]. Christmas was around the corner and little was done, and I asked, “What’s selling?” [Our people] said, “A little of this, a little of that.” We had so much [product] out there, so I said, “Show me what’s selling.” From that, we got the first 100 key items. I didn’t even know if they were the right items, but they were selling, so we got them going. In the second year, we got the team in place. I’m in no position to be buying merchandise from where I sit. We needed the experts. Then, the assortments started to come together. Our buying teams started to build adjacencies among the classifications to round out the assortments and make money for us and our vendors on programs. Ensembles evolved, which allowed us to sell rings, necklaces and earrings in groups. The stores became more trained to do repeat business and learned how to do add-on business. A lot of these skills were lost over the years at Zale Corp. because of the financial problems and the high turnover rates of our salespeople. The stores became more productive – they went from $650,000 [annual sales] to $1.1 million today. And [sales]people are now coming back to Zale because they sense stability and the opportunity to grow.
HVJ: Employee turnover is a critical problem for mass retailers. How is the situation at Zale?
RD: It’s been cut in half and is stabilizing. It’s probably at industry levels right now. Naturally, we’d like to improve on that, but we’re not witnessing the hysteria of the past [when large numbers of personnel left the company following the bankruptcy.] Rebuilding the sales force is a very long-term thing. It takes a long time to get a qualitative sales force back out in the field.
HVJ: Are you still fine-tuning your key item program?
RD: It hasn’t changed that much in the last three years. We have a list of about 250 key items [called “Brilliant Buys” in the Zales stores, “Gordon’s Gems” in Gordon’s and “Bailey’s Best” in the Bailey, Banks & Biddle locations]. The quantity will generally remain stable, but we’re always tweaking the list to the tune of about 25% every year. We carry approximately 2,000 SKUs per store, and those 250 generally do 35%-40% of the business.
Each of our formats has a slightly different twist on the formula. It has played a critical role in helping us reposition the Zales division as our national brand. At the other end of the spectrum, it is less significant for Bailey’s, where quality levels and price points are higher and the customer is more distinctive. But within each [format], there are key items that drive a large share of the business. At the same time, we recognize that the jewelry industry is a selection business and we need to balance that out in the stores.
HVJ: In Gordon’s, which you’ve positioned as a regionally-driven chain, are key items more regional in nature as well, compared to your other divisions?
RD: Some are – about 10%-15% – but the lion’s share are common [in all Gordon’s markets] so we can lock in our marketing and store presentational efforts across the division. This allows us to highlight and differentiate Gordon’s as a regional chain and still give ourselves the ability to pay the rent with the key items on a grand scale.
HVJ: How has converting Gordon’s from a promotional to a more upscale format affected your credit business?
RD: Ironically, as many other people have suffered through this credit crisis, our bad debt has gone down. Two years ago, before all of this concern over credit issues started, we began to raise our credit standards, particularly in the Gordon’s division. We were trading Gordon’s up and, in order to do that, all parts of the business had to be traded up to eliminate the bottom rung and attract a new level of customers at the top rung. The Gordon’s division, which had been traded down from 1989 to ’94, had a very bad track record in terms of bad debt on its books. The primary reason we traded Gordon’s up was to position it properly between Zales and Bailey’s, but this financial situation certainly made the decision a little easier. Since the credit portfolio generally trails the business by 18 months to two years, we’re getting the benefits of that move now.
HVJ: Zale announced earlier this year that it will open its own credit card bank. How does this help your credit operations?
RD: It puts us in a league with Nordstrom, Federated and the other big players, and allows us to have more flexibility with our credit card and avoid a lot of costly and cumbersome administrative entanglements. Our credit program itself is a very tightly controlled operation. We have major credit centers in Arizona and Florida. We approve credit centrally; we don’t allow the stores to approve their own credit. To me, that could be a conflict.
Credit is also a much smaller piece of the marketing effort for us than it is for others in the industry. We offer 90 days interest-free credit, while most of our competitors are at 12 months. Although a significant portion of our jewelry sales are accompanied by credit [DiNicola says private label card sales represent 52% of total sales], the credit piece is only a tool to help consummate the sale. We have not used it aggressively to drive our business.
HVJ: Part of your strategy to rebuild the Zales division into a national brand has obviously involved increasing your national TV advertising. What are your advertising plans this holiday season and beyond?
RD: Our core media will remain the same: TV, preprint and direct mail. Each division uses all three formats and, to a lesser degree, some others as well; but 90% of our ad dollars are spent in those three areas. At Zales, we’ll use TV more extensively because of the nature of its business. We knew we had a great name, and TV has played a great role in resurrecting that name. At Gordon’s, preprints are more important because the division is regionally-driven and needs to place its marketing efforts in the right locales. Bailey’s relies on direct mail because of the high income level and mature nature of its audience. You need to be very targeted to be effective with them, and direct mail is the best vehicle to do that. As we expand, the campaign naturally continues to grow. But although we’re spending more dollars on marketing efforts than before, the rate of advertising to total business has dropped by over a point – which proves that our efforts are working and are much more productive than in the past. We see our rate of advertising remaining fairly consistent, at 3%-3.5% [of sales]. It had been as high as 5%.
HVJ: You’ve been widely lauded for borrowing merchandising strategies like the key item program from your department store days [with Macy’s and Bon Marché] and successfully adapting them to the traditional jewelry store sector. Why has the approach worked so well at Zale, and why aren’t more jewelry chains doing it?
RD: I never viewed [the key item program] as a department store strategy. I always thought it was a common sense retail approach, particularly for our organization. To varying degrees, anyone can apply the principle. But I’m not saying it’s right for every jeweler in America to go after a key classification program. It might not be right for people running regional chains who are really geared toward a population and marketing niche. We went to the program to maximize strengths – buying power, size, name brand recognition and vast reach – we weren’t utilizing. With 1,100 locations, Zale Corp. can’t, and shouldn’t, try to compete with people on a local or sometimes even regional level. Consequently, we went from a one-of-a-kind, “onesy, twosy” business to a very productive, extremely volatile, key item and key classification business backed by an extremely impactful and wide-reaching multimedia marketing effort. Fortunately, we got a pretty good response.
HVJ: You’ve often talked about how important a role strong partnerships with key vendors has played in Zale Corp.’s turnaround. Inevitably, whenever vendors discuss such partnerships, the issue of consignment merchandise comes up – specifically, how the practice has hurt them in the past. Where do you currently stand on the memo issue?
RD: Our memo merchandise has been dramatically reduced, from about a 40%-50% memo mix to about 15% right now. Some of that memo in the past was financially-driven, but I think it went beyond just finances. Our approach has changed the face of Zale Corp. quite dramatically. This whole project of key items and key classifications requires us to have the confidence that, when we go into the market, we’re going to buy the product right and sell it right. We view memo as an opportunity to layer on and enhance the core business. When we take on memo, it’s designed to fit in with the product lines we’re offering on an owned basis. If it doesn’t fit, and it doesn’t enhance, it shouldn’t be in the case. In the Bailey’s division, memo should, could and probably will play a more significant role because of the uniqueness and distinctiveness of product that memo hopefully brings, versus a Zales, which is more commodity-driven.
HVJ: Last year, you drastically cut vendor drop shipments to stores and shifted a larger portion of deliveries to an expanded distribution center – which observers say helped cut costs, speed up inventory turnover, increase your merchandise shipping capacity and improve your in-stock position. What technological initiatives are you working on now?
RD: As we transitioned from a “one to show and one to go” business, we had to change the distribution center and merchandising systems to capture what was selling and be able to replenish it on a store-by-store, item-by-item basis. So two years ago we began to install a system called RETEK, to help us get the goods we were selling identified, replenished and sold much more rapidly. RETEK also facilitates the planning process by allowing retailers to do [merchandising] projections more easily. That project was completed on July 20.
The second project we’re working on is upgrading the whole point-of-sale system out in the field. We’ve been operating with old equipment and old technology for the last 10-15 years. We have allocated capital to address the issue so that, by the year 2000, our folks in the field have up-to-date POS equipment with all the “bells and whistles” that weren’t available on the selling floor 15 years ago. This includes the ability to execute the sale, control inventories and get customer information.
Our third project is to position our systems for the year 2000, an issue everyone in the world is facing. But we feel very good about it in terms of identifying the problem and getting it under control. RETEK is 2000-compatible, so our whole merchandising system is ready to go. We’ve identified older systems that aren’t 2000-compatible. We have a priority list and some are being transitioned now.
HVJ: You’ve started to develop some ancillary businesses, such as your Zales catalog and Zales World Wide Web site. How are these businesses doing?
RD: We call the catalog, telephone and Internet operations our direct business. It’s less than 1% of our entire business right now. We’re still layering in the infrastructure, but long-term we see it becoming around 5%-10% of our overall business. The Web site is interesting in the sense that, while we’re not doing much business on the Internet, it’s become another marketing tool for us. We’re getting so many “hits” on the site, with a lot of people seeking information: “Where’s your store [closest to their location]?” “Where can I get this product?” questions about quality. The site is extremely customer-friendly, and it will grow and evolve into a pretty significant part of the business. I also like it because at this stage, it doesn’t require a large investment, and we use the infrastructure that’s already there to get this piece of the business out into the hands of customers.
HVJ: Some time ago, there were also rumors about a Zale infomercial and possibly a Zale TV shopping network. Are you interested in developing such projects?
RD: Yes, the infomercial is something we’re looking at. Of course, if it’s successful, it could eventually evolve into a TV shopping network. But one piece has to fit into the previous piece. It’s all part of our three-point strategy for the direct business. First, we get mail and phone off and running and productive. Second, we migrate that successfully to the Internet. And third, we develop the direct customer profile on broadcast. We are already doing a lot of TV in terms of commercials. We’ve turned some of them into direct selling opportunities by offering a toll-free number [on the TV screen] for ordering. [Some of Zale’s circulars also include a toll-free order number.]
HVJ: What about non mall-based physical store formats, like superstores or outlet stores?
RD: We have much opportunity to grow our core mall business, which we’ve clearly demonstrated. Beyond that, there are opportunities for other formats, but we don’t have immediate plans to develop them. That’s not to say we never will. I think down the road, Zale can be successful in a format outside the mall without cannibalizing the core business, but there are different rules and circumstances [from a mall-based business] that must be considered to ensure success.
Take the superstore format. When I look at the nature of the jewelry industry itself – the slow turn and the high working capital investment required to offer the breadth, depth and selection of product lines – the ability to make a large number of superstores successful would be quite challenging.
We’ll also look at opportunities for freestanding stores, stores in [strip] centers and outlet stores. We already have a couple outlets which handle mostly close-out merchandise. We’ve identified 150-200 outlet store locations out there that could lend themselves to the Zale name. But I’m biased about what we do now [in the malls] and why we’re successful. So much of the jewelry business is done at holiday. We’ve positioned ourselves to be a 365-day-a-year business by layering a fashion jewelry and watch business on top of a solid bridal one. We’re very much the bridal store and the gift-giving store. We want to be in malls where there’s lots of traffic and we can attract that impulse customer. Also, the consolidation of anchor stores in malls is coming to an end, and they’re stabilizing their businesses. Malls have reacted by upgrading and adding exciting ingredients in terms of entertainment and new formats. As we look to the future, we see the mall continuing to draw traffic based on these factors.
HVJ: Other than financial commitments, are there any lingering negative effects from the bankruptcy?
RD: I think for the most part, the bankruptcy stigma has been overcome – and in a relatively short time – because of the hard work and success of a lot of people in this organization. Although we’re doing better than we were, and we’re certainly regarded as one of the leaders in the industry, it’s still our job to convince the financial community that we can do things successfully short- and long-term, and the jewelry industry can and will be a productive place to invest.