Zale’s holiday quarter results were disappointing. As a result, heads rolled, Zale’s organization structure was modified and advertising and marketing changes are underway. 

 

Mary Forte, Paul Leonard, and Charlene Wuellner have resigned at the request of the board. Forte was Zale’s CEO. Leonard was Zale Jewelers’ president.  Wuellner was senior vice president of corporate services; previously, she served as president of Gordon’s Jewelers and Zale Outlet. 

 

In a newly implemented management structure, all of the company’s mass market North American brands – Zales Jewelers, Peoples Jewellers, and Mappins Jewellers – have been consolidated under one leader – John Zimmerman who previously headed the company’s Canadian operations. The search is on for a new corporate CEO. We anticipate further changes as the company attempts to get back on track.

 

What Happened?

What happened at Zale Corporation during the all-important holiday selling season? What caused such a massive shake-up?

 

Betsy Burton, Zale’s interim CEO, provided some insight into the challenges that Zale faced in the holiday quarter as well as the board’s sense of future direction for the Zales Jewelers' brand. 

 

Burton explained why the Zale Corporation CEO was replaced:

• While the board was happy with the direction of the strategy, it was disappointed with the lack of progress.
• Management missed several internal operating and sales targets.
• The market share of the flagship brand – Zales Jewelers – has been eroding.

 

The Strategy

As approved by the board, the strategy for the Zales Jewelers division was as follows:

• Move moderately upscale

 

The Execution

As developed by Zales Jewelers president Paul Leonard and approved by Zale Corporation CEO Mary Forte, the Zales Jewelers management team implemented, among many tactical programs, the following:

• Reduced offerings of diamond fashion and diamond solitaire jewelry (especially at higher price points)
• Increased the mix of silver and gold jewelry (typically lower price point items)
• Missed a key price point -- $799 retail – in the holiday product line-up
• De-emphasized Zale’s traditional value message
• Implemented a new slogan – Be Brilliant – while dropping The Diamond Store, a slogan which Zale has spent years reinforcing in its advertising. 

 

The Result

• The average ticket dropped to $338 from $364 in the all-important holiday quarter ended January 2006. 
• Corporate same-store sales were up a very modest 1.4 percent, with Zales Jewelers’ same-store sales down an estimated 3 percent. Total sales were up 2.2 percent. 
• Corporate profits fell in the holiday quarter, dragged down by poor performance at the company’s flagship brand, Zales Jewelers, which represented about 46 percent of corporate revenues last year. 

 

Zale Forgot Its Roots

During management’s conference call with Wall Street analysts, Burton repeatedly noted that Zale failed to reach its core value-seeking Middle America customer. In short, Zale forgot its roots. 

 

Zale’s strategy is sound enough: by moderately up scaling, it should be able to achieve lower costs per sale, higher revenue per store, and greater profits. But the process of moving up-market is delicate. 

 

Burton, who comes across as a no-nonsense leader who listens as well as directs, provided answers to the question, “What did Zale learn from the holiday season?” Each of these comments relates to the Zales Jewelers brand, unless otherwise noted.

 

• Reduced promotional level hurt – Because Zale Jewelers’ cut back on price-based promotions, sales were adversely affected by at least $22 million or 6 percent on a same-store sales basis. 
• A Veterans Day promotion was eliminated
• A pre-Thanksgiving promotion was eliminated
• Some Bonus Buys and One Day Sales were eliminated
• Reduced reliance on value merchandise cut into revenues – There was far less emphasis on the value component of Zale’s merchandise.  For example, value-priced goods such as Brilliant Buys and certain key items were reduced from the merchandise mix.
• Erratic incoming orders resulted in uneven flow of goods to the stores – The flow of incoming goods was erratic, and back-up merchandise was not available. 
• Orders were placed too late
• 30 percent of Zales Jewelers merchandise was new
• 15 percent of Zales Jewelers’ vendors were new
• Low inventory levels resulted in high out-of-stocks – Inventory levels of critical goods were too low. The company cut back on higher price point merchandise in favor of smaller ticket goods, perhaps anticipating a customer who might scale back discretionary spending due to high gasoline and energy prices. 
• The mix of diamond fashion goods and diamond solitaires was reduced significantly.
• Gold and silver jewelry was added; this did not sell particularly well during the holiday season.
• Missed a key price point – During the holiday selling season, Zales Jewelers missed a key price point -- $799 – with too little product.
• TV ad shift – The company shifted some of its television ads from November to December. In contrast, other jewelers started their television campaigns early in the season, in an effort to build awareness and momentum.
• Too many item / price ads – In an effort to gain sales which had been lost early in the selling season, Zale began running 15-second price and item ads. These were not particularly effective.
• Too many institutional ads – The company focused too much of its advertising on building the new Zales repositioning, especially early in the season. 

 

Burton also noted the following:

• The off-mall strategy is on hold – The company has opened several Zale Outlet stores in off-mall locations to test the market potential. In one test market, test results were satisfactory; in another market, results were “really bad.” Further, the opportunity to open off-mall locations is more limited than originally anticipated due to radius clauses in the company’s mall store leasing agreements. 
• All facets of Zales Jewelers will be evaluated – Management will re-evaluate all elements of the Zales Jewelers offer:
• Product
• Pricing
• In-store experience
• Marketing
• Advertising will be evaluated – Zale’s new advertising agency is on the hot seat to explain why its advertising strategy was not as successful as expected.
• Zale’s promotional calendar to be reworked – Zale’s on-going promotional calendar will match when the customer wants to buy.
• John Zimmerman is the correct choice for president of Zales North America – Burton ticked off a litany of reasons that John Zimmerman is the right man for the job of restoring the Zales Jewelers’ brand to health.
• He successfully turned around the previously troubled Peoples (Canada) operation.
• He increased Peoples’ gross margin by 670 basis points during his term as president.
• Zimmerman will model Zales based on the successes at Peoples.
• Burton said that Zimmerman should have been named president of Zales Jewelers last year, instead of Paul Leonard. She noted that Paul Leonard had a “mixed track record” compared to Zimmerman who has a string of successes. 
• The new CEO vs. Zimmerman – The board moved ahead with the appointment of Zimmerman to run Zales Jewelers, despite the lack of a permanent corporate CEO. This board wants to see some results quickly, perhaps as soon as Mothers Day, but certainly prior to the all-important holiday selling season. Thus, it was decided not to wait to appoint a corporate CEO. 
• Kay is ahead of Zale – Burton hit several key points head on, as she articulated why Kay Jewelers has surpassed Zale.
• Kay is gaining market share; Zale is losing market share.
• Kay’s sales associate training is better.
• Kay’s sales associates are higher quality personnel.
• Kay is ahead of Zale in direct sourcing.
• Kay’s marketing spend is greater than Zale’s.
• Kay’s product is better quality.
• Kay’s sales associate pay scale is higher and better.
• Other tactics underway to move Zale back on track include the following:
• Zale is re-evaluating store associate pay. It will probably change the commission scale to yield higher pay.
• The ubiquitous 30-60 percent off signs that were put up during the holiday season will be removed. Those signs confused the typical Zale customer.