Tiffany – Extending the Brand Magic to New Categories?

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by: Idris Mootee

We did a little shopping this weekend my wife and I stumbled upon a few good finds including a pair of Burberry snow boots and a pair of elegantly designed Tiffany sunglasses (with Swarovski crystals on the sides).

This may be a category that they are planning to enter into. I don’t recall they have a large sunglasses collection. Companies such as Tiffany that cater to the affluent always face the same dilemma: how to balance growth with exclusivity. If you expand too far down the luxury ladder, you cheapen the brand and lose cachet. If you stay exclusive, your market base will always be limited. The question is not whether you should or not, it is how. Companies like Tiffany need to deliver growth but not at the expense of the brand.

There is so much talking about recession and one would think that luxury goods will be the first to be negatively impacted. Tiffany just gave an upbeat forecast for 08 despite everyone worries about the consumer sentiments. Tiffany CEO Michael Kowalski expects a 10% rise in total sales and mid-single-digit profit gain, pretty good taken into account the macro conditions. Tiffany touted growth will primarily be from China and Japan business will continue to falter. This is unarguably one of the best managed brands in the world and the blue box is almost magical to consumers. I am a fan of Tiffany. This little blue box company has grown in to a $2.2 billion 150+ stores company.  Even with a slowdown in front of us, I think they will still do fine. We can always expect a shakeout in the industry from the this slowdown and it will widen the gap between strong and weak brands. The key is to renew their focus on what they’re really good at and innovate within or next to those categories. Many luxury brands have entered into categories where they have no expertise because they fell into the trap of “lifestyle” brands.

Up-market consumers are highly discerning and sophisticated. They are always willing to pay a reasonable price premium for, brands that are specialists in certain categories. Tiffany in jewelries, Hermes in handbags, Louis vuitton in leather goods and luggage, Christian Louboutin in women’s shoes, and Berluti in men’s shoes are brands that up-market consumers rate highest as category leaders. Part of the strategic exercise is to cnduct a rigorous assessment of your brand’s category portfolio and get rid of the non-strategic extensions. This is when the brand makes a difference. The challenge for Tiffany is to find growth that doesn’t require new real estate investments but retaining the brand’s exclusivity and prestige image. That’s why they did this deal with Swiss watch giants Swatch. I think the idea is to design and produce an extensive collection of watches under the Tiffany brand and to be distributed beyond Tiffany’s boutiques. They do carry a small watch collection and mostly are on the high end. Is this a smart move (if so what is the strategy behind it) or a deprecate attempt to create new revenue stream at the expense of diluting the Tiffany brand? I think this is a smart strategy and will be a key part of Tiffany’s growth strategy.

The Tiffany brand will help Swatch market to women as well as more upscale market. The watch industry is still a man’s world. Women’s watch market makes up 35%-40% of the luxury watch market. There’s no reason why it cannot be at 55-65%. There is tremendous market potential to turn that into fashion watches like handbags. Tiffany hopes this deal will make them a strong competitor to Cartier and Bulgari, two jewelers that have successfully moved into the luxury watch business. Louis Vuitton and Hermes are also key players too. Hermes watches are good value for brand, design and price. Tiffany will launch in the second half of 08, with the first full collection to follow in 09.

I think the company will continue to move slightly (I really mean slightly) down market  and will continue to look at other high margin categories for extension and leverage their brand. What’s next? Sunglasses and leather goods? How about a Tiffany cell phone? I think it is a matter of time. Expect them to boost lower-priced goods like key rings, pens, stationary and porcelain should also lift profits because margins are attractive for those items. They need to learn from the mistake they made in Japan and not opening too many stores back home. The key is to explore the digital channel and also focus on the, business-to-business and catalog purchases (currently only 9% of total revenue). There are so much untapped opportunities that Tiffany can explore in the online space. This is also an area of vulnerability when we think how Generation Y goes shopping for engagement rings? Are they still going to pay a premium for the blue box from Tiffany, or are we going to Blue Nile? But for now, we all love the blue box.

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