Tiffany & Co: At What Point Does Affordable Luxury Prove Costly?

When a luxury brand renowned for high-end products takes a big chunk of its portfolio downmarket, there are risks. The biggest is that its prestigious image becomes diluted and affluent consumers drift away. Tough times call for bold decisions, though. Rewind a year and a half and US luxury jeweller Tiffany & Co found itself in choppy waters. Sales were sinking like a stone in its core home market, and in its New York flagship especially. Revenue in Europe and Asia Pacific was in freefall too.

In a bid to turn things around, Tiffany ramped up its participation in affordable luxury. At its famous New York flagship on Fifth Avenue, well-heeled shoppers could still spend upwards of US$50,000 on a piece of statement jewellery, or US$5-10,000 on a piece of fine jewellery. But, low-priced silver jewellery, typically costing less than US$500 a piece – and led by a new range branded as the Atlas collection – began to grow in visibility. Few retailers anywhere in the world offered products covering such a cavernous price spectrum.

Tiffany & Co: Global Net Sales

Source: Euromonitor International from company press release

 

Sales Growth by Region: Q1 2014 vs Q1 2013

Source: Euromonitor International from company press release

A Strategic Conundrum

The segmentation shift of Tiffany’s portfolio, risky as it was, has started to pay off. For the three months to the end of April, overall sales climbed 13% over the same quarter a year ago (and 11% on a comparable store basis), breaking the US$1 billion mark. Most impressive of all, net profit soared 50%.

“Strength in fine and statement jewellery sales continued while sales of our new or expanded (affordable) jewellery collections accelerated, led by our Atlas collection”, said Chief Executive Michael Kowalski in a statement. Kowalski did not say as much, but it is clear that affordable luxury has been key to a change in fortune in the company’s home market.

Kowalski now has a strategic problem. Specifically, affordable items (the sub-US$500 segment) fuel around a quarter of sales, and participation is climbing. He will have to decide how much this category is allowed to take over at Tiffany & Co. So far, the heritage of the brand has been unscathed, but what if low-priced jewellery becomes the norm rather than the exception?

The Audrey Hepburn Factor

It might seem a paradox but Tiffany’s profit margin on low-priced jewellery is higher than on expensive jewellery. There is a strong financial argument to stoke up the participation of affordable pieces, therefore, especially in the current economic climate. Keep in mind that affordable luxury is the fastest growing segment of the industry.

Sub-US$500 rings and pendants have proven especially popular with tourists visiting the New York flagship, which on its own accounts for 8% of global sales (the US as a whole accounts for nearly half of total sales). But, this popularity is precisely because the brand has such a prestigious global image. Its aspiration credentials were captured memorably in the 1961 film Breakfast at Tiffany’s, starring Audrey Hepburn, and the global image of the brand has gone from strength to strength.

If the participation of affordable jewellery starts to become dominant in the mix, it follows that the desirability of the brand will ultimately be weakened. Put simply, if Tiffany becomes better known for its low-priced silver than its pricey diamonds, high net worth individuals will turn their backs on the brand. In turn, that will dampen its appeal among middle-class shoppers. To be clear, part of the cachet of Tiffany & Co is that middle-class shoppers get to rub shoulders with (and feel like) millionaires.

Getting the Balance Right

The logical next phase for Tiffany & Co is to grow its global footprint. There is substantial capacity for expansion in emerging Asia and Western Europe, for example. However, as the brand builds new positions, it needs to think very carefully about the balance in its stores between absolute luxury jewellery, fine jewellery and affordable jewellery.

The temptation, given the recent financial success with Atlas (and its attractive profit margins), will be to let the affordable segment of the business accelerate ahead. But, in the long term that could prove costly in terms of the brand’s image. Having been bold in building a bigger affordable luxury presence, Tiffany now needs to be equally bold in reining it in.

Tiffany & Co: Number of Stores by Region 2014

Source: Euromonitor International from company press release