Discount warehouse chain Costco (NASDAQ: COST ) got no love from Tiffany (NYSE: TIF ) on Valentine's Day. Instead of a box of chocolates and a dozen roses, Costco got slapped with a lawsuit alleging it fraudulently sold engagement rings under the luxury jeweler's name.
Tiffany says the warehouse chain -- better known for selling megaroll bulk packs of toilet paper than high-end jewelry -- advertised through in-store signage and employee presentations that it was also selling Tiffany rings. The jeweler sniffs that not only had it not manufactured them, approved them, licensed them, or did anything in any way associated with them, it would never "sell its fine jewelry through an off-price warehouse retailer like Costco." Ugh! The thought of rubbing elbows with the masses!
The Wall Street Journal says the lowest-priced one-carat diamond ring the blue-blooded blue-box purveyor sells goes for $11,000, but Costco was hawking a one-carat "Platinum Tiffany" ring for $6,400. It was almost like you could pick one up while trying out the free samples offered at the endcap.
Down-home or down-market
Tiffany's jewelry is only sold at its own retail stores and it learned its lesson in discounting the hard way when it introduced a line of low-priced silver chains and bracelets several years ago that were cheap enough for every mallrat to wear. As the cachet of the Tiffany name appropriately wore off, the jeweler was forced to raise its prices again to remind you that when you bought one of its pieces you were joining an exclusive club -- not a warehouse club.
Now certain brands are considered "aspirational luxury," a stepping stone on the way to a premium brand. Handbag maker Coach (NYSE: COH ) revels in -- and has prospered from -- its exploitation of women biding their time before getting into a Louis Vuitton purse. So successful has it been that rivals like Michael Kors want to emulate the model, and Kors goes so far as to call itself "Hermes for Staten Island." Yet Coach risks the same degradation of its name as Tiffany did by now trying to become a "lifestyle brand" and increase its ubiquity further by selling perfumes and other accessories not typically associated with its leather goods. Perhaps going down-market is best left to the Wal-Marts of the world.
Targeting mid-level consumers
It's not unheard of for retailers to successfully tap a lower-end market, as high-fashion designers sought to offset the impact of the recession by giving air kisses to mid-tier retailers. Isaac Mizrahi and Missoni have put out discounted clothing lines at Target for years and Vera Wang has a longtime association with Kohl's. But as the recent "Neiman Marcus for Target" disaster attests, there is plenty of opportunity for failure. The discount department store ended up having to mark down the entire line by up to 70%.
Of course, these were conscious decisions to go down-market. Costco took it upon itself to give the impression it was selling the luxury brand next to the kibbles. After contacting the warehouse chain about the matter, Tiffany says the store removed the rings, but it's still seeking unspecified damages associated with prior sales.
If, as the jeweler says, there are potentially thousands of customers who bought rings thinking they were Tiffany, the cost to Costco in terms of a tarnished reputation may end up being more than any profit it made glomming on to the prestige associated with the jeweler.
So just remember: If you want to surprise your special someone with a Tiffany engagement ring, do it by going to a real Tiffany store and not while stocking up on your weekly grocery shopping.
The high cost of high living
Costco's low prices haven't just benefited customers -- shareholders have walloped the market, returning 11,000% over the past two decades. However, with prices near all-time highs, is the ride over for Costco investors? To answer that and more, we've compiled a premium research report with in-depth analysis on Costco. Simply click here now to gain instant access to this valuable investor's resource.