How Tiffany & Co. Is Adapting to a Shifting Luxury Market

After two years of lackluster sales, Tiffany (TIF) installed new CEO Alessandro Bogliolo in early October to revitalize its top line.The Industry Focus: Consumer Goods cast continues its discussion of the company's hurdles and opportunities by diving into the specific initiatives the company is employing to attract new business in the high-end luxury market.

A full transcript follows the video.

This video was recorded on Oct. 3, 2017.

Vincent Shen: Another long-term headwind that I want to focus on is something you mentioned, and it's kind of a topic on people's minds right now, and that seems to be decreasing interest in diamonds, especially among younger consumers. With some of the controversies surrounding sourcing for precious stones, for example, with conflict diamonds, and in general, we've talked in other industries, whether it's with restaurants, consumer packaged goods, snacks, beverages, whatever it may be, people are worried about environmental concerns, sourcing, sustainability. And that seems to be flowing into this business as well. What is the company really facing here?

Asit Sharma: The company is facing a similar problem that we've seen in many industries that we talk about here where consumer goods stands. We'll talk about Coca-Cola a little bit later in this show, but that's a great analog. Coca-Cola has been impacted by changing consumer tastes, the fact that if you have small children and you've grown up in this society and have a more sustainable bent about you and are more health conscious, you're not necessarily going to give your kids as much of that beverage, Coca-Cola, as you drank when you were small.

The same with Tiffany. We have these mini-cycles -- larger ways where consumers' perceptions of the brand and what's behind the brand evolve. And for Tiffany, it has to be careful about the sourcing of its diamonds, and it has to show the consumer that they can enjoy the products -- that is, the aesthetic quality of the product, the brand cachet -- but also feel good about the provenance of that. Where did the diamond come from? Is it responsibly sourced? Is it a blood diamond? So that's a drag that Tiffany is going to have to meet and continue to have a brand perception that customers can feel good about. I think they can beat that challenge.

What's interesting to me is, it's going all the way to the other extreme to deal with a little bit less high-margin revenue from the retail diamonds, in that it's in the wholesale diamond business. This is something that I really wasn't as much aware of until I was doing prep for this segment. The company has a fast-growing business, particularly in Asia, in the wholesale diamond trade. Now, that's got a much smaller margin than the luxury jewelry, the pendant necklace that you buy at their flagship stores. However, in these last two quarters, the company has booked $61 million of revenue from the wholesale diamond trade. Now, that's only 3% of Tiffany & Company's total revenue over the last two quarters, of that $1.8 billion I mentioned. But it's growing at a 50% clip year over year. So you can see how, within a few quarters, if it can maintain that focus, this low-margin part of the diamond trade will be a bigger portion of the company's bottom line, a little bit of a drag on earnings, but it's a smart way, just as Coca-Cola has moved away from only selling those sugary sodas, and as we'll talk about a little bit later, and is moving into some other types of products that customers can feel better about.

Shen: Why don't we just jump right into that, Asit? I think this is going to be a focus for the new CEO as he heads up the operations for the company. Can you tell us a little bit about what the company is expanding into, but also trying to help, in terms of appealing to the young consumers that it wants to bring on board?

Sharma: Sure. It's two big-picture avenues that Tiffany & Company is taking. One, like other companies of its ilk in many industries, it's firming up its approach to e-commerce. And this is one industry which, you can see Amazon.com is not as much of a threat as it is with so many companies we talk about on this show. It almost seems that, whatever segment we have, Vince, Amazon looms large.

Shen: Yeah, absolutely.

Sharma: Tiffany & Company has a really nice e-commerce portal that tries to recreate the experience of being in the stores. It's difficult, let's be honest, to match the experience. If you've had the opportunity to walk into one of their larger stores, it's impossible to actually re-create that. But you can recreate some of the ambiance, some of the desire around the product. And what I love about this is, Tiffany & Company has done a smart job of breaking its products into different pricing. Very quickly, when you visit the home page, after a click or two, it just flat-out gives you the choice -- here are products under $250, then it gradates up to $1,000, $2,500, and beyond, sort of like when you sort on Amazon, which, I'm somewhat cheap on some things, so I will often sort by price.

You don't feel like you've lost luxury of experience, but you can quickly go to the price point that interests you, and I think that's a really good approach on their part and will increase the flow of millennial traffic. Millennials as a whole, I don't think they're cheap like me. I'm a bit older, but I think they're thrifty. They know what they want, and they know how much they're willing to pay for certain products, especially luxury items of the type that Tiffany sells. So that flow going through their portal to completing that, converting that customer, is pretty well done.

The other thing that the company is also pragmatically undertaking is its product line. They're moving more into products like watches. This year, they will improve and expand their women's line of watches, which is a huge market. The current CEO has experience with that. For those of you who are into the fashion house of Diesel, you know that they have very attractive watch offerings. So not simply price points, but looking at what millennials buy, what's important to them. They may not be in the market for a beautiful diamond or heart-shaped brooch like your grandmother was, but they could use a watch, because they're tired of staring into their phone for hours a day.

Shen: Sure. I think that's a piece of the strategy the company will have going forward. At the same time, I'm a little bit skeptical, when we were doing research for this, I found a lot of headlines talking about how high-end jewelry, diamonds are on this strong downward trend in terms of popularity, like we mentioned, with millennials and younger consumers in general. But I feel like, with a company like Tiffany, with a very aspirational brand, they talk about how they will invest in their inventory to have lots of very pricey and extravagant diamonds and precious gemstones, because they want customers to go into the store and feel like there are things that they cannot afford. It's aspirational.

And I feel like that's something for young consumers that they will grow into over time as their tastes change and mature, as they grow older. I think the long-term picture for this company, there are always going to be people who appreciate what Tiffany represents in terms of the luxury world. So it will always have that moat.

Any final thoughts from you, Asit, in terms of this challenge the company faces, and thoughts on what the outlook might be?

Sharma: I think the company will be able to meet the challenges we talked about earlier. And also, these declining trends of interest in diamonds. That's somewhat geographically based. In the United States, we have a very advanced society on the curve of industrial development. But again, in China, if you look at India, which has a burgeoning middle class, and they love to buy gold objects, diamonds are the next step up. There is a market out there. It depends on where their focus is, and the company avidly seeks locations in Southeast Asia to expand. So they know where their future customers, who will still be interested in diamonds, exist. And I think that's simply numbers for them. That's one way they'll be able to counteract the trends that we see in places like Europe and the United States, where that interest is somewhat declining.

And a last point on Tiffany: I really do buy management's approach in saying that their name is their most important asset. It's one of the few brands that you can think about that's had staying power for decades and decades and decades. Listeners, many of you have seen Breakfast at Tiffany's, or read Truman Capote's book. Both of those are excellent. If you haven't, I recommend it. It's great for this weekend. Watch Breakfast at Tiffany's. But Truman Capote wrote that book in 1958. And to me, the name is just as bankable as it was some 60 years ago. So I think they can parlay that asset and really overcome any near-term challenges, and that's what you want to see as a long-term investor.