Iconic worldwide jewelry brand Tiffany & Co. (TIF) has long cultivated the mystique of exclusivity, which appealed to previous generations of U.S. consumers. But those shoppers are aging out of their jewelry accumulation years, and Tiffany now finds itself trying to appeal to a very different group of affluent customers.
The new generation of potential purchasers of Tiffany products in America are tagged HENRYs -- High Earners Not Rich Yet -- and they have different sensibilities than their forebears. HENRYs are individuals who currently have significant discretionary income and a strong chance of being wealthy in the future.
Retailers gain the most market share in the transitional phase, when a future rich person is adapting to a rapid increase in disposable income. That means a deep untapped market for Tiffany and companies like it, because there are more HENRYs in the world than ultra-wealthy.
But being too exclusive -- connoting elitism and excess -- turns off next-generation customers more than it excites them. The younger cohort demands responsibly sourced diamonds and gems, as well as environmentally sound corporate practices.
Tiffany faces a challenge in inserting itself into the HENRYs' lifestyle and creating brand loyalty without losing its older, established client base.
Different facets of the brand
The holiday season of 2018 showed a real change in Tiffany's approach to its more youthful shoppers. Reed Krakoff, the company's new chief artistic officer, introduced the new Paper Flowers collection aimed at this market; other offerings with the same target include Tiffany T, HardWear, and Love Bugs.
The 2018 "Believe in Dreams" video campaign took 30-something actress Zoe Kravitz on an "Alice in Wonderland"-esque looking-glass experience to a magic Tiffany workshop featuring the Paper Flowers, HardWear, and Tiffany T collections. The video ends with a reimagined Mad Hatter tea party with Tiffany place settings and supermodel Naomi Campbell in attendance.
Bridging the generation gap, the video's soundtrack featured Aerosmith's 1973 hit, "Dream On." With more than 25 million views on YouTube and widespread TV exposure, the ad made an impression, but not enough to move the needle on Tiffany's 2018 holiday season sales.
Though the lead Paper Flowers collection is well designed, with appeal to the HENRY market, it was priced for the older-generation customer at $2,500 to $16,000, blunting its momentum. Overall, Tiffany's revenue for the all-important fourth quarter of 2018 declined by 1% in the Americas. This is the most important region for the company's sales, accounting for 45% of the total last year.
Tiffany's main competitors, by contrast, posted gains. For the quarter ending Dec. 31, much of Richemont's (OTC: CFRUY) 9% sales gain was attributed to jewelry divisions Cartier and Van Cleef & Arpels.
Fast-forward to Tiffany's most recent quarterly results, posted Aug. 28. Same-store sales in the Americas were down 4%, while Wall Street had called for a drop of 1.7%. Results that reflected Tiffany's marketing efforts aimed at HENRYs were uninspiring: Sales from collections were flat, and engagement-ring sales declined by 4%. (High-end designer collections, aimed at traditional customers, fell by 12%.)
Alessandro Bogliolio, CEO of Tiffany, commented on product assortment: "It is just an area on which we are progressing literally every quarter. And if you look at the past 12 months, we have had important launches like Paper Flowers, T True Diamond, then we had Return to Tiffany Love Bugs, and we are now talking about a colorful version of T, et cetera. So it's a continuous progress. The point is to reach a critical mass of newness in order to really see results steadily growing because it's a process, it's a path, it's a journey."
How investors should style this news
Tiffany has been around since 1837, and it will eventually weather this latest reinvention. But management faces a challenge in simultaneously appealing to traditional wealthy, older customers to whom "luxury" means one thing and younger clients to whom it represents something totally different.
Additional challenges exist on the international front, where successful expansion is hampered by widespread social unrest in Hong Kong and trade-war tensions in China. Tiffany's stock-price targets were reduced Aug. 29 at Citibank, UBS, and Telsey Advisory Group.
And real-world visits are down as well, with Cowen's July 2019 Consumer Tracker study, conducted among 2,500 consumers, finding a dramatic year-over-year decline of 33.6% in second-quarter Tiffany store excursions. Online traffic during the quarter was off by 30.8% as well.
I suggest that investors avoid Tiffany stock at this time -- recent results show that the marketing strategy and product assortment are not yet working. I plan to hold off investing for a couple of quarters, then evaluate results and how Tiffany management is handling the many domestic and international issues in its jewelry box.