Wal-Mart Needs To Take
Lessons From Tiffany And HEB

After publishing our piece, Hormel, Wal-Mart And The Meaning Of Upscale, the Pundit took some flack for writing these lines:

Wal-Mart doesn’t need a branding consultant. It needs a sociologist who will explain that what upscale consumers want most in their life is the one thing Wal-Mart can never deliver: To NOT be associated with the people who shop at Wal-Mart.

Turns out that that an important upscale retailer, Tiffany & Co., doesn’t find the concept so ridiculous. The Wall Street Journalran a piece entitled Fashion Victim: To Refurbish Its Image, Tiffany Risks Profits. A subtitle explains After Silver Took Off, Jeweler Raises Prices To Discourage Teens.

The article explains that Tiffany’s had benefited by selling a great deal of highly profitable, relatively inexpensive, but high-margin, silver jewelry. But problems were starting to become evident as teenage girls swarmed to buy items such as the $110 silver charm bracelet:

In the winter of 2000, Carolyn Cippoletti headed to a Tiffany’s to buy a silver necklace for her 12-year-old daughter. She was surprised by jostling crowds. “There was nobody in the diamond section — everyone was in the silver jewelry,” says the New City, N.Y., resident. “I felt like I was in Macy’s.”

People inside the company debated the problem for months. “Some people would look at it one way and say, ‘If every 16-year-old gets her silver jewelry from Tiffany, they’ll eventually want their engagement ring from Tiffany 10 or 20 years later’,” says Mark Aaron, Tiffany’s vice president of investor relations. But “what if some of those teenagers fill up their jewelry boxes with Tiffany silver, and as they get older, they perceive Tiffany as where they got their teenage jewelry?”

Everyone knew how beneficial lower-end silver was to Tiffany’s bottom line. Any effort to curb it could dramatically slow sales and affect profitability — and likely upset shareholders.

Ultimately, the company says it relied on focus groups to make the decision. Complaints about crowding were beginning to appear in internal consumer research. The research also flagged concerns that Tiffany’s brand was becoming too closely associated with inexpensive silver jewelry. “We didn’t want the brand to be defined by any single product,” says Mr. Kowalski.

In 2002, Tiffany began aggressively raising prices on the pieces most popular with teenage girls, particularly the Return to Tiffany charm necklace and bracelet.

You can always make an argument for whatever you want to do it life and so, predictably, Wall Street was not thrilled when Tiffany & Co. eventually made the strategic shift public:

“By becoming less affordable to this aspirational customer, Tiffany risks alienating her when she returns for later milestones,” Goldman Sachs analyst Adrianne Shapira wrote in a 2004 research note. “If Tiffany is viewed as too expensive for smaller ticket purchases, then more substantial purchases might be sought elsewhere.”

It is a theory. However, the fact that most people can’t afford a Ferrari or a Bentley as their first car doesn’t seem to prevent them from buying them when their ship comes in.

Wall Street opposes this kind of move for the same reason most executives wouldn’t do it. The incentive plans all these people work under pay them to generate profit in the next few years by destroying long-term brand equity. There is a lot of ruin in a brand, and most of these people will be long retired before the degradation of the brand outweighs the earnings boost from selling the low priced stuff.

Tiffany & Co. must have had some exceptional leadership and a strong culture to make the decision to lose short-term profits to save the brand.

The lesson of all this is that the so called “mass affluent” market is a contradiction in terms. What upscale buyers want is exclusivity.

So Wal-Mart’s initiative to move upscale, while maintaining its client base, is impossible. It has to choose.

Of course, for a downscale retailer, an upscale division can give the whole operation a “halo effect” — if you want to see this at work, just go to Texas and visit a Central Market. It is one reason HEB is such a tough competitor for Wal-Mart. Every HEB store basks in the reflected glory of the Central Market concept. It motivates employees, suppliers, the media, politicians and consumers.

Yesterday, we talked about Wal-Mart CEO Lee Scott’s situation. He should follow the advice the Pundit gave in the piece we linked to above:

If it feels its growth is constrained because it has saturated the market in many places for consumers who live paycheck to paycheck, it shouldn’t knock its head against the wall trying to convince upscale consumers to buy amidst their downscale brethren. It should develop a separate store concept.

Tiffany & Co. provide a case study for why the Wal-Mart plan won’t work. Central Market provides a case study of what can.