Tiffany Case Study

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Tiffany & Co.

Background

Tiffany Co. which was a retailer, designer, manufacturer and distributor of luxury goods was founded in New York in 1837. It was bought by Avon in 1979, which tried to expand its product line such that it can be sold to wider set of target market. This resulted in enhanced sales, but expenses also increased significantly resulting in the sale of Tiffany by Avon to Tiffany’s managers. The company grew under the supervision of its new managers before it went for an IPO at $15 a share. By Jan 1993, Mitsukoshi owned 14% of the company, next top three institutional investors owned 29% and management owned 4.9%. Remainder of the stock was held by public.

In 1980’s and 1990’s Mitsukoshi was the largest Japanese retailer of Tiffany’s products. There was strong demand for luxury goods in Japan and Tiffany occupied only one percent of the $20 Billion Japanese Jewelry market. As a result of economic depression and reduced expenditure by Japanese public on luxury goods, Mitsukoshi gradually decreased the amount of inventory it purchased from Tiffany. The profit margin on the goods sold through wholesale also reduced. Even though yen was at its peak at that time, was believed to be overvalued and expected to fall ; Tiffany’s management still perceived long term growth potential in Japan. The company was currently selling its products at wholesale to Mistukoshi at a lower price and Mistukoshi was leveraging huge profits by selling them at a premium using its retail stores. The company was pursuing a strategy where it would sell its products directly to directly to Japanese public by cutting down the middle man and paying Mistukoshi only a share of 28% of its sales for using its retail Stores, salesperson, and services for security of Inventory and receivable collections.

Exposure to exchange-rate risk subsequent to...