Company’s Profile

Tiffany & Company is a large American luxury jewelry specialty producer. It operates in five market areas: Asia-Pacific, Europe, Japan, United States and other.   Tiffany & Company’s product category is jewelry, fragrances, accessories, leather and silver goods, as well as crystal and china products. Jewelry products of company involve engagement rings, wedding bands, diamond necklaces, platinum, gold and sterling silver jewelry. Tiffany & Co. is well known not only for its strong brand name by also for providing its consumers uniquely designed products. Primarily, Tiffany & Co. is famous for its diamond jewelry and high quality luxury goods. There are 275 stores all over the world and more than 115 operate in United States. Its headquarters is established in New-York.  Today, Tiffany and Company is considered as an authority of taste and style.

Market Structure of Tiffany & Co.

Tiffany & Company has a market structure of monopolistic competition. There are three main characteristics of Monopolistic Competition:

         (a)    Similar but not identical products

         (b)    Number of firms in the market is large

         (c)    Free entry/exit condition

Similar, but not identical product

Firms in monopolistic competition produce alike goods. For instance, there are some firms in a market like Saks Inc, Zale (ZLC), Wal-Mart Stores (WMT), J.C. Penney (JCP), Macy's Inc and etc, which provide customers similar products as Tiffany & Co. (engagement rings, gold and diamond jewelry). However, all of these products are a little bit different from others. In order to describe this, we will use the term Product Differentiation. Product differentiation is the strategy of differing the product or service from others in order to attract certain target market.

Tiffany & Company differentiates its products from competitors using three attributes of differentiation strategy: physical difference (product attributes), difference in providing service and strong brand name.

Product attributes implies physical difference in the product.  One of the essential attributes of Tiffany & Company is well-known Blue color of boxes, which became a trademark logo of the company. Its Blue box and Blue book catalogue are symbols of tiffany's inventive designs. Another distinctive feature of the company is unique and exclusive hand-crafted design.  Designs of Tiffany’s jewelry are acknowledged as a form of art.

Service. The company focuses on providing consumers excellent customer service (Knowledgeable employees) in the form of full lifetime warranty, Tiffany Diamond Certificate, engraving and lifetime cleaning.

Brand Name. Tiffany & Co. built strong brand image which is very famous all over the world. It provides customers high quality products and service.

The strategy of building strong brand is based on following attributes:

o   Innovation

o   Timeless designs

o   Ensuring of quality

    Thus, Tiffany & Co. positions itself as a 'classic luxury' brand that can stand the time and can be nourished for a lifetime. 

Relatively large numbers of sellers

Besides Tiffany & Co there are a lot of sellers in a market as jewelry retailers like Signet Group (SIG), Zale (ZLC), Blue Nile (NILE), Whitehall Jewelers, Nordstrom (JWN) and etc. All of them have a small market shares and restricted control over market price. Tiffany & Co. has some control over the price because of product differentiation. However, this control is restricted as there are quite large number of sellers in a market (potential competitors) and numerous potential substitutes for product.

Free entry/exit condition

Firms are able to enter or exit the market because there are no any restrictions. Entry into monopolistic competition is not difficult as there are basically small firms, economies of scale are few and the capital required for startup is relatively low. Many firms can easily entry Monopolistic competition, thereby later the demand for product decline due to the high level of suppliers and economic profit is 0. That can be the reason to exit. Thus, if the firms encounter unprofitable monopolistic competition they can easily shut down and exit the market, as it does not involve any sunk costs or exit costs.

Establishing prices in Monopolistic Competition

The ability to establish higher prices is a primary advantage of monopolistic competition. Prices for Tiffany & Co. goods are quite expensive. For example, prices for Tiffany’s engagement ring hesitate from $970 to $1,000,000. The company sets high prices on its products due to several factors. The first one is differentiation strategy and brand name. As Tiffany produces its goods with special and unique design, providing excellent quality to customers, it has some control over price and can charge respectively high prices in compare with competitors. Another factor is selling cost. Because of product differentiation, Tiffany incurs some additional expenditure in the form of selling cost. This cost involves sales promotion expenses, advertisement expenses, salaries of marketing staff, etc. So to cover up these costs the company has to establish higher price. And the last factor is cost of production. Cost of production is the total amount of money required for the producing of certain quantity of output. As it was mentioned above Tiffany & Co. is a large jewelry retailer and a great part of its cost depends on the costs of raw materials (diamonds, gold and silver). The growth in the price of raw materials will lead to a growth of cost of production. In turn, increase of production cost can lead to smaller profit margins. Thus, If Tiffany does not increase prices to compensate for the increase in production costs then it makes less money per sale, which can be the reason of incurring losses by the company. These factors explain why Tiffany & Co. sets high price for its products.

Demand for Tiffany & Co. production

In spite of high prices Tiffany & Co has high demand for its products among customers. Tiffany & Co. supports a huge number of consumers around the world by essential and highly demand jewelry and related products. Recently, the company affirmed its strong demand in Asia and other market segments, and it has an ability to expand gross margin not only by decreasing product costs, but also by enhancing prices. As few years ago the Company expanded its market in Asia-Pacific segment, demand for luxury goods of the company in that market segment increases every year. Let’s consider demand for Tiffany & Co. goods in one of Asia-Pacific region, in China. Providing annual report for 2013, the company imparted that “Strong demand for the sparkling gems in China helped lift the U.S. jeweler's global sales in the latest quarter, leading it to raise its profit forecast for the year”. It means that demand for Tiffany’s luxury goods in China dramatically increased. That could be seen in figure 1, growth in demand shifted demand curve rightward, that led to rise in price and quantity demanded.

Enhancing of demand for Tiffany & Co. production can be explained by following factors:

   v  Change in tastes and preferences of Chinese people. Traditionally in China the whole wedding jewelry segment was dominated by gold jewelry, but with Western influences the younger generations are more open to a diamond culture. Sales of Tiffany & Co showed Chinese customers’ growing interest in diamond jewelry over the traditional preference for gold in gift-giving.

   v  Population is another reason of increasing demand. China is the country with the highest population in the world. And it is known that the higher population the higher will be demand.

   v  After releasing of “The Great Gatsby” film the popularity of Tiffany’s Gatsby Collection (Figure 2) in China significantly increased. That led to increase of demand for Tiffany’s goods.

Figure 2

However, there is slightly decrease in demand in another Asia-Pacific country, in Japan. The main reason is exchange rate. As Tiffany & Co. operates in a large multinational market segment exchange rate plays one of the most significant roles in company’s performance. As we know today’s economic situation in the world is very unstable which reflects on the foreign exchange rate. Considering this fact, sometimes fluctuations of exchange rates can be worth more or less when convert back into US dollars. For example, in 2012 Tiffany & Co. made a great profit on Japanese sales due to the favorable exchange rate. Unfortunately, there was weakening of Japanese Yen this year which negatively affected on sales of Tiffany & Co. Due to the currency basis together with the sales, demand for Tiffany’s products in Japan also declined.

            Besides these factors, there is one thing that also can influence on demand of Tiffany’s product. It is Income Elasticity of Demand. Products manufactured by Tiffany & Co. are luxury goods. Luxury goods are high-quality and high-priced items that are not considered essential for life and acquired for their value or prestige. Now let’s try to connect level of income with the quantity demanded of luxury goods. Mankiw (2008) noted the income elasticity of demand measures the responsiveness of the demand for a good or service to a change in income (p.236). Income elasticity of Demand for luxury goods is greater than 1, as with rise in income the consumption of inferior goods declines and consumption of luxury goods will increase. For example if income of potential customers of Tiffany & Co. goes up quite significantly, the demand for the company’s products will grow at an even faster rate. Thus, quantity demanded is very responsive to changes in income. A raise in income (YED>1) is followed by a proportionally greater growth in quantity demanded. This is typical for luxury goods. This concept is shown in Figure 3 (When Income ↑, the D for luxury goods will ↑).

Conclusion

Over 170 years, Tiffany has built an international reputation as a luxury jewelry retailer and has a wealthy legacy of innovation, discovery and gorgeous jewelry which vastly contributes for it to be a distinguished leader in jewelry market. This legendary style existing even today affords Tiffany & Co. to maintain as a standard of style and sophistication with exclusive craftsmanship and excellent quality.

References

Calia, M. (2013) Tiffany profit rises 50% on higher sales. Available from:

http://www.marketwatch.com/story/tiffany-profit-rises-50-on-higher-sales-2013-11-26 [Accessed 19 December 2013]

Cheng, A. (2013) Tiffany, sparkling in Asia, still shows a mixed U.S. business. Available from:

http://blogs.marketwatch.com/behindthestorefront/2013/11/26/tiffany-sparkling-in-asia-still-shows-a-mixed-u-s-business/ [Accessed 14 December 2013].

Mankiw, N.G. (2008) Principles of Microeconomics. 4^th ed. New York: McGraw Hill – Irwin.

McConnell, C. R., Brue, S. L., Flynn, S. M. and Grant, R. (2012) Economics, Global Edition^ Principles, Problems, and Policies. New York: McGraw Hill – Irwin.

Okonkwo, U. (2007) Luxury Fashion Branding. Hampshire: Palgrave Macmillan

Sloman, J., Wride, A. and Garrat, D. (2012) Economics. 8^th ed. New Jersey: Pearson Prentice Hall.

Susan Chi (2009) Can Tiffany deliver an ethical diamond. Available from: http://www.brandchannel.com/home/post/2009/10/28/Can-Tiffany-Deliver-An-Ethical-Diamond.aspx [Accessed 28 December 2013].

Tiffany (2010) Tiffany for the Press; The Tiffany Story. Available from: http://press.tiffany.com/AboutTiffany.aspx [Accessed 20 December 2010].

Wharton (2004) Tiffany & Co: A Case Study in Diamonds and Social Responsibility. Available from: http://www.wharton.universia.net/index.cfm?fa=viewArticle&id=871&language=english [Accessed 2 January 2014].

Image Reference

Figure 2: Dailycandy (2013) All that jazz. [Online image]. Available from: http://www.dailycandy.com/everywhere/article/147647/Dedicated-Tiffany-Co-Alt-template [Acessed 16 December 2013].