Summary
Michael Hill's entry into the US market during the 4th quarter of 2008 may mean more than lost sales for mid market jewelers in the Chicago area. Here's why.
Analysis
Michael Hill International (MHI) announced it was entering the US market in time for the 4th quarter of 2008. Traded on the New Zealand stock exchange, the stock closed at its 52 week high on the news. The company will buy 17 locations from bankrupt jeweler Whitehall according to a recent press release for $5 million US or about 294,000 per store. The stores are located around Chicago and St Louis. Whitehall had 24 locations in Illinois and 4 in Missouri, so Hill will effectively absorb a good part of Whitehall’s market share; at least in the Chicago area.
Michael Hill is a new comer to the US retail jewelry market. New Zealand based, they most recently expanded into Western Canada with a goal of opening stores in the Ontario market. Excluding Quebec, Ontario is the largest jewelry market in Canada. It appears they are duplicating that strategy to enter the US. While Midwest jewelers have suffered more than most during the current economic slowdown, historically, Northern Illinois has been one of the top five jewelry markets in the US. Long term, it’s the beginning of a good real estate strategy.
US consumers aren’t familiar with Michael Hill, but the company has enjoyed good success in New Zealand, Australia, and Canada where it operates about 210 stores. Primarily a diamond jeweler located in malls, the company’s P & L shows a 30% return on equity for its latest fiscal year. But whether they can maintain those returns in the highly competitive US market is problematic. For one thing, the US market is highly fragmented meaning the cost of marketing and advertising will be higher. The cost of area management will be higher too if the company chooses to expand across the US. Something it has already done buying into the St Louis market. Still in the Chicago market, Michael Hill could steal market share from the likes of Zale, Kay, Helzberg, JB Robinson, and Fred Meyer this fall.
Michael Hill isn’t the first jeweler from down under to enter the US. L. J. Hooker (Australia, not New Zealand) bought Merksamer Jewelers, an eleven store, California chain, in 1986 with the goal of expanding the chain across the US. Merksamer grew to 80 stores in 12 states before its parent company filed for bankruptcy three years later in 1989. Highly leveraged, a swing in interest rates brought down the Hooker empire. But over leverage wasn’t the only problem at Merksamer.
The company also suffered from a lack of identity in most of the markets it entered which limited sales growth. Michael Hill is likely to experience the same problem as it attempts to enter markets totally unfamiliar with its name. Despite the look of new stores, state of the art in store systems, fresh inventory, trained staff, and a predatory compensation program, Merksamer couldn’t entice sufficient consumers to switch from jewelry names that they were familiar with in their local market.
Michael Hill will likely experience the same problem in the US, especially now that research shows consumers view jewelry purchases more in terms of the store name than the brands that they carry. Clearly, there are ways to do it better than the shot gun approach Hooker tried, but whether Hill has the savvy to pull it off, remains to be seen. Nevertheless, the company has been remarkably successful as a diamond merchant and as an international retailer too. That could be bad news for US mid-market jewelers this fall and in the future. It could also mean there's an future buyer for the Peoples brand in Canada and the Gordon trade name, both owed by Zale. which is in rapid decline.
In the meantime, just as Signet Group changes its stock listing to the New York Stock Exchange, investors have another overseas jeweler to watch (See MHI on the New Zealand Exchange).
