Prospective Client Risk Assessment

Spring 2014

Meng Liu

Anne Forbes

Felix Alvarez-Rodriguez

Prospective Client Risk Assessment Tiffany & Co.

Prospective Client Risk Assessment Tiffany & Co.

Table of Contents
COMPANY OVERVIEW ...................................................................................................4
Foundation ...........................................................................................................................4
Corporate Strategy and Agenda ........................................................................................4
Size and Location .................................................................................................................5
Products ................................................................................................................................5
Raw Materials ......................................................................................................................7
Affiliated Entities .................................................................................................................7
Customer Base .....................................................................................................................9
INDUSTRY OVERVIEW ..................................................................................................10
Key Economic Factors ........................................................................................................10
Life Cycle .............................................................................................................................10
Factors for Success ..............................................................................................................11
Accounting Considerations .................................................................................................12
Legal and Regulatory Matters ............................................................................................13
Social Matters ......................................................................................................................14
Primary Competitors ..........................................................................................................15
Personnel Turnover ............................................................................................................16
Easy of Entry .......................................................................................................................16
SWOT Analysis ...................................................................................................................17
Porters Five Forces ............................................................................................................18
Company Integrity ..............................................................................................................20
Corporate Governance ........................................................................................................21

Prospective Client Risk Assessment Tiffany & Co.

Company Overview

Foundation

Tiffany & Co. is founded in New York City by Charles Lewis Tiffany and John Young. It started with
only selling stationery and costume jewelry. As the company expanded, Tiffany & Co. added silverware,
timepiece, perfume and other luxuries to its product lines. Although it served European Royalty in its
early stage, Tiffany changed its focus to American market, and eventually to the international market. In
1960s, Tiffany became a worldwide name through the popularity of the Movie, Breakfast at Tiffanys.
Today, its products are sold internationally through retailers, Tiffany store and official online store. In
order to remain competitive in the high-end jewelry market, Tiffany & Co. differentiates itself by
targeting wealthy customers with high quality jewelry and using marketing strategy to gain brand
recognition.

Corporate Strategy and Agenda

The management team of Tiffany & Co. has some key strategies based on its market position and
continues implementing these strategies. According to the 2013 10-K report, the key strategies mainly
focus on brand recognition, operation margin and customer relation. First of all, Tiffany & Co. will
expand the global distribution without compromising its brand value. The management team is planning
to add more physical stores in both potential and existing market. It realized that there are a lot of
potential markets that are qualified for the value of Tiffany & Co. in the overall international market,
while some over-saturated market might negatively impacts the brand value. In addition, Management
wants to achieve a higher growth rate by increasing efficiency of sourcing, manufacturing and
distribution. While at the same time, it will continue to invest in new product development. Furthermore,
management values customer relation. In order to provide superior services, Tiffany & Co. will enhance

Prospective Client Risk Assessment Tiffany & Co.

the professionals training program.

Size and Location

Over the past three years (2010-2012), Tiffany & Co. maintained an average worldwide net sale of $3.4
Billion, with $3.794 billion in 2013 due to growth in all segments. In 2012, The Company added a net of
28 TIFFANY & CO. stores (13 in the Americas, 8 in Asia-Pacific, 2 in Europe and 5 in the United Arab
Emirates (U.A.E.)). Today, Tiffany & Co. has approximately 9,900 employees with 1.02% growth on
employee worldwide in 2012. The rapid growth makes Tiffany & Co. become a top competitor in the
luxury jewelry industry. However, with a market capitalization of $8.35 billion, its still not comparable to
$93.21 billion of LVMH and $49.84 billion of Richemont.
Tiffany & Co. remains its headquarter in New York City. And now all the staff in New York City work at
the same location after the relocation in 2011. The company sells its products exclusively through 275
Tiffany & Co. stores and boutiques worldwide, its website, business-to-business accounts, and catalogs.
275 stores are strategically located in Asia/Pacific, Japan, Europe, Canada, Latin America, and other
countries.

Products

Tiffany & Co. began as a stationary goods store in New York City that sold primarily silverware and
lighting decorations. Since then the brand started by Charles Tiffany and John B. Young has become one
of the premier fine jewelry retailers in the world due to its exquisite diamond work and hollow silver
products. Using its worldwide prestige, the company has expanded its offerings in order to satisfy
customer demand in different market segments and economic levels.

Prospective Client Risk Assessment Tiffany & Co.

The Tiffany Brand can now be divided into three primary sectors: jewelry, fragrance, and accessories.

Jewelry

According to 2013 jewelry industry statistics, Tiffany & Co. is the fourth largest retailer of jewelry and
watches worldwide with revenues of $1.5 billion. In a time where global finance has been volatile,
Tiffany has endured by providing fine jewelry that can fit any budget and occasion. The blue box,
wedding, and diamond collections have been the cornerstones for success over the last century and
continue to provide steady revenue streams while overcoming seasonality. As a result of new collection
focusing on moderate price while upscale jewelry purchases increased by 6% across the industry in 2013,
Tiffany has seen a 4% increase in net sales worldwide according to their 10-K report.

Fragrance

Tiffany for women was launched in 1987 with the aid of perfumer Francois Demachy and two years later,
Tiffany for Men was developed by perfumer Jacques Polge. Although it is a relatively new product line, it
has already become a profitable part of Tiffanys product mix with 8% of net sales attributable to
perfume, cologne, leather goods, and accessories alone. As mentioned in the 10-K report, all non-jewelry
goods are purchased from third parties with fragrance subsidiaries worldwide; some primary locations are
Australia, Botswana, Canada, Russia, and South Africa.

Accessories

In the interest of expanding the brand, Tiffany & Co. offers a wide arrange of personal accessories for
men, women, and children. Another recent addition to the brand, wallets, sunglasses, cufflinks, and
handbags has all contributed to the media exposure and overall advertising appeal of Tiffany. The

Prospective Client Risk Assessment Tiffany & Co.

accessory segment collaborates with the main jewelry segment in the making of miscellaneous products
that bring positive light to the brand such as hall chandeliers, the Sprint Cup, and the Vince Lombardi
Trophy.

Raw Materials

The 2013 10-K report does not explicitly list or identify any raw materials, however; we gathered from
previous years reports that Tiffanys raw materials are gemstones and precious metals. The report does
make note that almost all non-jewelry products are purchased from third parties and that diamond
processing facilities operate outside of the United States. Another significant activity is the purchase of
mixed rough diamonds, which may not meet Tiffany quality when polished and are then sold to third
parties for small or non-existent gross margin. There is also the possibility of an increase or decrease in
the cost or supply of raw materials that could affect customer demand and sales. Financial report users
should be cognoscenti of changes in prices for mineral commodities, especially diamonds.

Affiliated Entities

Subsidiaries

Tiffany & Co.s primary business functions are based on the selling of fine jewelry through its
subsidiaries. As of 2013 there are 67 active subsidiaries located worldwide with headquarters in New
York City. These entities are wholly owned by the Registrant and are monitored extensively to correctly
report contributions to overall profits. See Figure 21.1 for a chart of subsidiaries.

Prospective Client Risk Assessment Tiffany & Co.

Related Parties

In compliance with AU 334, Tiffany & Co. lists the Bank of New York Mellon as a related party. In the
10-K report it is stated that the Companys Chairman of the Board and Chief Executive Officer is a
member of the Board of Directors of The Bank of New York Mellon, which serves as the Companys lead
bank for its Credit Facilities, provides other general banking services and serves as the trustee and an
investment manager for the Companys pension plan. The fees and nature of this relationship is explicitly
stated and should be analyzed diligently by financial report users.

Licensing Agreements

In an interest to maintain corporate quality only two silencing agreements have been made with Luxottica
Group and Swatch Group:

Luxottica Group
The Company receives earnings for the distribution of Tiffany & Co. brand eyewear. The 10-K report
does not disclose the amount of mutual investment between these entities however as the world leader in
luxury eyewear, Luxottica presents little inherent risk. Eyewear sales represent approximately 1% of
overall profits, which also minimizes bargaining power between these parties.

The Swatch Group

The relationship between these entities is discussed at length due to legal conflicts in 2011. The 10-K
outlines the relationship because as of 2007, the Company entered into a 20-year license and distribution
agreement with the Swatch Group for the manufacture and distribution of Tiffany & Co. brand watches.
This watchmaking company is wholly-owned and controlled by the Swatch Group but is authorized by
Tiffany to use certain trademarks owned by Tiffany and operate under the Tiffany & Co. name as Tiffany

Prospective Client Risk Assessment Tiffany & Co.

Watch Co., Ltd. This arrangement resulted in royalty revenue to the Company from the Swatch Group
that has not been significant in any year. TIFFANY & CO. brand watches sold in the Companys stores
constituted 1% of worldwide net sales in 2012, 2011 and 2010. This agreement is being arbitrated for
possible breach and presents future legal risk.

Customer Base

Tiffany & Co. is primarily a jeweler specializing in high end products therefore making its customer base
that of more wealthy individuals, typically women. Even though higher end women tend to be Tiffany &
Co.s main target, they still segment into other markets by advertising sterling silver that is less expensive.
Also, they produce products for males to purchase as well, such as cuff links, which helps diversify their
customer base more than by strictly catering to wealthier women.

Prospective Client Risk Assessment Tiffany & Co.

Industry Overview

Key Economic Factors

Because Tiffany & Co.s is a luxury jewelry company catering towards wealthier individuals, the success
of their sales depends on how the Stock Market is doing as a whole. For example, if there is a crash in the
stock market, individuals will be more concerned with saving their money than spending it on expensive
jewelry. Therefore it stands reason to believe that if people have more free spending money, they will be
more inclined to purchase expensive jewelry than if the economy is facing a recession. Finally, Tiffany &
Co. is known for producing extravagant engagement rings, so the sales may increase during a time when
more people are becoming engaged compared to a time when individuals are not interested or not
financially stable enough to get married.

Tiffany & Co. is an international company with over 250 locations worldwide, so if there is a problem in
one market, while this will affect the company, if another location is thriving this will ultimately even out
the sales.

Life Cycle

Tiffany & Co. was founded in 1837 meaning it has been in business for over 175 years (177 total) and it
is still a well known household name and individuals associate Tiffany & Co.s signature box as Tiffany
blue. For this reason, it can stand to believe that Tiffany & Co. is in the mature stage of its life cycle. It is
an international company who continues to perform well in all segments. Also, individuals already know
the name and brand so there is less advertising that needs to be done than in the growth or decline stage of
the life cycle.

Prospective Client Risk Assessment Tiffany & Co.

Factors for Success
There are two factors resulting the success of Tiffany & Co.: Market development, and Brand building.

Market development

Tiffany & Co. not only focuses in the North American and European market, it also aims at the global
market. In the past three years, Asian-Pacific market and Japan market is growing rapidly, while
American and European market seemed over-saturated and stopped growing. Also, Tiffany opened its
online store in 1999, which now became a main revenue source.

Source from mergentonline.com

Brand Building

In February 2014, Tiffany & Co. selected Ogilvy & Mather for its global marketing. Although global
marketing investment is not determined, U.S. media spending, not including Internet, was $22 million
(according to Nielsen) in January through September of 2013. Tiffany & Co. always focuses on investing

Prospective Client Risk Assessment Tiffany & Co.

in its brand name. For a unique business like this, customers value the brand, not the products. In 2013,
Tiffany & Co. also sponsored movie, The Great Gatsby, which was a great marketing success. After the
movie, Tiffany & Co. soon released the Great Gatsby collection.

Accounting Considerations

Management has the responsible of prepare financial statements. And investors often make decision based
on the information in the financial statement. So, it is important that one understand the statements. Here
are few areas need additional disclosure and explanation due to the characteristics of the industry and the
change in accounting standards.

Expense

Jewelry industry is so unique in terms of the value of merchandise. Company often spends a significant
amount of money at store for selling, general expense and administrative expense. At Tiffany & Co.
specifically, it provides retail staff and bears the risk of inventory loss in the foreign departments stores
which carry Tiffany & Co. jewelry. Also, a part of retail staffs compensation is commission, which is also
included in the selling, general and administrative expense.

Marketing and brand building determined the success of Tiffany & Co. Every year, company makes
investment in this area to archive higher sales in return. Advertising, marketing, public and media
relations costs include media, production, catalogs, Internet, marketing events, visual merchandising costs
(in-store and window displays) and other related costs. In 2012, 2011 and 2010, Tiffany & Co. had a cost
of $242,524,000, $234,050,000 and $197,597,000, representing 6.4% of worldwide net sales in each of
those years.

Prospective Client Risk Assessment Tiffany & Co.

Inventory

Tiffany & Co. recently changed from LIFO method to average cost for its products, which inflated profit
by lowering the expense. However, the major competitor of Tiffany & CO. use FIFO method, which
results the lowest cost of good sold out of three methods. Although Tiffany & Co. s change in inventory
method inflated the profit, it is not material comparing to the industry.

Legal and Regulatory Matters

Tiffany & Co. is in compliance with all debt covenants and external audit standards regarding internal
control and financial reporting as of 2013. In regards to legal proceedings, the company expressed
confidence that current and past litigation cases do not adversely affect financial position while also
making note of a 2011 arbitration with The Swatch Group Ltd. (Swatch) and its wholly-owned
subsidiary Tiffany Watch Co.

Arbitration

The plaintiffs (Swatch Group Ltd. And Tiffany Watch Co.) are seeking damages for alleged breach of
agreements between the Swatch Parties and the Tiffany Parties effective as of December 2007. The
agreement provided terms on the development and commercialization of a watch business along with
provisions for the allocation of profits. On September 12, 2011, the Swatch Parties publicly issued a
Notice of Termination purporting to terminate the Agreements due to alleged material breach by the
Tiffany Parties. No other material developments or transactions have been associated with this case.

Other Legal proceedings

As explicitly stated in Tiffany & Co.s 2013 10-K report, the Company is, from time to time, involved in

Prospective Client Risk Assessment Tiffany & Co.

routine litigation incidental to the conduct of its business, including proceedings to protect its trademark
rights, litigation with parties claiming infringement of patents and other intellectual property rights by the
Company, litigation instituted by persons alleged to have been injured upon premises under the
Companys control and litigation with present and former employees and customers. Management
believes that such pending litigation, individually and in the aggregate, will not have a significant effect
on the Companys financial position, earnings or cash flows.

Social Matters

Tiffany & Co.s primarily caters to high wealth individuals, so as far as social matters go, if there is a
drastic change in the economy where everyone tends to be more equal as far as money matters go then
Tiffanys would notice a drastic change in their sales, in a detrimental way. For example, if an individual
grew up in the middle class but then obtained a job that earned them a significant amount of income, they
would be more inclined to purchase products from Tiffanys than a high worth individual who
experiences losses and therefore loses a large portion of money who will now not splurge on high end
jewelry.

Additionally, Tiffanys is known for its engagement rings so it would notice higher sales with individuals
in their 20s-30s primarily because this is the age where expensive gifts and engagement rings have the
highest spike in sales. After that, there will still be sales with older individuals if they have an
anniversary or something similar, and there may be graduation gifts for people in high school, but these
will not have a huge grasp on their sales like 20-30 year olds.

Prospective Client Risk Assessment Tiffany & Co.

Primary Competitors

Hoovers online database gives a list of 30 companies as the competitors of Tiffany & Co., including
Nordstrom, Chanel, Citizen etc. Annual sales for these companies range from $0.8 billion to $37.14
billion. There are 3 companies in this list are identified as top competitors: LVMH, Harry Winston and
Richemont.

Source from hoovers.com

Tiffany &

Co.s revenue is much

higher than

some companies in the

industry. Harry Winston is also a retailer and manufacturer for diamond and other luxury jewelries. Sold
by the parent company Harry Winston Diamond (now Dominion Diamond) now is owned by Swatch.
Harry Wonston reported $30.7 million revenues. However, its not comparable to its top competitors.
Richemont owns the top competitive brand, Cartier. But it also owns Piaget and Baume & Mercier
watches, Alfred Dunhill leather goods, and Montblanc pens. Through multiple brands, its market
capitalization is rapidly increased, which made it become the 3 rd largest luxury holding company. In 2012,
Richemont had $13.01 billion of revenue with 20.43% net profit margin. LVHM has a well-diversified
product porfolio: wines and spirits (Dom Prignon, Mot & Chandon, Veuve Clicquot, and Hennessy),
perfumes (Christian Dior, Guerlain, and Givenchy), cosmetics (Bliss, Fresh, and BeneFit), fashion and
leather goods (Donna Karan, Givenchy, Kenzo, and Louis Vuitton), and watches and jewelry (TAG
Heuer, Ebel, Chaumet, and Bulgari). In 2012, LVMH attained $37.14 billion of revenues with a net profit
margin of 11.52%.

Prospective Client Risk Assessment Tiffany & Co.

The market position of a company in the luxuries industry is highly depended on the numbers and
awareness of the brands it owns. Although Tiffany & Co. is not as big in size as a few of its competitors,
it is still on the top-notch of the high end jewelry store industry.

Personnel Turnover

The total number and rate of new employee hires and employee turnover by age group, gender, and region
was not disclosed in 2013 or in any previous years financial statements. Tiffany & Co. did express that as
of January 2013 the company employed an aggregate of approximately 9,900 full-time and part-time
persons with approximately 52% working in the US. These number show persuasive but not conclusive
evidence of consistency with 2012s report of 9,800 employees with 54% working in the US. Various
attempts were made to contact Tiffany management for assurance but none resulted successful.

Easy of Entry

Tiffany & Co. is a jewelry business which is not one of the most difficult markets to enter, but due to the
fact that Tiffanys caters to higher end clients and uses top of the line materials it would be more difficult
for a new competitor to enter the higher end of the market. While there are high end jewelry places
anywhere a person may go, this does not necessarily mean they have other stores or are an international
company and for that reason, it would cause an individual to believe that it would take an extended
amount of time to penetrate the market and gain a share of the industry. Therefore for the reasons above
it would be safe to say that while anyone can enter the industry (Walmart and Target would be considered
competitors), the higher end of the industry is the hard part to penetrate.

Prospective Client Risk Assessment Tiffany & Co.

SWOT Analysis

Strength: Tiffany & Co. already has a large part of the market share both nationally and internationally
and has been around for over 175 years meaning that households know the name and brand and would be
more inclined to purchase their jewelry from a place they know will produce above par products.

Weakness: Tiffany & Co. has been in the market for so long, that it will continue to have to think of news
ways to stay fresh and current. It is easy to find a niche and then become lost in the shuffle when other
competitors being to make your products, but better. Therefore, Tiffanys will have to continue to
innovate.

Opportunity: Tiffany & Co. already has a large grasp of the jewelry industry so one market they could
try to penetrate is the accessories department they have. If they succeed they would notice larger sales
than by just primarily focusing of their jewelry.

Threat: If Tiffany & Co. focuses too much of its efforts on penetrating new markets instead of focusing
on expanding its jewelry market they could notice a loss of sales in both departments and also a customer
base if they are noticing less superior products.

Its a tight line to tread, but if Tiffany & Co. focuses its efforts efficiently the company can continue to be
a lead competitor in its industry.

Prospective Client Risk Assessment Tiffany & Co.

Porters Five Forces

Michael Porters Five Forces Model is a framework of industry analysis and strategic development that
outlines the factors present when thinking about all business decisions.

Prospective Client Risk Assessment Tiffany & Co.

Rivalry

The trends and development of an industry is composed at a fundamental level by the interactions
between competing entities in the marketplace. Each individual decision made by a rival company
directly and indirectly affects the way in which competition is viewed within that sector. In the case of
Tiffany & CO., we find that competitors vary drastically in operational styles and strategic planning. In
2013 industry statistics show Wal-Mart as the leader in jewelry retail along with TV shopping network
QVC at the fifth position directly behind Tiffany. These three companies have naturally different goals
and methods, which is why we analyze each entity individually using the five forces. Tiffany & Co. has
been an industry leader since the early 20th century and continues to show positive results when faced
with upcoming or long-standing competition. The enduring relationships between subsidiaries and raw
material provider give Tiffany an edge in a market where product costs are the main drivers of success.

Threat of Substitutes

Although there are some legitimate substitutes available, the true threat of substitution comes from
illegitimate products. Counterfeiting has been a problem for high cost brands and has become
exponentially worse over the last three decades. The industry as a whole has united to combat this
problem and has helped in stressing the importance of intellectual property protection. Although some
companies may make similar jewelry, the Tiffany style cannot be directly reproduced and makes it
difficult to provide legal substitutes that embody such a high-end brand.

Bargaining Power of Buyers

Customers have little to no bargaining power in the fine jewelry business, particularly when it pertains to

Prospective Client Risk Assessment Tiffany & Co.

Tiffany & Co. The companies recent offerings show great variety in prices and styles, which makes it
improbable that a customer could dictate terms of sale.

Bargaining Power of Suppliers

Having consistent and low cost suppliers is the foundation of competitive advantage within this industry.
The fluctuations in price coupled with the depletion of natural resources make the purchase of raw
materials vital to profitability, thus making supplier relations a top priority. Another factor that influences
supplier selection is the regulations regarding blood diamonds and child labor laws for the mining of
these gemstones or precious metals. Tiffany & Co. complies with safe mining practices and has been
outspoken on issues related to their subsidiaries activities in Sierra Leone and other parts of Africa.
Overall the suppliers have a key role in maintaining operations strong, which is why Tiffany and financial
report users should always be vigilant of international affairs.

Threat of New Entrants

With high startup costs and a small number of reputable suppliers it is unlikely that new competitors can
enter the marketplace and thrive. Licensing agreements and long term contracts keep Tiffany & Co. and
its competitors in a position of market dominance that cannot be easily overcome. There is always the risk
of aggressive marketing or negative public perception that could pave the way for new companies
however, there has been no indication that these circumstances will occur.

Company Integrity

Tiffany & Co. has been diligent in maintaining a corporate culture of both class and integrity over its 175
year span of operation. The most recent external audit performed by PricewaterhouseCoopers LLP.

Prospective Client Risk Assessment Tiffany & Co.

expresses an unqualified opinion on the fairness of financial reports while also praising adequate internal
controls. The annual 10-K reports of 2013 and all years prior have been signed by the CEO (Michael
Kowalski) and CFO (James Fernandez) in compliance with the standards established by the SarbanesOxley Act of 2002.In addition, CEO Michael Kowalski, released a 2013 statement where he said that
Through our initiatives to ensure the protection of the environment, respect for human rights and support
for the communities in which we operate, we aspire to conduct our business in a manner we all can be
proud of. Those practices demonstrate a commitment to ethics over compliance that can be justified by
consistent additions to the companys code of conduct and sustainability programs.

The ethical agenda of the company is composed of four fundamental activities: sustainability
commitment, responsible sourcing, industry leadership, and charitable giving. In 2002, Tiffany
discontinued any production of coral based products due to the ecological impact this industry was having
on ocean based ecosystems as part of their sustainable growth campaign. The companies responsible
sourcing model follows a framework of preservation, responsible mining, and beneficiation when
searching for its gemstones, precious metals, wrapping paper, and other packaging materials providers. As
an industry leader, Tiffany has stressed the importance of proper supply chain practices and has
collaborated with forward-looking leaders and non-government organizations in the jewelry trade to
enforce compliance. The Tiffany & Co. Foundation provides grants to nonprofit organizations working in
two main program areas: the environment and the arts since its creation in 2000.

Although many ethical issues have plagued fine jewelry makers in the past, in particular diamond
vendors, Tiffany & Co. has shown a proactive and efficient agenda of both compliance and ethical
integrity. There is evidence to support managements commitment to integrity and there is no indication
of diminishment in the near future. Beyond the occasional tabloid gossip or public figure controversy,
there is no reason to believe that Tiffany & Co.s agenda is unreasonable or unobtainable.

Prospective Client Risk Assessment Tiffany & Co.

Corporate Governance

Corporate governance shows how the company manages risk and how effective their ability to manage
the risks. Investors could use corporate governance information for decision making. According to MSCI,
Tiffany & Co. has a G-score of 5, which is in the medium range of riskiness. In ISS model developed by
MSCI, companies are analyzed in four different areas: board structures, shareholder rights, compensation
and audit. And the score in each sub-categories is in the range from 1 to 10, with 1 indicates the lower
governance risk and 10 for higher governance risk. Tiffany & Co. has an overall medium/low G-score,
but scores 8 in the board structure section.

Sources from Issgovernance.com