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Zales Corporation is one of the largest jewelry and diamond companies in the world. It is also struggling to survive. During the 2009 holiday season, the company suffered its biggest losses ever, leaving it with millions of dollars worth of unsold inventory. In these trying times, Zales is trying to get creative to outlast the downturn.

It is common in the jewelry industry for vendors to swap out old styles that have not sold for new styles. But because Zales needs cash, it could not rely on this standard arrangement. Instead, it wants its vendors to buy back the unsold inventory for cash, at the full price it paid to purchase those items from the vendor. Even vendors that do not manufacture the jewelry are being asked to purchase it back at the wholesale cost.

In return, Zales is promising that it will order from the vendor twice as much as usual in the next year. The vendors are understandably wary of the promise though; Zales may not survive long enough to fulfill the promise, and the vendors bear most of the tremendous risk of such an agreement. Zales already had cancelled some of its holiday orders and requested extended payment terms. And after December, it cancelled most of its advertising for Valentine’s Day and Mother’s Day—two holidays that contribute 70 percent of Zales’s profit. The financial situation does not seem to be getting better.

Even if vendors agreed to Zales’s buy-back terms, they would have no recourse if Zales chose not to purchase from them in the future or went bankrupt. Merchandise that Zales buys is not insurable for payables. Vendors are almost guaranteed to lose money, considering the retailer’s performance and lack of investment in future inventory. In contrast, competitors such as Kay Jewelers and Jared the Galleria of Jewelry enjoyed 7.6 percent increases in sales, even as Zales was undergoing double digit declines.

Discussion Questions:

  1. What situation does Zales find itself in?
  2. Why are vendors reluctant to enter into Zales’s buy-back terms?

Ann Zimmerman, “Struggling Zales Looks to Suppliers for Cash,” The Wall Street Journal, February 4, 2010.

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