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UK operating review
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Overview
Signet is the largest speciality retailer of fine jewellery in the UK, with 581 stores and a total market share of approximately 17%. It trades as H.Samuel (14% of Group sales), targeting the middle market, and Ernest Jones (11% of Group sales), positioned at the upper end of the middle market. Total sales during 2006/07 were £482.5 million (2005/06: £469.6 million), H.Samuel's sales were £260.8 million (2005/06: £256.2 million) and Ernest Jones' £217.6 million (2005/06: £208.5 million).
At 3 February 2007 there were 375 H.Samuel stores and 206 Ernest Jones stores (including 16 Leslie Davis stores). Approximately 54% of these are in covered or enclosed shopping malls and 46% are located in prime "High Streets" (main shopping streets with high pedestrian traffic). Mall stores accounted for 61% of total UK division sales. H.Samuel is the largest chain of speciality retail jewellers in the UK and its stores are located in virtually every medium and large retail centre. Ernest Jones, the UK's second largest speciality retail jewellery chain, is represented in most large retail centres.
The strategy in the UK is to increase average transaction value by focusing on merchandise where the division's competitive advantages are greatest, particularly diamond jewellery, thereby improving store productivity and achieving operational leverage. To achieve this, the division has an integrated series of initiatives in the key areas of retail execution to continue the improvement of customer service, merchandise selection, the store environment and selling opportunities.
Competitive advantages
Signet has a range of advantages in store operations and human resources, real estate, merchandising and marketing compared to competitors within the UK speciality jewellery retail market and has access to leading US expertise. The principal competitive advantages are summarised below and explained in greater detail here.
• Store operations and human resources
The division's scale enables it to invest in industry-leading training, which is accredited by national and international industry bodies such as the National Association of Goldsmiths (NAG) and the International Gemmological Institute (IGI). This is particularly important, as the sale of diamond jewellery requires increased standards of product knowledge and customer service from sales associates. During 2006/07 the division's watch training achieved recognition from the British Horological Institute. Also, in 2006/07 an enhanced training programme called Amazing Customer Experience ("ACE") was introduced.
• Real estate
Strict criteria are followed when evaluating real estate investment and management believes that the quality of its store portfolio is superior to that of many of its competitors. The strength of the Group's balance sheet and the division's trading record makes it an attractive tenant. The well-tested H.Samuel and Ernest Jones revised store formats, which are more suited to selling diamond jewellery, enables the division to increase market share in that category.
• Merchandising
Management believes that the division's leading position in the UK jewellery sector is an advantage when sourcing merchandise and enables delivery of better value to the customer. An example of this is its capacity to contract with jewellery manufacturers to assemble products, utilising directly sourced gold and loose polished diamonds. In addition, the division has the scale to utilise sophisticated merchandising systems to test, track, forecast and respond to consumer preferences.
• Marketing
The UK division has strong and well established brands and leverages them with advertising (television, print and online), catalogues and the development of customer relationship marketing techniques. Few of its competitors have sufficient scale to utilise these marketing methods successfully. H.Samuel and Ernest Jones also provide the leading integrated e-commerce and retail store service to the consumer within the speciality jewellery sector.
• Access to US expertise
The UK business benefits from its close relationship with Signet's US operations. Synergy is gained by sharing knowledge in all aspects of retail best practice procedures. None of the UK division's competitors has similar access to the leading operator in the world's largest jewellery market.
Initiatives and developments in 2006/07
Specific initiatives taken in 2006/07 to strengthen the division's competitive position included:
Store operations and human resources
- the introduction of ACE, a new, more flexible customer service/ selling system with accompanying training and recognition schemes;
- improved management training to assist in the execution of the division's strategies;
- expansion of the recently-introduced e-learning system to enable managers and staff to monitor knowledge levels more easily;
- enhanced employee remuneration benefits package as part of a three year programme to improve the recruitment and retention of top quality staff; and
- the measurement of employee satisfaction through a staff opinion survey and extensive use of an employee consultation framework.
Real estate
- the roll-out of a more customer focused store design to an additional 27 stores; and
- further development of the store design elements in H.Samuel by improving the presentation of jewellery in wall display cases, enhancing the presentation of branded merchandise such as watches and using more effective in-store signage.
Merchandising
- increased differentiation by use of exclusive items and jewellery collections;
- continued development of the Leo and Forever Diamond ranges; and
- developed use of key volume items in H.Samuel.
Marketing
- testing of new television commercials for H.Samuel and Ernest Jones;
- expansion of H.Samuel television advertising to national coverage; and
- Ernest Jones website transactional capability to complement in-store customer service.
Initiatives and developments for 2007/08
Initiatives planned for 2007/08 include:
Store operations and human resources
- updating training to further increase staff confidence and skills in customer service and product knowledge;
- continuation of the programme to enhance employee reward packages; and
- implementing of a three year programme to enhance service levels and further improve training in head office.
Real estate
- between 15 and 20 major H.Samuel store refurbishments;
- testing of some design enhancements in Ernest Jones stores; and
- selective store openings, relocations and closures.
Merchandising
- further increase brand differentiation through collections and exclusive merchandise;
- making shopping easier by improving displays and rationalising ranges; and
- developing key volume items.
Marketing
• continuing to test and develop television advertising campaigns for H.Samuel and Ernest Jones.
Marketplace
Although reliable figures on the size of the UK jewellery market are difficult to obtain, management estimates that in calendar year 2006 the size of the total UK market for fine jewellery, costume jewellery and watches was approximately £3.2 billion ($5.8 billion) (including VAT of 17.5%). The jewellery market has grown at an estimated compound rate of 4.9% per annum from 1998 to 2004. It declined by about 11% in 2005, when the retail sector as a whole experienced the sharpest deterioration in trading conditions since 1991, with the jewellery sector being particularly affected. In 2006 the UK jewellery market stabilised, although the volume of items hallmarked by the Assay Office continued to show a significant decline. Per capita spend on jewellery in the UK remains at approximately half of the level of the US. The market includes speciality retail jewellers and non-speciality jewellery retailers, such as mail order catalogues, catalogue showrooms and jewellery departments in department stores.
The UK retail jewellery market is very fragmented and competitive, with a substantial number of independent speciality jewellery retailers. Management believes there are 7,000 to 8,000 speciality retail jewellery stores in the UK.
In the middle market H.Samuel competes with a large number of independent jewellers, the only speciality competitor of significant size being F Hinds (107 stores). Competition at the lower end of the H.Samuel product range also comes from Argos, the catalogue showroom operator and discount jewellery retailers such as Warren James (120 stores).
In the upper middle market Ernest Jones' competition is from independent speciality retailers and a limited number of other upper middle market jewellery brands such as Goldsmiths (160 stores), Fraser Hart (32 stores) and Beaverbrooks (59 stores).
Based on surveys, management believes that customers are attracted to H.Samuel because they have confidence in the brand, and its sales associates are perceived to be friendly, helpful and knowledgeable. Ernest Jones is perceived to offer high quality merchandise and premium service from professional and knowledgeable staff.
Store operations and human resources
Training
Management regards customer service as an essential element in the success of its business. The Signet Jewellery Academy, a multi-year programme and framework for training and measuring standards of capability, is operated for all store staff. As part of this programme, 1,000 sales associates and 1,100 store managers and assistant store managers (representing 81% of store management) have now passed the Jewellery Education & Training Level 1 qualification accredited by the National Association of Goldsmiths. Upon completion of each of the four levels, staff are better able to deal with customer requirements. The programme was enhanced during 2006/07 to improve basic product knowledge and jewellery repair skills and further developments are planned for 2007/08.
ACE, an improved customer service and training programme was introduced in 2006/07 and will be developed further in 2007/08. ACE is a flexible programme consisting of six elements that better enable store staff to meet the needs of customers.
In conjunction with the Signet Jewellery Academy, training in management skills for all tiers of store operations management was developed further last year to support the enhanced store associate training programme and to build general management skills.
All store personnel have daily performance targets. They are given training and weekly feedback on their performance from store and field management to help them achieve these targets.
Recruitment and retention
Recruitment procedures, including online facilities, continue to improve the suitability of new store personnel, helping to ensure that they meet key basic requirements and are motivated to work within a jewellery store environment. Field and human resources management are responsible for the recruitment, review, training and development of sales staff, thereby ensuring consistency in operating standards and procedures throughout the business. All new store staff receive a structured induction programme that covers all aspects of store operations, product knowledge and customer service. A financial reward is received upon completion.
The division-wide commission-based remuneration programme was in operation for the whole year in 2006/07 for the first time. The level of commission paid is dependent on a combination of store and individual performance. To continue to improve the recruitment and retention of top quality staff, a three year programme to enhance the employee benefits package was begun in 2006/07.
Promotion
The division's preferred policy is to promote store management from within the business; approximately 80% of store management appointed in 2006/07 were so promoted. Each chain always has a number of sales staff who are qualified to advance to store management level, thus assuring the availability of newly trained managers familiar with the division's operating standards and procedures.
Store support
In order to increase staff selling time and to improve efficiency, operating procedures are routinely reviewed to identify opportunities to enhance customer service and reduce in-store administrative tasks. The Signet intranet provides a computer-based platform for improved communication between stores and head office, with sales floor and back office administrative functions being simplified and standardised through this medium.
Opportunities for better store procedures and employment practices were identified through a staff opinion survey. It is believed that the results provide a basis for further improvement in the motivation and retention of staff.
Head office
Management believes that successful recruitment, training and retention of head office staff is important. Accordingly, structured recruitment, training and performance management systems are in place. Internal career advancement is encouraged and is supported by succession planning. Teamwork and service to the stores are encouraged through a performance bonus plan for head office staff, which is based on the division's results. In the first quarter of 2006/07 part of the divisional head office function was relocated in order to enhance efficiency. The implementation of a three year programme to improve training in head office will commence in 2007/08.
Real estate
Store design
A more open format, better suited to the sale of diamonds, fine jewellery and higher priced watches, is being rolled out over the refit cycle. The design draws on the Group's mall store experience in the US and was developed as part of the programme to increase sales and store productivity by focusing on the outperforming diamond category. It was further refined for H.Samuel during 2005/06 and will also be enhanced for Ernest Jones in 2007/08. In 2006/07 44% of the division's sales came from stores utilising the more open format.
The design allows greater interaction between sales associates and customers and better presentation of merchandise by the use of low level display counters rather than window displays. The design for mall locations includes display cases on the frontage with the concourse, rather than the traditional window presentation. The open frontages make the store more accessible and inviting to the customer, as well as improved in-store signage. The High Street stores have wide floor-to-ceiling windows that provide views directly into the store.
The use of low level display units, that also serve as service counters for much of the merchandise, allows the sales associate to show an assortment of merchandise to the customer without having to break away to select additional merchandise from the window displays, as in the traditional window based store design. The reformatted stores achieved a rise in both diamond sales and average retail price, reflecting changes in the mix of merchandise sold.
An additional 27 stores (26 H.Samuel and one Ernest Jones), were trading in the new format at 3 February 2007, bringing the total to 255 (217 H.Samuel stores and 38 Ernest Jones stores). Two other H.Samuel stores were also refurbished. In 2007/08 up to 30 refurbishments are planned, with an enhanced design being tested in Ernest Jones.
Details of recent investment in the store portfolio are set out below:
| Number of stores | 2006/07 | 2005/06 | 2004/05 | ||
| Store refurbishments and relocations | 28 | 78 | 81 | ||
| New H.Samuel stores | - | 3 | 2 | ||
| New Ernest Jones stores | 1 | 5 | 7 | ||
| Store fixed capital investment | £8m | £22m | £23m |
H.Samuel
H.Samuel, accounting for 14% of Group sales in 2006/07 (2005/06: 15%), offers a range of jewellery, gold, watches and gifts on merchandise mix. At 3 February 2007 average selling space was 1,091 square feet per store.
H.Samuel store data
| 2006/07 | 2005/06 | 2004/05 | |||
| Number of stores: | |||||
| Opened during year | - | 3 | 2 | ||
| Closed during year | (11) | (15) | (11) | ||
| Open at end of year | 375 | 386 | 398 | ||
| Percentage increase/(decrease) in | |||||
| like for like sales | 0.7% | (8.8)% | 1.9% | ||
| Average retail price of items sold(1) | £42 | £38 | £37 | ||
| Average sales per store | |||||
| in thousands (exc. VAT)(2) | £695(3) | £681 | £723 | ||
| (1) Excluding accessories, repairs and warranties. (2) Including only stores operated for the full financial year. (3) 53 week year. |
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The average retail price of items sold has increased at a compound annual growth rate of 6.2% over the last five years. This upward trend is expected to continue as the sales mix of diamonds is anticipated to rise and that of gifts to decline as a percentage of sales. Average sales per store have increased at a compound annual growth rate of 0.8% over the same period. In 2006/07 the average retail price increased by 10.5% and the sales per store by 2.1%. H.Samuel will increasingly focus on larger stores where it is better able to offer more specialist customer service, a wider range of jewellery and benefit from a more customer friendly format. The number of H.Samuel stores is therefore likely to decline in smaller markets as leases expire or suitable real estate transactions become available.
Ernest Jones (including Leslie Davis)
Ernest Jones sales accounted for 11% of Group sales in 2006/07 (2005/06: 12%). Where local market size and the availability of suitable watch agencies permit, the Ernest Jones chain follows a two-site strategy, using the trade names Ernest Jones and Leslie Davis.
The principal product categories are diamonds, branded watches and gold jewellery, which are all merchandised and marketed to appeal to the more affluent upper middle market customer ( see merchandise mix). Ernest Jones retails an extensive range of diamond and gold jewellery as well as prestige watches such as Breitling, Cartier, Longines, Omega, Rado, Raymond Weil, Rolex and Tag Heuer. It also sells contemporary fashion watches such as Burberry, DKNY, Emporio Armani, Gucci, Hugo Boss and a range of traditional watches including Accurist, Rotary, Seiko and Tissot.
At 3 February 2007 the chain had average selling space of 864 square feet per store. The average retail price of items sold has increased at a compound annual growth rate of 6.5% over the last five years. Over the same period average sales per store increased at an annual compound growth rate of 3.3% and were the most productive stores in the Group in terms of sales per square foot. In 2006/07 the increase in average retail price was 10.1% and sales per store increased by 1.3%. The number of Ernest Jones stores has increased by 22 over the last five years, and the number of stores is expected to gradually increase, depending on the availability of suitable sites and prestige watch agencies.
Ernest Jones store data(1)
| 2006/07 | 2005/06 | 2004/05 | |||
| Number of stores: | |||||
| Opened during year | 1 | 5 | 7 | ||
| Closed during year | (2) | (2) | - | ||
| Open at end of year | 206 | 207 | 204 | ||
| Percentage increase/(decrease) in | |||||
| like for like sales | 1.7% | (7.6)% | 4.5% | ||
| Average retail price of items sold(2) | £163 | £148 | £141 | ||
| Average sales per store | |||||
| in thousands (exc. VAT)(3) | £1,079(4) | £1,065 | £1,150 | ||
| (1) Including Leslie Davis stores. (2) Excluding accessories, repairs and warranties. (3) Including only stores operated for the full financial year. (4) 53 week year. |
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Merchandising and purchasing
The division retails an extensive range of merchandise including gold and silver jewellery, watches, diamond and gemstone set jewellery and gifts. As with other UK speciality retail jewellers, most gold jewellery sold is 9 carat. However, sales of 18 carat gold jewellery and white gold have been increasing.
The merchandise mix of the UK division is given over. In 2006/07 diamond jewellery sales accounted for 30% of total Signet UK sales versus 23% five years ago. In line with the strategy of the UK division to increase the percentage of diamonds in the merchandise sales mix, since 2001/02 the compound annual growth rate of Signet UK diamond sales has been about 7%.
Merchandise mix
| Percentage of sales | |||||
| 2006/07 | 2005/06 | 2004/05 | |||
| Gold and silver jewellery | |||||
| H.Samuel | 37 | 37 | 37 | ||
| Ernest Jones | 26 | 27 | 27 | ||
| Signet UK | 32 | 32 | 32 | ||
| Watches | |||||
| H.Samuel | 23 | 23 | 23 | ||
| Ernest Jones | 30 | 29 | 29 | ||
| Signet UK | 26 | 26 | 26 | ||
| Diamond jewellery | |||||
| H.Samuel | 23 | 21 | 20 | ||
| Ernest Jones | 38 | 38 | 38 | ||
| Signet UK | 30 | 29 | 28 | ||
| Gift | |||||
| H.Samuel | 11 | 12 | 13 | ||
| Ernest Jones | 2 | 2 | 2 | ||
| Signet UK | 7 | 7 | 8 | ||
| Repairs and accessories | |||||
| H.Samuel | 6 | 7 | 7 | ||
| Ernest Jones | 4 | 4 | 4 | ||
| Signet UK | 5 | 6 | 6 | ||
Suppliers
Merchandise is purchased from a range of suppliers and manufacturers and economies of scale continued to be achieved by combining the volume of purchases for H.Samuel and Ernest Jones. In 2006/07 the five largest of these, all watch suppliers, together accounted for approximately 24% of total UK division purchases, with the largest accounting for approximately 7%. Only a small percentage of merchandise is purchased on consignment see notes to the accounts.
Direct sourcing
The UK division also employs contract manufacturers for approximately 28% of the diamond merchandise sold, thereby achieving cost savings. Some 21% of the UK business' gold jewellery is manufactured on a contract basis through a buying office in Vicenza, Italy, thereby eliminating the costs associated with intermediaries. Overseas direct sourcing is also used to purchase complete merchandise.
Merchandising
Both H.Samuel and Ernest Jones employ experienced buyers who concentrate on product development, sourcing and supplier management appropriate to their particular needs. Merchandising teams work in conjunction with the buyers and focus on assortment planning, branch grading, repeat orders, inventory levels and margin management. Product category reviews are regularly carried out with a focus on increasing potential gross margin return on investment. Rigorous test marketing procedures are used to trial products, and their subsequent distribution is made strictly against rates of sale.
Each store is assigned a range of merchandise that reflects local buying patterns. Display equipment and layouts are constantly reviewed and updated, and new display formats that draw upon the US division's experience have been implemented.
Branded diamonds are of increasing importance in the UK division. H.Samuel and Ernest Jones have the exclusive distribution in the UK of the Forever Diamond and the Leo Diamond, respectively. Both these branded diamonds have unique cuts that provide greater sparkle and brilliance than a typically cut diamond of similar size, colour and clarity. The Leo Diamond utilises a higher quality diamond and therefore retails at a higher price than the Forever Diamond. The selection of jewellery utilising these diamonds continues to be expanded.
Other merchandise initiatives in 2006/07 included:
- continued development of the diamond and white metals categories;
- the greater use of merchandise collections based on particular design features and styles, to further differentiate the division's brands in the marketplace;
- an increase in merchandise exclusive to H.Samuel and Ernest Jones; and
- a greater focus on more fashionable merchandise.
Following the successful test of key volume items in 2005/06, H.Samuel made more use of this tactic in 2006/07 to drive footfall. These items are bought taking advantage of H.Samuel's scale and are offered to consumers at an attractive price. They are promoted in marketing and point of sales material. While the overall level of promotional activity was similar to that of previous years, this more targeted approach helped to increase H.Samuel's differentiation in a challenging retail environment during 2006/07.
Marketing and advertising
Gross expenditure on marketing and advertising amounted to 3.1% of sales in 2006/07 (2005/06: 3.2%). Marketing campaigns have been tailored to reinforce and develop further the distinct brand identities of H.Samuel as a middle market jewellery chain and Ernest Jones as a more upmarket diamond and watch specialist. Both campaigns aim to expand the overall customer base and improve customer loyalty.
Catalogues
For most of the year the primary marketing and advertising medium employed in 2006/07 consisted of a series of catalogues for each brand, distributed as inserts in newspapers and magazines as well as by mail and available in all stores. The quality of catalogues was improved and their distribution was better targeted.
Television advertising
During Christmas 2006 new television commercials were used by both H.Samuel and Ernest Jones; the former using national television advertising for the first time. Ernest Jones' television coverage of its store base was about 60%, a similar level to that of 2005/06.
Internet
Following the launch of an e-commerce (transactional) capability for the H.Samuel website in 2005, a similar facility was enabled on the Ernest Jones website (www.ernestjones.co.uk) as a complement to store-based customer service. Both websites performed satisfactorily in 2006/07.
Insurance loss replacement business
While nearly all the UK division's sales are made directly to the consumer, management believes that Signet is the leading UK jewellery retailer in the insurance loss replacement business. This involves the settlement of insurance claims by product replacement through jewellery stores rather than by cash settlements from the insurance company. A lower gross margin is earned on these transactions than on sales to individual customers. However, the division benefits from the resulting higher level of sales, greater customer traffic in the stores and the opportunity to create and build relationships with new customers. Given its nationwide store portfolio, breadth of product range and ability to invest in systems to support the business, the division has benefited from insurance companies settling claims in this manner. In 2006/07 the proportion of sales generated from the insurance loss replacement business increased.
Credit operations
Whilst the division does not have an in-house credit operation, it does accept major credit cards. Credit card sales are treated as cash transactions and accounted for approximately 28% of sales during 2006/07 (2005/06: 30%). During the period approximately 2% (2005/06: 2%) of sales in the UK were made pursuant to interest-free programmes, which are available for purchases above a particular price. The receivables for the interest-free programmes are sold at a discount on a limited recourse basis and administered by an unaffiliated company.
Management tools and communications
EPOS equipment, retail management systems, purchase order management systems and merchandise planning processes are in place to support financial management, inventory planning and control, purchasing, merchandising, replenishment and distribution and can ensure replacement within 24 hours of any merchandise sold. The third phase of an electronic "Business To Business" communications project, developed to improve the efficiency and effectiveness of dealing with suppliers, was implemented in 2006/07.
A perpetual inventory process allows store managers to check stock by product category. These systems are designed to assist control of shrinkage, fraud prevention, financial analysis of retail operations, merchandising and inventory control.
Regulation
Various laws and regulations affect Signet's UK operations. These cover areas such as consumer protection, consumer credit, data protection, health and safety, waste disposal, employment legislation and planning and development standards. Management monitors changes in these laws with a view to ensuring that its practices comply with legal requirements.