Mark Hanna has a fireside chat with his old boss at Tiffany & Company, Jim Fernandez, who reflects on his 31 years at the iconic American jeweler and its outstanding growth into one of the world’s largest retailers of fine diamonds.
Mark – You have had a very successful career at Tiffany & Company. When did you retire and what was your position at the time?
Jim – I decided to retire in 2014; and at that time, I was Chief Operating Officer in charge of distribution, manufacturing, the diamond business, IT and Finance. Prior to becoming Chief Operating Officer, I was Chief Financial Officer for 21 years. It was an exciting time; but after 31 years, I decided that was long enough, and it was time to pass the reigns on to someone new. After I retired, I continued to be involved in business. I had been on the Board of Directors of Dun and Bradstreet since 2004 which was a publicly listed company on the New York Stock Exchange. During my time on the board, I was Chairman of the Audit Committee and was also on their Governance Committee. I was also non-executive chairman for a year in 2018 during which time I oversaw the sale of the company.
Mark – Can you explain the history of your role and how it changed as the company evolved throughout your career?
Jim – It was so exciting. I joined the company in 1983, and very few people know that at that time Avon Products owned Tiffany. I had transferred to Tiffany from Avon as a Manager in the Accounting Department in 1983; and in 1984, Avon decided to sell Tiffany. It was not a good strategic fit for either company, and so in the fall of 1984 there was a leveraged buyout by management backed by an investment company, and Avon sold Tiffany for roughly $130 million. Keep that number in mind.
Tiffany was not very profitable at the time. It was very U.S. centric. We had a small business in Japan wholesaling to Mitsukoshi department stores and a very limited number of branches in the U.S. with, of course, the New York flagship store. Once the company was sold, we saw the opportunity to expand both internationally and domestically. We had a brand that was famous around the world, some of that due to the movie Breakfast at Tiffany’s. People all over the world knew the name, knew it stood for quality and that it was a very special place.
The priorities were to expand by opening more stores, improving the quality and the selection of the merchandise offered. As we started to expand, sales grew dramatically and profitability improved.
In 1987 we decided to take the company public, and Tiffany offered shares on the New York Stock Exchange. The company was valued at about $230 million dollars. With the public offering, we were able to raise the capital to fund our expansion internationally. We started opening stores throughout Europe and Asia and continued our expansion in the U.S. all using a refined store design. At the same time, the company needed to grow its internal production capacity as we had tremendous demand for our jewelry, but our suppliers could not keep pace with our growth. We had a small high-end production shop in New York, and we opened new manufacturing workshops in the northeast of the U.S. to manufacture finished gold, platinum and diamond jewelry products. In addition, we opened a major workshop to produce our silver jewelry, and this gave us the facilities to manufacture the majority of our products.
Strategically, we decided that we should go further upstream in terms of some of the raw materials in our jewelry. We felt that we could not continue to buy our diamonds, our most important product and what Tiffany was best known for, as a third party. The standards for our polished diamonds were very strict; and as our business grew, we discovered that in the categories we were interested in, when we went into the market to purchase our quality, we actually moved the market in terms of price. The success of our business was hurting our margins in a big way, and we felt this was likely to continue going forward.
We concluded that we would have to expand our sourcing to include rough diamonds. Around this time, Bob Gannicott, the CEO of Aber Diamonds, approached us as he had a diamond discovery in Canada that he was trying to finance to go into production. We decided to team up with them by buying shares of the company which entitled us to take the rough diamond production that suited our needs from this Canadian mine. We agreed to a supply contract where they would sell at least $50 million a year to us of Tiffany quality rough diamonds, and this regular supply of rough would allow us to invest in polishing operations to begin supplying our own diamonds.
Obviously, this didn’t satisfy all of our needs, but we were able to launch a business in Antwerp where we would make the initial manufacturing decisions, value the rough, do the initial sawing process and send out the goods to the various Tiffany facilities around the world for cutting with the final polished goods arriving back in New York for quality assurance.
Mark – This was an interesting time for me personally as you and Andy Hart, Tiffany’s Senior Vice President – Diamond and Jewelry Supply, hired me to start the Laurelton business which was the subsidiary that Tiffany created in 2002 to acquire and manufacture diamonds.
Jim – It certainly was an interesting time; and, while building these operations, we were able to hire some of the best people in the industry due to the reputation of Tiffany combined with a decision by De Beers to exit the polishing business. This allowed us to pick up the skills that we needed to start operations very quickly. Over the next few years, we were able to secure rough supply from a variety of sources but always focusing on the type of rough that would yield a Tiffany quality diamond. Of course, not all the diamonds we were offered met the requirements of Tiffany in terms of color and clarity, so we started a rough sales business to realize the goods that didn’t meet those standards.
Mark – Beyond diamonds, could you give a little background on some of the other sourcing initiatives that Tiffany had?
Jim – We also started to purchase gold and silver from specific mines that we assessed as being among the most environmentally friendly mines for supplying the raw material that we required. As you know, gold mining can be quite a problem environmentally; but the Bingham Canyon mine in Utah that we started to buy from is primarily a copper mine, and gold and silver are by-products of the copper extraction. They also had one of the cleanest and newly-built smelters, so what was being released into the air was comparatively clean as well. We also bought platinum from U.S. sources and purchased recycled metals, and we were able to do this because we did so much in our own operations. Tiffany sources raw materials: diamonds, gold, platinum and silver in the most environmentally friendly way, and that is a real compliment to the company and I believe customers continue to expect this level of quality from Tiffany.
Over a long period, our strategy allowed us to expand our business with responsibly sourced diamonds and other raw materials. We continued to design and manufacture exciting new products and expand our global footprint; and by the time I retired in 2014, the company was valued at approximately $14 billion. For those of you who followed recent events, Tiffany was sold last year to Louis Vuitton Moet Hennessy (LVMH) for a little over $16 billion. And this from that little $130 million company that Avon owned. You can imagine the excitement of being part of a growing company to that level of sales, profitability and valuation.
Mark – Jim that is a great story and you should be very proud of your part in this. It always struck me as I visited the various facilities around Tiffany that the supply chain was very U.S. centric. What was the reason for this?
Jim – We focused finished goods manufactured in the U.S. as it was important for our customers to have a product made in the U.S. So, while we polished diamonds around the world, we kept our finished goods manufacturing for engagement rings, other diamond jewelry and the majority of other jewelry categories focused on the U.S. There are some special jewelry lines that we sourced from designers in Europe, but the majority of our jewelry is made in the U.S.
Mark – One of the interesting elements of a publicly-owned company like Tiffany acquiring rough diamonds and manufacturing them is how to deal with this in terms of the company’s balance sheet?
Jim – There are a couple of interesting challenges as you go downstream into the diamond business. Whether you are dealing with rough or polished, the difficulty is the valuation. What is the real cost (and cost cannot be greater than the realisable value by U.S. GAP accounting standards)? You must be careful what you carry your inventory at, and you have to be even more careful as to what you’re willing to sell your goods for. There is very little actual information on what the last real transaction was for a certain quality and size. So, when it came to valuing rough, we had to base the value of the rough not only on what we paid for it but also, after examination, what we thought we would realize in terms of polished from a piece of rough. In addition, you do not normally buy one piece of rough; you buy rough as a group or parcel of stones that you need to allocate cost among. This was a challenge, but we came up with a process with a customized price book and cost allocation method. The polished was just as challenging because, when you look at the market in the diamond industry there are only a couple of sources of information for estimating the value of polished. The most dominant are Rapaport and IDEX; and when people in the industry talk about the value of a polished diamond of a specific color, clarity and size, they talk about the discount to RAP. This is in fact a discount to an asking price; and depending on other parameters, the discount may vary. For the moment, there is no better method for valuing polished. I think that this presents a serious issue for diamantaires and how they value their inventory which in turn is an issue for banks and how they finance the inventory of diamantaires.
Mark – So Jim, the lack of an exchange or transparent market where actual transactions are registered as you would find for other products like gold, silver platinum or oil means that the price discovery process for diamonds is quite difficult or even impossible?
Jim – Yes, there is currently no actual price discovery system; and since I have been involved with yourdiamonds.com, I am encouraged to see that there is a possibility to create a diamond spot market that could help diamantaires and banks value diamond inventories. They have several apps that run on market and auction data and will offer a variety of valuation, financial and insurance products.
When I was at Tiffany, we did hear about people trying to create financial instruments based on diamonds, but they did not come to anything. Today there are new ideas and even NFT type diamond tokens; but, without a proper pricing mechanism or spot price, using diamonds for investment purposes and hedging your inventory is not possible.
Yourdiamond.com data could provide the information necessary to enable some of these instruments. I hope that the various yourdiamond.com products will significantly help the diamond industry and supply chain.
Mark – Thanks Jim for taking the time to tell me about your time at Tiffany and your new interests. You can be very proud of what you and the management team at Tiffany achieved in your career.