Strategic Position Review of Michael Hill Jewelers in New Zealand

Michael Hill Jewellers (MHJ) is one of the most recognizable names in the New Zealand retail jewellery industry. In 1979, Michael Hill opened his first store in Whangerei. Until then, jewellery stores had been run primarily by craftsmen jewellers. Michael Hill changed this with the philosophy “to make jewellery buying less intimidating and more accessible to the public.” In order for any company to succeed, it has to take a look at the environment in which it operates. This is why an external environmental analysis is so important.

This involves a continuous process of scanning, monitoring, forecasting, and assessing the external environment. Doing so will illuminate any opportunities to be exploited or threats to minimize. The first step in the analysis is environmental scanning which identifies any trends or changes which are occurring or have recently occurred in the environment. Once identified, the company can then strategise and react in order to exploit the phenomenon. Three useful tools in an environmental analysis are a PESTEL analysis, Porter’s Five Forces, and Strategic Grouping. Utilising these tools, an environmental scan of the jewellery industry will be performed.

PESTEL Analysis

Political

Many of the raw materials for the jewellery industry can originate in countries that have political instability. Of the top five diamond producing countries, Canada is the most politically stable, with minimal probability of any mining disruption due to war. The other four are a different situation. Russia is still in a state of internal turmoil regarding Chechnya and other breakaway nations, while Botswana, Angola and Congo are all in a constant risk of war both from within and from neighbouring war-torn countries. A war in any of the above countries would cause a considerable loss in production and have a significant impact on the jewellery industry worldwide.

Economic

The entire jewellery industry relies on commodities such as gold, platinum and silver in order to manufacture their product. This can create a problem as the prices of commodities can fluctuate drastically. For example, from 1982 to 2005 gold prices remained relatively stable. From 2005 to 2011 it nearly quadrupled in value. This price increase for the raw material will be passed on to the consumer causing a price increase in the end product. Conversely, if the price of the commodity drops it would be expected that the price of the finished product would reflect this.

Social

In recent years, it has become more important to consumers to purchase products that have been produced ethically. In the jewellery industry, one of the most prominent ethical issues is the use of blood or conflict diamonds. These diamonds are mined and sold by African rebel forces in order to finance their wars in Angola and Sierra Leone. There has been a certification system instituted that lets the consumer know the origin of the diamond that they are looking at purchasing. Consumers can now ask the jeweller to see the certificate of origin for their diamond. Jewellers must now be aware of this and ensure that they buy only ethically obtained diamonds in order to fulfil this request.

Technological

The internet allows consumers to select and purchase any piece of jewellery they desire online. A large number of jewellers have online stores or use websites such as amazon.com and ebay.com to reach their customers. It is important for the jewellers to recognise that their clientele are no longer limited geographically and can easily find and in some cases import items that may not be readily available in that region.

Environmental

Businesses are starting to become more aware of the impact that their own production processes have on the environment and are looking for ways to reduce this. The gold mined to produce jewellery is not always extracted with the most environmentally sound methods. Up to 15% of the world’s gold is produced using artisanal and small scale gold mining, the single largest demand sector for mercury. Virtually all of this mercury is dumped directly back into the environment causing havoc on the surrounding ecosystems. The jewellery industry needs to ensure that they purchase raw materials from only environmentally sustainable mining companies.

Legal

Due to the size of some of the companies in the jewellery industry along with the large sums of money and power that accompanies it, there are strict antitrust laws in place. The Responsible Jewellery Council is an international organisation set up to oversee and protect the jewellery industry from various practices. This council has set up antitrust policies in order to protect its members. Industry Environment Analysis – Porter’s Five Forces

Porter’s Five Forces model is used to evaluate the degree of rivalry between competitors in a given industry through assessing the four forces that lead to this outcome. These forces are the threat of new entrants, the bargaining power of suppliers, the bargaining power of buyers, and the threat of substitute products.

The threat of New Entrants

Is the ease in which a new company can start into the retail jewellery industry. It is not difficult to start a jewellery store as the only requirements are start-up capital and the premises. There are many small sole trader jewellery shops in New Zealand to attest to this. Therefore, the threat of new entrants is:

HIGH Bargaining Power of Suppliers

Is the control that suppliers have over the pricing and distribution of their products across the jewellery industry. Once the wholesalers have sold their products to the retailers, the retailers can sell for any price they deem appropriate. There are many wholesalers in the industry, many based in Asia, giving the retailer alternative suppliers if the price is not right. Therefore the bargaining power of suppliers is:

LOW Bargaining Power of Buyers

Is the power belonging to the customer to choose to shop at a store? As there are many jewellery stores to choose from, many of which seem to have sales on every week, the customer can decide not only to shop elsewhere but even try to haggle for a discount. Therefore the bargaining power of buyers is:

HIGH

Threat of Substitutes

Is the probability that a consumer will purchase something else. Since jewellery is a luxury item and not a necessity, consumers will choose to
spend their income on many thing before jewellery even makes the list. Not only do necessities come first, but other luxury items may be higher on the list of things to purchase like golf clubs or bicycles. Therefore the threat of substitutes is:

HIGH Degree of Rivalry

Is the level of competition within the industry. Even though only three out of the four forces were identified as high, the retail jewellery industry is still extremely competitive. The one anomaly was the power of suppliers and the only reason that was low is that the suppliers operate in such a competitive state as well, giving more bargaining power to their customers, the retailers. Therefore the degree of rivalry is:

HIGH Strategic Grouping

A competitor analysis compares a company against each direct competitor. It relies on four key areas for comparison. These are future objectives, current strategy, assumptions, and capabilities. By looking at these concepts a response can be formulated and the company can create a strategy. The closest competitor of Michael Hill is Pascoes. They have similar strategy with pricing and target market. Walker and Hall aims at a higher level with more designer items and craftsmen in store. Partridge Jewellers is a contrast to Michael Hill with only the best brands and handmade jewellery in their stores in only four select high end shopping districts in New Zealand.

Conclusion

Through a PESTEL analysis, an industry environmental analysis and a strategic grouping map, the retail jewellery industry can be evaluated. The PESTEL analysis showed various trends that may have an effect on the industry while the industry environmental analysis showed that the competitive rivalry in the industry is quite high. The strategic grouping map illustrated that the company itself shares a target market with few other large companies but does not display the hundreds of other smaller independent firms that offer similar services.

What has been learned in this assessment is that Michael Hill has cornered the jewellery retailing industry in New Zealand and has bucked the financial trend by being one of the companies on the NZX to make large gains during the recession. Through low prices, Friedman Group staff training, and a good understanding of their industry environment, they have become one of the leading retailers in New Zealand.