Friedman’s Inc.

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Friedman’s Inc.

4 West State Street
Savannah, Georgia 31401
U.S.A.
(912) 233-9333
Fax: (912) 238-4873

Public Company
Incorporated: 1920
Employees: 3,071
Sales: $287.3 million (1998)
Stock Exchanges: NASDAQ
Ticker Symbol: FRDM
NAIC: 44831 Jewelry Stores

Friedman’s Inc. is a chain of some 470 specialty retail jewelry stores throughout the southeastern United States and adjoining areas. Based in Savannah, Georgia, it has stores in 22 states, and sells to a low- to middle-income clientele in the 18-to-45 age bracket. The company maintains its position as “The Value Leader” (a registered trademark) among specialty retail jewelers by offering a wide selection of merchandise, prices comparable to those of such principal competitors as Zale’s, and strong customer service. Founded in 1920, Friedman’s remained outside the limelight until its purchase by the Morgan Schiff & Co. investment firm in 1990. Since then it has experienced explosive growth, in the process employing a strategy that focuses on “power strip centers” (or power strip malls) as opposed to large upscale shopping malls. This allowed it to operate at considerably lower overhead than jewelers selling from more prestigious locations, and during the mid-1990s Friedman’s rapid expansion elicited a great deal of interest in the financial community. By the latter part of the decade, however, it had experienced growing pains which led to a shuffle of upper-level management.

A Tale of Two Brothers in the 1920s

The history of Friedman’s may be traced to two brothers, Abraham and Benjamin Friedman, in south Georgia. In 1909, a merchant named Sam Segall came to the town of Savannah on the coast of Georgia, where he founded a jewelry store. In 1920, he died, and his two nephews Abraham and Benjamin took over the business. Because their name was Friedman, they changed the name of Segall’s store. At some point Abraham moved away from Savannah, heading north to Augusta, on the Georgia-South Carolina line. Benjamin stayed behind, and in time they split up their holdings, which consisted of seven stores.

By all appearances the parting was amicable, and the two agreed that neither would interfere in the other’s territory until their companies had grown more. Thus out of the line of Abraham came A. A. Friedman, an Augusta-based jewelry chain with 127 stores in 1997; and from the line of Benjamin came Friedman’s Inc. For generations, it appeared that there would be no conflict between the descendants of Abraham and the descendants of Benjamin, because both were family-owned businesses,

However, by the late 1990s, Benjamin’s former stores would no longer belonged to Benjamin’s children. By contrast, A. A. Friedman remained under the control of the Augusta, Georgia Friedmans. Ultimately the two companies would clash over the right to the Friedman name, but before the owners of Friedman’s took their troops into the fray, an empire would have to be built.

Seventy Quiet Years

For 70 years, the store founded by Benjamin Friedman remained well outside the limelight. As with many a private company later acquired by an outside investment firm, most of Friedman’s early history is all but forgotten, with one notable exception. Having built its business, with mall-based retail stores—as is typical of most jewelers—Friedman’s in 1979 found itself in a difficult position. It already had one store in a certain mall, and desired to open a second one for reasons that are no longer clear. Friedman’s management did not want to confuse customers by operating both stores under the same name, so they developed the “Regency Jewelers” tradename.

According to the company’s 1998 annual report, “Since then, the company has continued the use of the name when it deems it to be advantageous for advertising or marketing purposes. The company also uses the ‘Regency Jewelers’ trade-name in 37 locations as of September 30, 1998. With the acquisition of all the rights of A.A. Friedman Co., Inc. of Augusta, Georgia... to the Friedman’s Jewelers tradename, the company plans to change substantially all of the Regency Jewelers stores to Friedman’s Jewelers stores during January 1999.” Conflict over names—Friedman’s and Regency—would be a recurring theme for the company.

1990: Morgan Schiff Acquires Friedman’s

In a 1995 profile of Friedman’s, Scott Thurston of the Atlanta Journal and Constitution described it as “no newcomer.” Over the course of its first 70 years, he wrote, it had become a “quietly profitable family-run company” which by 1990 had 48 mostly mall-based stores. In the latter year New York investor Philip Cohen and his investment firm of Morgan Schiff & Co. formed a partnership and purchased Friedman’s for $50 million from the Friedman family.

Morgan Schiff already owned a similar company, Crescent Jewelers of California, and perhaps its experience prepared it for the vicissitudes of the industry. Certainly its first two years as owner of Friedman’s would have been disappointing to any owner lacking in a long view: “Initial results were dismal,” wrote Thurston, “as the recession and buyouts drove Friedman’s into the red in 1991 and 1992.”

The turning point for the company came in 1993, when Morgan Schiff brought in Bradley Stinn as chief executive officer. Just 27 years old when he became a managing director for Morgan Schiff in 1986, Stinn had served as chief financial officer for Crescent Jewelers from 1990 to 1992. When he arrived in Savannah to take over Friedman’s, he was only 33.

Stinn, in turn, attributed the company’s turning point to a visit he made in 1992, when he was driving through south Georgia with Robert Morris, executive vice-president for store operations. On their way to Florida to visit Friedman’s outlets there, they stopped at the coastal town of St. Mary’s, a city with a mushrooming economy thanks to the flow of purchasing dollars from Navy personnel stationed at the nearby Kings Bay Submarine Support Base. Stopping at a strip mall with a Wal-Mart as its anchor store, Stinn offhandedly asked Morris, “Think you could do business with a store here?” Morris answered, “I could do business out of my trunk here.” The rest, as Thurston reported, was company history: “Before leaving town they tracked down the shopping center’s owner and signed a lease on the hood of his car. That episode—and the subsequent success of the St. Mary’s store—prompted Stinn to go full-bore with what he calls a ‘Wal-Mart vapor trail’ expansion strategy. So far, the results have been lustrous.”

The Power Strip Mall Strategy of the Mid-1990s

Thus was born what would become Friedman’s strategy in the mid-1990s, as it defied tradition and embarked on a pattern of wild growth. Historically, jewelry retailers had established their locations in elegant-looking mall stores—which carried a hefty price tag. Stinn, on the other hand, proposed to put Friedman’s stores in “power strip malls” like the one in St. Mary’s. Whereas malls were collections of stores under one roof, their doors opening into a common area, strip malls were strings of separate stores with doors all facing toward a vast parking lot. The strip mall’s “anchor” (or primary store in the group) drew customers who would presumably visit other stores as a result of stopping at the anchor, usually either a supermarket or a discount retailer such as Wal-Mart. The “power” designation simply suggests the great volume of shoppers drawn in by the anchor.

Certainly power strip malls lacked the cachet associated with traditional shopping malls, but they also lacked the costs as well. According to Pablo Galarza of Investor’s Business Daily, a retailer could in 1994 set up a store in a power strip mall for about $225,000. If the owner then chose to “walk away” and cancel his lease, he would pay a penalty of perhaps $40,000. By contrast, in a large indoor shopping mall a retailer would shell out $400,000 just to get started, and a whopping $490,000 if he chose to walk away.

In the words of Craig Weichmann, an analyst for Morgan Keegan & Co., “Schiff ran the numbers and the light bulb went of. Power strip malls offer attractive economics compared to large mall stores. Not only is competition less intense in power malls, there are more of them.” Referring to two extremely upscale jewelry stores, Stinn told Galarza, “We aren’t looking to be Tiffany’s or Cartier. We’re interested in selling to the average working person.”

From 48 stores in 1990, the number of Friedman’s retail outlets grew more than threefold in the next several years. As Phillip Carter wrote in 1995 in Investor’s Business Daily, “Company officials said Friedman’s has just begun growing. Of the 750 retail stores it hopes to acquire in the Southeast, it has only purchased 158.” Among the factors contributing to this runaway growth were the installment of a new computer system, of which CFO John Call said, “Prior to the installation of that system, the company was operated manually, if you will. It allowed us the platform from which to control growth—that was a big add.”

This facilitated a change in the way the company offered credit, allowing point-of-sale credit agreements. By contrast, Carter wrote, “At Zale’s, customers fill out credit applications. These are electronically processed at a central location while the customer waits in the store. If these requests for credit lines are rejected, customers can be embarrassed.... Friedman’s policy gives the local employee and store manager the power to issue credit up to certain limits at the store level.”

Company Perspectives:

Friedman’s believes it has developed a distinctive franchise based on its value orientation, loyal customer base, and strong name recognition, having served the Southeast since 1920.

Thus technology helped the chain put into practice its policy of giving managers greater power over individual stores. With this freedom came greater responsibility, and Friedman’s likewise compensated its “partners” (as Stinn began calling managers) on the basis of their store’s sales and rate of collection. It was a system that, according to Stinn, “attracts people who want to stand on their feet.”

The Late 1990s and Beyond

In the year that ended September 30, 1997, Friedman’s opened a staggering 83 locations. By then it had become the third-largest jewelry retailer in the country, and in the seven months between the end of the 1997’s fiscal year and an April 1998 interview with Stinn in Jewelers Circular Keystone, the company had added 40 more locations while net income rose by a phenomenal 39 percent. However, the company’s rapid expansion came with a pricetag.

There had been a drop in comparable store sales and return on investment, while the ratio of bad debt levels to total revenues had increased. As a result, the company had shuffled its top management. Stinn, who remained as chairman, had turned over the CEO position to former Blockbuster Entertainment executive Richard Ungaro. Taking a controversial step, Friedman’s had sunk $25 million into its privately owned sister corporation, Crescent (of which Stinn would thenceforth be CEO), in just 18 months. “Friedman’s executives,” Glen Beres reported in Jewelers Circular Keystone, “say that Crescent, which has struggled in recent years, is back on a positive track with expansion plans as ambitious as its East Coast counterpart.”

Then there was the dispute with the descendants of Abraham Friedman. For some time, Friedman’s and A. A. Friedman had been locked in a struggle over the name—a struggle initiated by Friedman’s. In 1997 the two parties agreed that A. A. Friedman would turn over the rights to the name in exchange for $7 million. “It’s kind of sad,” one Augustan told the hometown Chronicle, adding “It won’t seem the same without the name Friedman’s.” Under the terms of the agreement, A. A. Friedman would be able to continue using the name for two more Christmas seasons before Friedman’s could enter its territory with its own name. In the meantime, A. A. Friedman would be phasing in the name it already used for some of its stores, Marks & Morgan. (Marks was the maiden name of Betty Friedman, the recently deceased A. A. Friedman chairwoman.)

Ironically, the name change seemed to hurt Friedman’s in the short run. As Stinn told Beres, “we haven’t gotten the full benefit of the agreement yet, because we don’t have unrestricted freedom of operation in those markets until January 1999. In fact, there might have been some detriment, because [A. A. Friedman] advertised they were changing their name. We had a lot of people walk into our stores at Christmastime and say, ‘I thought you were changing the name of your store’.” In a further irony, the 1998 annual report stated that “The Company has received a letter from Service Merchandise”;—one of its leading competitors—“alleging that Service Merchandise owns an incontestable federal registration for the trademark ’The Helbros Regency & Design’ and that the Company’s use of the service mark ‘Regency Jewelers’ infringes this mark. Service Merchandise has only requested that the Company halt further use of its Regency Jewelers mark. The matter is close to settlement.”

Another thing that remained to be settled was the future of Friedman’s relationship with Crescent. Asked if he thought the large investment in the sister corporation “could come back to haunt Friedman’s,” Stinn was emphatic in the negative: “The number-one fallacy is that the Crescent investment has kept Friedman’s from doing something it would have otherwise done. That is flat-out wrong. If that money didn’t go into Crescent, it would be in the bank now, earning interest.” With regard to the possibility of a future merger between Crescent and Friedman’s, however, he left it up to discerning readers to draw their own conclusions: “It’s been 10 years since the leveraged buyout, and Crescent shareholders need to see a financial return. So Crescent has two considerations: to get liquidity for the investors by going public as an independent company or by merging into some other entity, Friedman’s being most likely.”