Marks Brothers Jewelers, Inc.

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Marks Brothers Jewelers, Inc.

155 North Wacker Drive
Chicago, Illinois 60606
U.S.A.
(312) 782-6800
Fax: (312) 782-2367
Public Company
Incorporated: 1895
Employees: 1,000
Sales: $155.5 million (1997)
Stock Exchanges: NASDAQ
Ticker Symbol: MBJI

SICs: 5944 Jewelry Stores; 3911 Jewelry, Precious Metal

Marks Brothers Jewelers, Inc. is a leading American specialty retailer of fine jewelry, primarily gold and diamonds, which owns and operates 188 stores in 24 states across the country. Under the names of Whitehall Company Jewellers, Lundstrom Jewelers, and Marks Brothers Jewelers, the company runs stores in upscale city and suburban shopping malls. From 1992 through the end of fiscal 1997, Marks Brothers Jewelers reported a string of consecutive sales records and earnings. Fiscal 1997 ended with an impressive increase in revenues of almost 20 percent over the previous year, amounting to $155 million. Much of the company’s success is due to its ability to take advantage of the highly seasonal aspect of jewelry sales, which occur during the last quarter of the year and usually ends on December 31. The resulting financial success has enabled Marks Brothers to expand rapidly and increase its profile and sales volume. In 1995, the company opened a total of 14 new stores, while in 1996, 19 stores were opened in prime shopping mall locations. This rapid expansion is very unusual in the jewelry retail industry, and provides a good indication of the company’s talented and astute management team.

Early History

Marks Brothers Jewelers began its long history in 1895, when a group of brothers from Eastern Europe decided to settle in Chicago and open a retail jewelry store. Pooling their meager resources, the brothers established their family store in the center of downtown Chicago, and welcomed the growing middle and upper classes of the city that were inclined to spend their money on high-quality, elegant diamonds, watches, rings, earrings, and fashionable hat pins. Within a very short time, Marks Brothers Jewelers had garnered a reputation as one of the most reliable and trustworthy jewelers in the city of Chicago, with some of the finest diamonds in the entire Midwest.

During the early years of the 20th century, and through the end of World War I, Marks Brothers Jewelers developed its reputation as a first-rate jeweler. At that time, Chicago was a city that provided ample opportunity to satisfy the ambition of entrepreneurs yearning for success. The railroads had made Chicago hog-butcher to the world, and families such as Kraft and Hormel made their fortunes from the stockyards on the southside of the growing metropolis. The families that managed this new wealth spent their money on items that indicated their status in society, such as diamond-studded tie pins, and gold brooches to highlight the dresses of women attending gala winter balls. But the prosperity of the city was also shared by the growing middle class, who also frequented Marks Brothers Jewelers and purchased items for special occasions, such as diamond engagement rings. By 1919, the company had not only established and solidified its reputation as a jeweler, but had also laid a firm financial foundation for its continuation into the future.

The “Roaring Twenties,” as they were called in the United States, had a particularly load roar in Chicago. The Volstead Act, which prohibited the production, sale, and consumption of alcoholic beverages, was a godsend to gangsters who illegally distributed beer, wine, and hard liquor to customers in “speakeasies” (private membership clubs). The ownership of these clubs and the territories they were located in generated bitter and violent battles between the gangsters for the large amounts of cash involved. In addition, many individuals in Chicago were making large sums of money speculating on the stock market, and there seemed no end to the growing wealth in the city. Many of these individuals who had made large sums of money legally and illegally bought their diamonds at Marks Brothers Jewelers.

Although the stock market crash of October 1929 sent the entire United States economy into a downward spiral, Marks Brothers Jewelers was able to survive this difficult period. Sales dropped dramatically, of course, and the company was forced to lay off many of its employees, but the brothers were able to gather together their family in order to run and operate the store themselves. As the Great Depression continued throughout the decade of the 1930s, sales at the company remained stagnant. Yet a glimmer of more profitable times was just around the corner.

World War II and the Postwar Period

Even before the beginning of World War II, the country’s economy began to improve. President Franklin Delano Roosevelt implemented a comprehensive national program to place the United States on a wartime production schedule, with the manufacture of materials for troops that would be sent overseas to fight the Axis Powers of Germany and Japan. The resurgence of American manufacturing and production stimulated the economy and lifted the country out of the throes of the Depression. As a result, employment rose and people were paid comfortable wages. No longer worried about putting food on the table, people were able to spend more money on luxury items, such as marriage bands and diamond rings. Gradually, with the revitalization of the economy, specialty retailers like Marks Brothers Jewelers benefited from the increase in consumer purchasing power.

By the early 1950s, Marks Brothers Jewelers was riding the wave of American economic prosperity. Employment was high, wages were increasing, and America was the undisputed economic leader of the free world. All of these developments meant that many more American citizens were doing better than they had ever done before, and were able to pursue leisure activities and buy luxury items like no time in the past. This meant higher sales for Marks Brothers Jewelers, especially as more and more young couples decided that expensive diamond rings and gold wedding bans were necessities for their weddings.

Throughout the 1950s and 1960s, Marks Brothers Jewelers prospered, albeit unobtrusively. Still managed and run by family members, the company never valued as a priority the expansion of operations through a strategic acquisitions strategy or, for that matter, any other way. The family was satisfied with running the company as a relatively small but highly regarded operation, with a modest-sized, long-term staff that was knowledgeable about diamonds and fine jewelry. A loyal customer base that grew steadily over the two decades was also a significant factor. By the time the 1960s had come to an end, Marks Brothers Jewelers had increased its revenues dramatically since the end of World War II, but still the family did not want to expand the company’s operations.

Growth and Expansion

The jewelry specialty retail business changed significantly during the 1970s, as companies which had traditionally operated as one-store retailers began to expand their business by establishing new stores in different parts of one city or by expanding into different cities altogether. Thus although a well-known company might have its flagship store in downtown New York, it would begin to open stores in Chicago and Los Angeles, for example, and also take advantage of the enormous demographic changes that led to the creation of the suburban “mall.” This latter development changed the jewelry retail business forever, since many companies decided at this time to rent mall space in order to attract the growing and affluent middle class that was moving to the suburbs.

Marks Brothers Jewelers did expand its operations during the 1970s, and gradually opened nine additional stores in various sections of downtown Chicago. However, there was no serious consideration of expanding company operations farther than the city limits. This attitude changed in 1979 with the arrival of a new and younger management team. Hugh Patinkin became chairman, president, and CEO, while his brother Matthew Patinkin assumed the position of executive vice-president of store operations, and John Desjardins was brought on board to act as executive vice-president of finance and administration.

Throughout the 1980s, the new management team implemented a comprehensive strategy to expand and improve company operations. Rejecting the trend toward developing high-volume superstores that sold diamonds and jewelry, such as Service Merchandise, Marks Brothers Jewelers remained faithful to its own brand of a unique, small store concept. What this meant was that the size of a Marks Brothers store averaged around 800 square feet, but could be as small as 400 square feet, while the average size of most jewelry stores averaged 1,500 square feet. In addition, management at Marks Brothers decided to locate new company stores in center court locations in malls. The center court location provided the company with a high profile, and the small store concept helped keep rent and operating costs to a minimum. By the beginning of 1990, the new management team had opened 100 new stores in malls across the country.

The 1990s and Beyond

The impressive expansion achievement of Marks Brothers was not done through an acquisition strategy but by a detailed and careful analysis that resulted in choosing prime mall locations one by one. Most of these new stores were opened under the names of either Whitehall Company Jewellers or Lundstrom Jewelers. The modus operandi of the management team was to first open a Whitehall Company Jewellers store, and later open a Lundstrom Jewelers store, an upscale rendition of the Whitehall store in regard to its merchandise, in the same mall. In this way management minimized competition, and customers were not usually aware of the fact that the parent company, Marks Brothers, operated the two stores.

In 1995, the company continued its aggressive growth strategy by opening 14 additional stores, and in 1996 there were 19 new store openings. Most of these stores were located in two new locations, San Diego, California, and Orange County, California. The success of these stores, especially in an extremely competitive environment where upscale merchandise and elegant surroundings were of utmost importance, was largely based on the knowledge and effectiveness of a highly trained sales force.

To make certain these stores were a success, management decided to clean house and rid the company of nearly 10 percent of its sales force that was not meeting company standards. With all the pieces now in place, the company was ready to take the next major step in its expansion strategy, namely, make the change from a private to a public company. In May 1996, Marks Brothers Jewelers went public with a stock offering that garnered over $52 million to fuel its continued expansion.

By the end of fiscal 1997, the company was operating 188 stores in 24 states, all under the names of Whitehall Company Jewellers, Lundstrom Jewelers, and the Marks Brothers Jewelers Company. Traditionally having sold its wares to more affluent customers, management also decided to upgrade merchandise in all of its stores. Diamond jewelry now comprised most of each store’s inventory at approximately 60 percent, while gold represented about 20 percent and gemstones about 15 percent of the inventory respectively. The company’s focus on selling more diamond jewelry was related to its goal of attracting an aging baby-boomer market that would grow dramatically during the next 10 years. The company had discovered that some of the top items sold to this demographic group included a $7,000 pear-shaped diamond ring, a $3,000 trillioncut diamond ring, and a $6,000 diamond solitaire ring. Even more exciting for the company was the discovery that items selling at over $1,500 accounted for approximately 25 percent of sales at its Lundstrom and Whitehall stores, while items selling at over $3,000 accounted for 12 percent of sales.

Marks Brothers Jewelers has grown so rapidly in such a short period of time that it is presently the fourth largest mall jeweler in the country, and the sixth largest jewelry retailer overall. Zales, Sterling Jewelry, and Service Merchandise are the company’s prime competitors in the malls, while Helzberg Diamond rounds out the general competition. Only two of these companies, Zales and Sterling, continue to expand their operations. Zales, which operates over 1,000 stores, has initiated a major marketing effort to capture new customers and intends to open nearly 200 new stores in the near future, and Sterling, having just gone through a period of consolidation, is also concentrating on opening new stores in malls throughout the United States. Service Merchandise is closing 60 of its stores, and Helzberg Diamond has only opened 10 new stores during fiscal 1997.

With a growing trend toward consolidation in the industry, and the lack of new competitors on the horizon, Marks Brothers Jewelers is well situated to take advantage of the growing market demand from aging and affluent baby boomers for luxury items such as diamonds, jewelry, and gemstones. The family business that once regarded growth with suspicion is now positioned to become one of the most prominent jewelry retailers in America.