Hallstead Jewelers has been one of the premier jewellers in the United States for 83 years. Located in the largest city in the tri-state area, the company has been a family-run business since its inception. Until 1999, the company had operated at the same location due to its excellent reputation and loyal customer base. However, in 1999, Hallstead Jewelers began to experience a decline in profits and stagnant sales. After a few years, the owners realized that relocation was necessary.
In 2004, owners Gretchen Reeves and Michaela Hurd decided to move to a larger building in an effort to expand the business. The new facility was only two blocks away from the original location, so it was expected that there would be no loss of customers. The owners also decided to expand their product line to increase sales, but they faced competition from large retailers like Tiffany and Company and online businesses like Blue Nile. Unfortunately, the relocation did not produce the results that Gretchen and Michaela had hoped for.
Instead, revenue continued to fall. An analysis was conducted to identify the operating issues and determine a course of action to improve revenue and business profitability. The following issues were identified: the company has not kept up with changes in the business landscape, revenue and profits have continued to decrease, and the company faces competition from other local businesses and online businesses that offer similar products.
The breakeven point for the number of sales tickets was $4,616, $5,032, and $7,442 in 2003, 2004 and 2006 respectively. The breakeven in sales dollars was $7,417 in 2003, $7,669 in 2004, and $11,556 in 2006. The margin of safety was $1,165 in 2003, $432 in 2004, and negative $845 in 2006, showing a decline in the margin of safety.
One approach to improve business profitability is to reduce the sales price. A 10% reduction in price is expected to increase the number of tickets sold to 7,500. However, this would still require selling an additional 141 items at the reduced price to reach the break-even point.
Gretchen’s grandfather and father have said that sales commissions have been key to the company’s success, but Gretchen has the idea of eliminating them. Eliminating sales commissions would decrease the breakeven point in sales volume by $1,116.72, which could have a positive impact on the growth of Hallstead Jewelers.
Increasing advertising by $200,000 would increase the breakeven sales by $416.9, but it would also increase total expenses and decrease net income. If fixed costs remain the same for 2007 as in 2006, average sales tickets would have to increase by $122.50.
The recommendation is for Gretchen and Michaela to eliminate the sales commission. The company needs to avoid or reduce costs during this difficult time, and eliminating sales commissions will decrease the breakeven point in sales volume. The company should also not increase advertising by $200,000 because it would further increase expenses and decrease net income. Reducing the price by 10% would not be beneficial either.
