Visit the Kay Jewelers Web site, and you’ll see something nontraditional for a mall-based mass-market jewelry chain. Sure, there’s a box touting an “inventory clearance,” but there’s also a prominent banner boasting that every Kay store now has a “diamontologist,” with degrees from the Diamond Council of America.

Some might scoff that this isn’t the same level of education one finds in the best high-end independent jewelers, with their gemologists and graduate gemologists. But when was the last time a mall chain talked about its salespeople, instead of just its sales?

It’s another indication of how the big chain jewelers are upping their game—and getting back to their roots as, well, jewelers. This upmarket makeover is something that’s reflected in better service, better-trained salespeople, and better-quality product. And while neither Zales (the store) nor Kay will likely soon be taking on Tiffany, it’s a pronounced change in a segment once known for low prices with quality to match.

“You look at the jewelry chains, and you are seeing quality product in there that didn’t used to be there,” says Terry Chandler of the Diamond Council of America. “A lot of the big retailers are looking at their models and rethinking what works for them.”

As Ken Gassman, a veteran jewelry-chain watcher, says: “Upscale seems to be the word of the day.”

OBLIGATORY IMPROVEMENT

To hear analysts tell it, the chains had no choice. First, consumers are better educated today—and expect better service and quality.

Even Zale’s own research found that “customers felt that we needed to improve the quality and value of our merchandise, and our assortments were too narrow and lacked uniqueness,” Paul Leonard, president of the Zales division, told analysts in a conference call following release of the company’s financial results.

“You have to be a better jeweler today,” says Chandler. “The customer is intelligent, they have the Internet, they just expect more. Today consumers walk into the stores, a lot of the time they are more educated than the salespeople. And they won’t buy from someone who knows less than they do.”

Second, stores like Wal-Mart, Target, and an increasing force in the market, Kohl’s, have all but cornered the low end. To stay afloat, jewelry chains have to differentiate themselves, specialize, and carve out their own niche.

“Our drop [in 2004] was in low-quality diamond fashion product that you see more and more of at Wal-Mart and JC Penney and Kohl’s,” Leonard says. “We felt we had to reposition to be out of the direct line of fire of mass merchants.”

STERLING SPARKLES

Moving upward has worked wonders for Sterling, America’s No. 2 chain and arguably its most successful. Christmas same-store sales were up 5.5 percent, and total dollar sales grew 10.5 percent.

Results look particularly good for its “big box” chain, Jared. Analysts credit Sterling’s success to everything from its stable corporate culture to the relatively good wages it pays salespeople to its popular ad campaign, “Every Kiss Begins With Kay.” “Sterling right now is the chain to emulate,” says Jeff Pfeffer, senior vice president for diamonds and jewelry at HSBC Bank.

Its bigger brother Zale Corp. is trying to do just that—in part, as even its executives admit, because Zales has lost market share to Kay. Over the last year, Zale has undergone a substantial transformation: It’s eliminated several annual promotions, upgraded its merchandise—10k gold and promotional diamond products are mostly out—and is advertising in somewhat tonier venues. “We have Zales in magazines for the first time like Elle, InStyle, Marie Claire, Vogue,” chief executive officer Mary Forte said at the analyst call. “We have 52 weeks on the lead page of the Style section of the New York Times.”

Its new ad campaign is more image-based than its past campaigns were and is built around the slogan “Be Brilliant.” It’s also beefing up its store design and sales training—all part of its plan to “enhance the customer experience.”

“We want to be less product and price-point focused, and more focused on style, fashion, and quality,” says David Sternblitz, the company’s vice president and treasurer. “The strategy is to be less like a mass merchant and more like a fine specialty jeweler.”

This repositioning has come at a cost. The company has had a mediocre year, with lackluster sales and profits, and Christmas same-store sales increased only 0.9 percent, below projections. “We are disappointed,” Forte said in a statement, using a word she has uttered a lot this year.

The problem might be that Zale made a lot of changes recently—too many, some think. “They changed their merchandise, their vendors, and their advertising all fairly dramatically, plus they launched a catalog versioning program,” says Jeff Stein, a Zale analyst and managing director of Key Bank Capital Markets. “To do all those things in one year and to execute them all flawlessly is asking a lot. As far as where they are going, I think it’s the right direction. It’s unfortunate it all seemed to come together in one year.”

The sheer size of the company—2,375 stores—doesn’t help, Gassman notes. “It takes a long time for change to happen at Zale,” he says. “It’s such a huge company. Salespeople have to learn how to sell upscale goods, they have to stop discounts when customers walk in the door. Those are huge obstacles for Zale to overcome.”

Jeff Taraschi, president of Interactive Group Limited in St. Petersburg, Fla., who has long followed the majors, says the company is in part burdened by its history.

“You are talking about quantum change at Zale,” he says. “In the late 1990s, the Zales division was very dependent on the percentage off. Now they are living with the backlash. I know of very few examples where highly promotional businesses were able to reduce promotions and reshape their image. It remains to be seen if they can re-educate the customer to re-embrace Zale for what it once was: A place to get great jewelry with very educated salespeople.”

And, in fact, the company will clearly resort to its old ways when things are not going well. The Dallas Morning News reported that Zales stores hung “lowest prices of the season” banners on its stores the week before Christmas, and its Web site is almost entirely taken up by a big red box saying prices are “up to 50 percent off.”

“We are not walking away from promotional activity altogether,” says Sternblitz. “There is an appropriate time for that, particularly in that pre-Christmas period. But if you look year after year, we haven’t anniversaried a lot of these promotional low-margin events.”

“Is everything perfect now?” he adds. “No. We admit there have been a lot of changes at Zale in a short period of time. It will take time and will continue to evolve. But we feel the strategy is working, and it’s a matter of time before it’s working as it should.”

PROBLEMS AT OTHER CHAINS

As for the other chains, this is an uneasy time. Leased jewelry department operator Finlay has been hit hard by Federated’s merger with May—which will result in its closing nearly 200 doors—and holiday sales results did not match expectations: Comparable-store sales rose only 1 percent, less than the 2.5 percent to 3 percent expected.

Taraschi says Finlay is struggling with the same woes as the other majors. “Finlay has been as promotional as anybody,” he says. “They sit in a department-store environment where it’s one promotion after another.” (Finlay representatives did not return a call for comment.)

Two other big chains—Friedman’s and Whitehall—spent most of the last year in turmoil. The former emerged from Chapter 11 bankruptcy protection in December, and it, too, is looking upmarket, with plans to shed its controversial “credit jeweler” image. Whitehall has suffered from legal problems and a revolving door in its executive suites since the death of chairman Hugh Patinkin. Its board recently approved a takeover effort while resisting one from one of its largest shareholders.

None of this means that you’ll never again see a “percentage off” sign or low-end product at your local mall. But, analysts agree, in this age of Wal-Mart, the big chains will have to more carefully pick their battles.

“It’s easy to build business with an increasing level of promotion year to year to year,” notes Taraschi. “But you reach a point where you can no longer promote anymore. Stores today have to create a relationship with the customer that isn’t simply based on price and promotion.”