The Zale saga is a classic American success story, born in Old World persecution and nurtured by New World opportunities.

It begins in the early 1900s, when an Orthodox Jewish family – Samuel Zalefshy; his wife, Libby; and their young sons, Morris and William – fled czarist Russia’s violent pogroms for America, settling in Texas. When Libby’s brother, a Fort Worth jeweler, moved his store to Wichita Falls, Texas, Morris Zalefshy accompanied him. It was about then, too, that Morris (known to all as M.B.) shortened his name to Zale. “I’m an American, not a Russian,” he said. “I want my name to reflect that.”

In 1922, M.B. started his own business in nearby Graham, Texas, renting a corner in a drug store and setting up a pair of jewelry display cases. His business acumen was already obvious. He put in 16-hour days seven days a week. He was shrewd, marketing to middle- and lower-income consumers shunned by other jewelers. He was also innovative. To attract customers’ attention, he played a Victrola (an early record player, unique in those pre-radio days) outside the store door at full volume.

But Graham was a hotbed for the Ku Klux Klan, and Zale was its sole Jewish resident. His business declined, and he feared for his life. In late 1923, he returned to more tolerant and oil-money-rich Wichita Falls.

Starting over. Zale began anew, but this time, it was a family affair. He took over a store vacated by his uncle. Six of the seven stockholders of the new Zale Jewelry Company, formed March 17, 1924, were family members. M.B. was president and his brother William vice president. Other relatives joined in later years and became important officials.

M.B. wanted to build his business by selling to working people. To do it, he launched an aggressive three-part merchandising program that would have far-reaching influence.

First, he used credit to sell jewelry for “1 cent down and a dollar a week.” This was revolutionary. Few working-class people could afford fine jewelry at the time. Most fine jewelers catered primarily to upper-class clients, and jewelry sales were cash-only. To reach working people with affordable jewelry, he had to use credit.

The idea wasn’t original, as he often said. A few Detroit and Chicago jewelers already experimented with credit. The difference was that Zale used his credit program as a marketing tool to build traffic and sales, not a profit maker. “An honest face buys anything in this store,” said his ads. There were no carrying charges, and Zale refunded money to anyone who could buy the same jewelry cheaper for cash.

The results were stunning. From the first day, most Zale sales were made on credit, and that continued for decades.

A second innovation was mass marketing. At a time when jewelers rarely advertised, Zale bought advertising supplements several pages long with bold headlines in local newspapers. “It made Zale a household name,” says Tommy Stringer, a Texas college professor who has studied the history of Zale Corp. Aggressive promotion and credit transformed jewelry retailing by opening it to the middle class. “He did for the jewelry business what Henry Ford did for the automobile industry,” says Stringer.

A third factor was Zale’s emphasis on high-quality wares and honest and friendly customer service. “Everyone who walks into this store is treated the same,” M.B. Zale declared.

Zale’s store was thriving by the end of its first year. In 1928, he opened a second store in Tulsa, Okla., and a third in 1929 in Oklahoma City, both booming oil towns.

Then America’s economy collapsed.

Depression and war. The Great Depression hit Zale hard. Jobless people couldn’t afford jewelry, even on credit. To cope, M.B. sought but was denied a $10,000 loan from a Wichita Falls bank. It was a make-or-break moment. He drove to a bank in Oklahoma City and pleaded with the loan officer, who okayed a $9,600 loan that saved the company. A grateful Zale kept a corporate account there for decades. But he never borrowed another dime.

In 1935, the firm began opening one store annually for the next several years. That led Zale Jewelry Co. directors in 1938 to centralize purchase and distribution of all stores’ merchandise through the Wichita Falls location. “It was the beginning of the store chain concept for Zale,” says Stringer.

By World War II, Zale had 12 stores in four states. The war halted expansion and created difficulties owing to rationing of strategic metals. Despite wartime problems, the 1940s saw important developments.

The firm opened a New York City office to purchase gold, jewelry, and watches for its stores. By the late 1950s, it was also importing, grading, and mounting diamonds and importing and casing watch movements for its stores.

In 1944, Zale expanded beyond its working-class clientele with the purchase of Corrigan’s, a high-end Houston jewelry store. It was Zale’s first acquisition and the seed of its guild division, which catered to affluent consumers and acquired many fine jewelry stores and chains.

In 1946, Zale Jewelry Co. moved to Dallas. The metropolis was centrally located in Zale’s growing retail network. It also had a major airport, “which made Zale’s rapid postwar expansion possible because any city in the United States was accessible within hours,” says Stringer. “That enabled [Zale] officials to monitor business activities and to investigate potential expansion sites.”

In the late 1940s and ’50s, Zale stepped up expansion, opening several stores a year, seizing opportunities wherever company officials found them rather than following a plan. Growth also came from ongoing acquisitions, such as the upscale Bailey, Banks & Biddle chain in Philadelphia.

By 1957, the Zale Jewelry Co. had grown so much that a restructuring was necessary. Several top management posts were added, and M.B. and William Zale retired as president and vice president. They remained involved, though – M.B. as chairman and William as a director and head of financial committees. Under their leadership, the company had become the world’s largest jewelry chain, with $36 million in annual sales, 74 stores, and 1,500 employees in 16 states. Yet, it was only a prelude to an era of even more aggressive growth.

Lipshy legacy. Ben Lipshy, M.B.’s brother-in law, succeeded him as president. Though he learned the business under M.B.’s tutelage, Lipshy’s approach differed in significant ways.

Whereas M.B. didn’t go by formal business plans, Lipshy did. He created the organizational structure the company needed to support its continued rapid expansion.

While M.B. didn’t believe in borrowing, Lipshy’s first actions as president were to secure a $15 million line of bank credit and launch Zale’s first public stock offering to support new stores.

It was also Lipshy’s decision to buy Zale’s rough directly from the De Beers diamond cartel, making Zale the first retail jeweler in history to do so. Zale then created its own diamond division, with offices in Europe and plants in Israel and Puerto Rico to cut its own diamonds, another first.

Lipshy’s farthest-reaching decision was to open stores in shopping centers, a then-nascent retailing concept that transformed the way America bought and sold consumer goods. By the late 1950s, there were thousands of shopping centers nationwide, and Lipshy believed they were the future for Zale and retailing in general.

Two weeks after becoming president, he opened Zale’s first shopping-center store near Dallas. From then on, the firm focused on shopping centers, and their rapid spread across the country likewise accelerated Zale’s growth. By 1965, more than half of Zale’s 400 stores were in shopping centers. Two decades later, almost all Zale stores in the United States were in malls and shopping centers. That’s still the case with the company’s 1,125 stores today.

Growth and change. The 1960s saw accelerated expansion and extensive changes in Zale’s operations. It added new leadership posts. (New executives included M.B.’s sons Donald and Marvin and Leo Fields, a nephew of both M.B. and Ben Lipshy.) New facilities included an 18-story headquarters building with a bronze glass exterior outside Dallas, which locals dubbed the “Giant Jewel Box.”

Meanwhile, Zale was expanding into other retail industries following General Electric’s successful creation of synthetic diamonds. Company officials worried that mass production of synthetic stones might hurt Zale’s sizable diamond business. To offset that, Zale Jewelry Co. in 1965 bought a major drugstore chain and changed its name to Zale Corporation to reflect its diversification. Within a decade, the company was operating a variety of non-jewelry businesses, including shoe stores and airport newsstands, in addition to its jewelry, manufacturing, and diamond business.

The 1970s were a time of tremendous growth for Zale Corp., with stores opening almost daily. It began the decade with $321 million in sales and almost 750 stores in 42 states and Puerto Rico. By the late 1970s, the company had more than double that number of outlets (including stores in Canada and Europe) and sales approaching $1 billion.

The decade also saw important changes in top management. M.B. Zale retired as chairman in 1970, replaced by Ben Lipshy. Donald Zale became president. A year later, Bruce Lipshy, Ben’s son, was named vice president. At the end of the 1970s, when Ben retired, Donald became chairman and chief executive officer and Bruce took over as president.

They focused on jewelry-only retailing and continued growth. Most non-jewelry operations were sold, as was the “Jewel Box” headquarters. Zale Corp. moved into leased facilities in nearby Irving, Texas, where it remains today. Expansion reached a high point in 1980 with 1,845 stores (almost 500 in foreign countries) and $1 billion in sales.

Tough times. The 1980s marked the start of a difficult period for Zale. Economic recession took a heavy toll, resulting in Zale’s first red ink in decades and flat sales. By mid-decade, it sold the rest of its non-jewelry and foreign operations, reorganized into a market-driven company, and made fashion jewelry its merchandise leader.

Zale’s market dominance still made it a takeover target. In the early ’80s, People’s Jewellers, one of Canada largest jewelers (though only one-sixth the size of Zale) began aggressively buying Zale stock. Zale resisted and sued to stop it. But in 1986, after three unsuccessful tries, People’s – with aid from Swarovski International of Austria, a producer of jewelry and lead crystal – succeeded with a $550 million leveraged buyout. Zale’s board approved the offer, and the Zale and Lipshy families sold their shares. The largest and most successful U.S. retail jeweler was now under foreign ownership, and the Zale family – long a nexus for the U.S. jewelry industry – was no longer part of it.

Zale’s new owners rebuilt it according to their own blueprint. They jettisoned its manufacturing and diamond operations, consolidated its retail divisions – Zales, guild, and leased jewelry – into one, downsized management, sold a number of stores, focused on less-expensive wares, and slashed advertising.

Yet, they kept expanding and in 1989 paid $400 million for Houston-based Gordon’s Jewelers, the second-largest U.S. retail jeweler. It was one acquisition too many. A recessionary slowdown in jewelry sales plus the enormous debt the new owners incurred buying Zale and Gordon’s created financial distress. To cope, the company decentralized and downsized, closing hundreds of stores.

It wasn’t enough. By early 1992, Zale was staggering under debt, and its creditors forced it into bankruptcy. The firm spent 18 months in court-supervised financial and organizational ownership.

Revitalized. Zale emerged from bankruptcy in mid-1993 as a financially stronger, publicly held corporation. In 1994, a new management team came in with policies that reinvigorated Zale’s operations and provided a new direction.

It was led by Robert J. DiNicola, a former executive of Federated Department Stores, who was named chairman and chief executive officer, and Larry Pollock, a veteran jewelry chain executive who became president and chief operating officer. (Pollock resigned in 1996.) DiNicola built a strong team, many of them veteran department-store executives. And in keeping with Zale’s pioneering tradition, several of the top officials are women, in contrast to most of the jewelry trade.

DiNicola and his team initiated a “Back to Basics” plan. They focused on retailing fundamentals, best-selling key items, an overhaul of under-performing retail divisions (and the sale of the leased jewelry department division), special attention to employee concerns, customer service, and an $80 million upgrade of the stores.

By 1998, Zales’ annual sales topped $1.3 billion and net earnings grew 20% annually. Its three divisions were restructured as profitable, autonomous units: Zales Jewelers (national brand, called Zales, The Diamond Store, selling mainstream merchandise), Gordon’s Jewelers (regional brand, with contemporary wares varying according to locale), and Bailey, Banks & Biddle (the former guild division, with affluent customers). The company began again, cautiously, to make acquisitions with the purchase of New England’s Karten’s Jewelers chain. Investors looked favorably on the changes, and Zale’s stock price rose from $9 in 1994 to $32 in early 1999.

In 1999, at the dawn of a new century, Zale is again a leader in the U.S. retail jewelry industry. It will open up to 100 stores annually for the next few years. With Zales and Gordon’s set, it is now positioning Bailey, Banks & Biddle as a national brand for affluent customers. It is extending its core jewelry business into a variety of new channels including the Internet, direct mail, and its revamped, fast-growing Zale Diamond Outlet stores. It’s hard to believe that 75 years ago, Zale was just a single store in a small Texas city.

Zale’s Chief Speaks Out

Zale Corp.’s rebirth is largely credited to chairman and chief executive officer Robert J. DiNicola, who brought a new strategic vision to the beleaguered company. In this interview with JCK senior editor William George Shuster, he discusses his plans for the business.

You call fiscal 1998 a “breakaway year” for Zale Corp. Why?

It was the first year without looking over our shoulders at problems we inherited. It was also the first time since reorganization [in 1993] we were profitable in all four quarters, breaking our dependence on the holiday period. Previously, 100% of earnings came from that quarter. Today it’s 70%. We aim for 60% in three years.

So you’re putting less emphasis on the holiday quarter?

By no means! It remains the most critical period. But we’re competing against many other types of stores for consumers’ discretionary dollars. So it’s important to remind consumers year-round that jewelry is a wonderful investment.

Has Zale recaptured the market share it lost in the early 1990s?

It’s hard to judge. The best measure, perhaps, is productivity on a store-by-store basis. When we came in 1994, all Zale Corp. stores were averaging $650,000 in sales. Now, it’s $1.2 million. We have about 3.5% of the total jewelry market now. Whether that’s where we should be is hard to tell because the jewelry category [in retailing] as a whole has grown so much in the past 10 to 15 years. However, if we’re 3.5% of a growing pie, that’s wonderful!

What is the per-store productivity for each division, and what are your projections?

Zales Jewelers averages about $1.1 million in sales per store now. We project it will go to $1.5 in three years to four years. Gordon’s Jewelers averages just under $1 million and should go to $1.3 million. Bailey, Banks & Biddle stores are $2.2 million and should go to $3 million or $4 million. The outlet stores will average over $1 million.

What about Zale Corp.’s overall volume in the next five years?

We’re conservative planners, but overall we’ll open 75 to 100 stores a year in the next several years and renovate others. That coupled with realistic existing-store growth should total about 10% per year.

Bridal jewelry is 30% of Zale’s business, but your marketing also stresses gifts, fashion jewelry, and watches. You’ve also added non-jewelry products at Zales Jewelers like keepsake boxes and collectible bears [proceeds go to the Make-A-Wish Foundation]. Will Zale Corp. be putting emphasis on non-bridal merchandise in the future and less on bridal?

We’ve always been known as the bridal store. It’s what differentiates us from others. But there are also opportunities for us in fashion jewelry and watches. They let us use our marketing strength to create a gift-giving mentality built around a strong brand name. So, on top of that solid [bridal] base, we’ve layered on other fashion parts of the jewelry business to get consumers to walk into our stores.

What are your growth plans for Zale’s operations in the next few years?

We do 60% of our business in Zales Jewelers, 25% in Gordon’s Jewelers, and 15% in Bailey, Banks & Biddle. Zales will remain the significant contributor in volume and dollar. It has about 700 stores now. We expect to have 850 stores in malls within the next two to three years. As for Gordon’s, there are 317 stores in malls. That could become 500 to 600 in a few years. There are 105 Bailey, Banks & Biddle stores now. That will grow to 250 in three to five years.

Isn’t Bailey, Banks & Biddle the last phase in the revitalization of Zale, which began with Zales Jewelers in 1994 and continued with Gordon’s?

The last couple of years saw a major cleanup and positioning [of Bailey, Banks & Biddle]. We built up and repositioned the core assortments, closed locations that didn’t fit the customer profile, and stabilized its management. There are still high-end designer lines to be added. Next, we are transposing remaining names [of high-end chains owned by Zales, such as Corrigan’s] to the Bailey, Banks & Biddle logo. Finally, we will take the Bailey, Banks & Biddle name national over a number of years. That will include a flagship store in Manhattan.

Tell us about plans for the outlet stores.

Initially, the Zale outlet stores were designed to move excess, problematic, and discontinued merchandise. Recently, though, we found a solid customer base for branded products with great value in outlet malls. So, we concluded, this is a natural extension of our brand.

The Zale Diamond Outlet Stores, as they are called, no longer sell old or discontinued merchandise. They have their own buying, marketing, and management teams and a fresh assortment that appeals to customers looking for branded products and value. There were 13 outlet stores at the end of 1998. We see the division growing to 150 stores in three to five years.

Your Zale Direct catalog division and Zale Web site account for 1% of sales. What is their potential?

I see these becoming 5% to 10% of sales in the next five years as consumers become more familiar with the Internet to make purchases. They don’t yet have a tremendous desire to buy jewelry online, but ultimately we think they will. Meanwhile, we continue to upgrade our Web site as an informational and selling tool. We have 200 key items on the Web you can purchase.

What are the biggest challenges facing the jewelry industry and Zale in the next couple of years?

The biggest challenge is to maintain our credibility and integrity in the eyes of the consumer. As an industry we are constantly threatened from all sides by questions on the very essence of our business — the quality of the products themselves.

We also remain a very fragmented industry. We need to come together more as a retailing and manufacturing force and do a better job being heard. As an industry leader, Zale needs to do its part, too. Now that we’re back on our feet and healthy again, we are in a much better position to lend our support.

M.B. Zale helped create a jewelry retailing revolution by using his credit program as a marketing tool to build traffic and sales.

Out Front in Innovation, Benefits, and the Cause of Peace

Zale Corp. has been a pioneer in both the jewelry trade and American business. Consider how often it’s been ahead of the times:

• Benefits: Store managers could buy stock as early as 1930. In 1944, Zale adopted one of the industry’s first employee stock-purchase plans. In the early 1950s, it created a generous hospitalization plan and a profit-sharing plan for employees, also firsts. It had one of American business’ first no-smoking zones (1960s) and day-care centers for employees (1980s).

• Technology and training: In 1953, Zale installed one of the country’s first computer systems. It was among the first major jewelers to institute management training (1950s), offer professional training to its employees (1960s, through the Gemological Institute of America), and use video cassettes to train staff (1970s).

• Philanthropy: In 1951, the Zale and Lipshy families launched the Zale Foundation to support medical care and research and provide scholarships to minorities. The company also supported local charities and for decades gave Braille watches to the blind in America and abroad.

• Promoting world peace: A large African diamond discovered in 1970 was bought by Zale, cut to a 130.27-ct. pear-shaped stone (the world’s second largest), and named “Light of Peace.” It went on tour, and proceeds established the short-lived Zale Peace Prize. (The diamond was later sold to an unknown buyer.) The Zale Foundation also donated to the United Nations.

• Giving back: Zale is still “giving back to communities where we live and work,” says chairman Robert J. DiNicola. In 1998, it donated more than $500,000 to charitable causes, including the Make-A-Wish Foundation of America and the United Way.

At the dawn of a new century, Zale is again a leader in the U.S. retail jewelry industry.