Tiffany Eats Chow Tai Fook's Breakfast

Think Tiffany's third-quarter results were bad? Take a look at Chow Tai Fook, the world's largest publicly traded jewelry chain. Net income fell 42 percent in the first half, the Hong Kong company reported Tuesday. With more than seven times as many outlets, Chow Tai Fook has been trailing its New York peer in terms of operating income all year.

To add insult to injury, the main bright spot in Tiffany's results Tuesday was a place where Chow Tai Fook should be cleaning up: Asia. Sales from Japanese stores rose 34 percent in the quarter once the impact of currency movements was stripped out. Chinese tourists accounted for a significant slice of the growth, Tiffany's vice-president of investor relations, Mark Aaron, said on an investor call after the announcement.

There's probably as much serendipity as strategy in this outcome. Japan hasn't traditionally been a big market for Chinese tourists thanks to the frosty relations between the two countries. The reversal of that trend this year probably owes a lot to Middle East Respiratory Syndrome driving mainland holidaymakers away from Korea, Tiffany President Frederic Cumenal said at an investor conference in September.

Chow Tai Fook, on the other hand, doesn't have the excuse of accident. The Hong Kong company has an explicit strategy to shift its sales toward China's provincial and sub-provincial capitals known as Tier 2 and Tier 3 cities. It opened its first Tier 3 outlet back in 2000, and its ``direct, deep and strategic'' access to an expanding middle class in small-town China was an important part of the pitch for its 2011 initial public offering. Over the past four years, the company has added 543 point-of-sale outlets in Tier 2 and Tier 3 cities, compared with 37 in Tier 1 cities such as Beijing and Shanghai and 43 outside of mainland China: