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David Brown

Dark Economic Clouds Loom on Horizon, Says David Brown

Negative sentiment is appearing.

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CONSUMER SPENDING IS a matter of confidence, and declining retail sales can often be one of the first barometers of economic sentiment. The trend we have seen since early in the year has been further backed up by the economic news which, despite positive reporting from many listed companies, has brought a storm cloud of negative sentiment.

Fears of rising interest rates, even though they may have been slow to happen, will dampen consumer spending. The threat of trade wars with China and an increased cost of imports and reduced income from exports are playing on investors’ mind. We’ve seen a drop in the Dow Jones reflect this fall in confidence, and it seems likely that there will be some further belt-tightening going on in the foreseeable future.

Below is a comparison of the individual monthly data for September versus the same month last year.

Our same-store September data year-to-date showed a decline of 0.52 percent in the rolling 12-month sales figure compared to September 2018. Average store sales for the 12-month period to September was $1,579,921, down from $1,588,204 at the end of August. This has extended our run of declining sales to eight months when our rolling 12-month sales stood at $1,629,755.

So what’s caused this to happen? Ever since the financial crisis in 2008, governments all around the world have increased the amount of money that is in circulation. Their logic? That more money encourages more spending.

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To a large extent their strategy has worked, as if you hand out cash to the “man in the street” he will naturally spend it. Now you might be wondering how this works. Governments don’t appoint cash dealers to stand on street corners doling out dollar bills. They will generally do it through the banking system in one of two ways. The first is to print money, either figuratively or literally. These days most money travels electronically, so it usually consists of blips on a screen. This money is made available to banks to lend as mortgages or credit card debt – which allows it to filter its way through to consumers. The other way they can do it is through debt – treasury bills and government bonds can be issued to finance the government deficits that are increasingly the norm for most countries. These are effectively a demand on the government to repay later. These debts are viewed as ironclad, as a government is always able to guarantee its payments (by printing more money, but this can cause its own problems as you will see!) So the government can control the money in circulation by selling more bonds (which takes money out of the system) or buying back their bonds (by putting more money into the system re-purchasing the bonds).

Now this all sounds pretty simple, but it can come at a price. Printing money can cause the value of a currency to decline (like any rule of supply and demand, the more of something there is the less anyone will pay for it). A declining dollar can make exports more competitive, but it does raise the cost of importing goods because you will need more dollars to buy the foreign product so this will lower demand for goods. Creating more government debt can be a way of mopping up the money, but it can lead to higher interest rates as lenders get more nervous the higher debt you have (even for governments) which is happening now.

There is a lot of debt, both personal and government, that is sloshing around the world. Personal debt is high because of all the money that the governments have injected in the economy through the banks.

Now that the government is tightening the money supply, there is a nervousness that many of those with high borrowings won’t be able to deal with the increase of interest rates that will now happen as money becomes tight again. The fiscal stimulus of money being injected into the economy may have kicked the can down the road, but to throw in another cliché, the chickens may be about to come home to roost.

David Brown is president of the Edge Retail Academy, a force in jewelry industry business consulting, sell-through data and vendor solutions. David and his team are dedicated to providing business owners with information and strategies to improve sales and profits. Reach him at david@edgeretailacademy.com

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David Brown

Why Warren Buffett Places So Much Trust in Emotional Currency — And How Your Store Can Get It

It’s time to create a “moat” around your prices.

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He’s long been considered America’s foremost investment guru, and given the returns achieved by his company, Berkshire Hathaway, it’s easy to see why. Understanding what Buffett considers to be a good business can shed light on how to improve your own business strength — to put, as he calls it, “a moat” around it to ward competition away.

Hearing his theory on business value is well worth doing, whether it’s his annual Berkshire Hathaway meeting or other snippets of advice the media shy guru may drop. It’s his take on business value from a commission investigating the financial crisis back in 2009 that recently caught my attention.

When asked about his investment in the ratings agency Moody’s, Buffett had the following to say:
“If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by a tenth of a cent, then you’ve got a terrible business. I’ve been in both, and I know the difference.”

Buffett went on to discuss his belief that good management can’t save a bad business, but a good business can continue no matter what management does.

Moody’s represented a case in point. Because of their duopoly with Standard and Poor’s as the benchmark of rating agencies, they effectively had a business with a moat around it. Even if a competitor came in offering ratings at half the price, both Moody’s and Standard and Poor’s had created a business that would not suffer. Price increases or decreases would make no difference.

In a jewelry industry where pricing competition often seems to be the only thing that customers are concerned about, it raises the question, “Can a jeweler successfully build a pricing moat around what they offer?” Moody’s and Standard and Poor’s perform a task that others can do but no one else can do it with the prestige of having their name attached — and that makes all the difference.

On the face of it, it may seem difficult to achieve this level of power when selling a commodity that can be purchased elsewhere — yet jewelry is an emotional buy. By definition, you should also be able to achieve an emotional moat around the association of your name to the process. Tiffany has achieved this — however, is what they are offering any different to what you or other jewelers able to provide? Does the customer gain any form of tangible benefit, or is it a feeling based on emotion?

Just because it’s intangible doesn’t mean it’s not real. The ability to increase prices and have your customers accept it because you are the only feasible option is priceless — the number one thing Buffett considers when investing.

If it’s worthwhile for Mr. Buffett to consider it for his major investments, it’s worth you considering for yours.

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David Brown

Jewelers See Unit Sales Decline — Here’s a Way to Fix the Problem

It’s the seventh straight month of declining monthly sales data.

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August sales data showed a small drop in our rolling 12-month sales results of 0.08 percent compared to July, converting to an annualized decline of 9.6 percent should the trend line continue.

August’s monthly sales figure of $117,275 across our store average comparison data is down from August 2017’s total of $118,542. This is reflected in a drop in unit sales from 276 units in August last year to 261 units sold this year. Average sale showed an increase from $382 last year for the month of August to $384 this year. Gross profit of $52,710 was down from August 2017’s monthly result of $53,612, a reduction of $902, or 1.6 percent.

This is the seventh straight month of declining monthly sales data, a sequence we have not seen since the Great Recession. Since January this year, sales have dropped from an average annualized sales figure of $1,629,755 per store to $1,588,204. This is a decline of 2.5 percent, or approximately $41,000 so far this year.

It might not sound like much but for an average business doing keystone (and we can now see that most businesses are not achieving keystone), that represents $21,000 off the bottom-line profit after paying for the inventory sold.

Looking at the last three years of data, margin has maintained its level of 45 percent with average retail sale making small increases from $375 to $384 (2.4 percent) while unit sales dropped from 286 to 261 units (a decline of 8.7 percent over the three-year period). Monthly figures represent an isolated snapshot, but the overall trend is continuing.Unit sales are no longer decreasing as quickly as they have, and average retail sale achieved is no longer climbing as quickly as it was, however the rate of decline in units sold continues to outpace the offsetting increase in average retail sale achieved. This has resuled in a drop in August sales figures in the last two years from $119,481 to $117,275, a drop of 1.8 percent. Although the speed of change has slowed, its consistency in trending downward appears to have become a greater concern.

Let’s look at unit sales from a longer term perspective. In August 2014 the average store was making unit sales of 5,391 items per year. Fast forward to August 2018 and that total has declined to 3,970 items.

That’s a drop in just four years of 1,421 items, or 26 percent of items sold. As most of you know, “sales” equals the number of units sold times the average selling price. That’s a big increase required in average retail selling price in order to compensate for this drop.

How do your numbers compare? Take a look at your total annual units sold from four years ago and compare that number to now. Has it declined? If so, how much? What about your average retail sale achieved? Has it increased? If so, how much? Has it been enough to compensate for this drop in units sold?

Sooner or later, the decline in unit sales must be addressed.

Increasing unit sales can start with one simple strategy that, once executed consistently, can be supplemented by others. My recommendation is to look for the add-on sale. The easiest customer to sell to is not the one who is at home looking at your marketing material, nor is it the one who is browsing in your store. It’s the one who has just bought from you – yet these are the customers we neglect to sell to because the “job is already done.”

You don’t need more customers to make more unit sales – just do more with the ones you have already won over.

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David Brown

This Exercise Will Tell You Exactly Which Day of The Year You’ll Start Taking Money Home

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What’s your favorite day of the year? There are a lot of options to enjoy across the annual calendar, but one in particular often goes unheralded: Tax Freedom Day.

Each year, the Tax Foundation calculates how many days the average American has to work in order to cover their tax liability. This year, Tax Freedom Day occurred on April 19th. So from that point forward, every dollar, on average, you earn as profit is for yourself, not Uncle Sam.

Or is it? Tax is just one of the obligations a business has to meet. If you are going to work out when you’ve worked off your tax bill, why not some of your other costs?

The Tax Foundation has worked out the Tax Freedom Day based on an approximate average tax rate of 29 percent. That gets you to around the 107th day of the year, or early- to mid-April. As a business owner, we would want to look at our costs relative to income, not relative to profit — after all, some expenses may be greater than the amount the business owner takes home, so it’s not the best way to apportion your costs.

Let’s say your net profit is normally 10 percent of your total income. This would mean that tax would represent 2.9 percent of your total sales or income, rather than 29 percent of your profit. So your tax would be covered by income after 2.9 percent of the year, which means approximately 11 days of average annual income. 

If you achieve a 50 percent gross profit, then it will take you half a year to earn enough average annual income to cover the cost of the goods you sell. Depending on what percentage of your costs are attributable to different aspects of your business, you can work out how long you need to work to meet some of your other business obligations.

For example; if wages represent 16 percent of your total income, then you will need 58 days of average annual income (365 days x 16 percent) to meet your staffing costs. If rent is 10 percent, then you’d be looking at around 36 days to meet this obligation. Of course, this is an extremely simplistic guideline, but it’s an interesting scenario to see who gets your money each day!

Of course at 10 percent profitability, and assuming an average income that is consistent each day, you would have to work until around Nov. 24. You can do the real exercise yourself and determine just when your profitability arrives. Given the proportion of income that skews toward December, it’s more likely that your Profit Freedom Day will be sometime after the middle of December.

So focus on cutting your costs and raising your margin — the sooner you can start keeping that income for yourself, the better it will be! 

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