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David Brown: Can Sales Be Maintained When Average Retail Value Is Falling?

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RETAIL SALES DIPPED again in July, their third monthly drop this year although the first time since April. There seems little doubt that we are slowly coming out of the economic doldrums. As the graph below illustrates, the trend in sales growth has seen positive growth months exceed negative growth months since March 2009. But it’s tough to keep lifting sales however when you’re battling into a headwind of declining average retail value.

Average retail value has continued to drop on the back of an increase in the bead market, particular in silver, as we have shown in previous months. Overall storewide average sales for the last 12 months (on a rolling basis) declined from $1,019,413 at the end of June to $1,017,281 by the end of July. However, sales of silver product increased from $157,310 per annum to $163,858, an increase of $6,548 during the same period. Needless to say most other areas declined – with gold suffering the most.

Has this had a negative impact on profitability? It seems not. The annual average gross profit at the end of June was $512,432 and this figure has been maintained for the year ended July despite the revenue drop. This emphasizes the fact that although silver can be harder work to sell for every dollar earned, it does offer a better level of margin than the product sales it has been replacing. The average markup achieved on silver product in the U.S. is 135 percent against an industry average across all categories of 104 percent. Given the large volume being generated in sales of silver there is obviously a relatively low percentage of profit being achieved in other major departments.

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Markup achieved by category  12 mth average
Stores under $1M Stores over $1M Average
Diamonds 94% 89% 92%
Gold 133% 123% 128%
Silver 136% 127% 132%
Watches 86% 60% 73%
Repairs 104% 103% 104%
TOTAL 108% 99% 104%

As the table shows above there is a higher level of markup achieved by smaller stores but this is reflected in the higher average retail value achieved by larger stores and the corresponding drop in margin that occurs on these higher priced items.

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Although watches are the lowest department for profitability (markup) given their impact on overall sales (less than 5 percent of total sales for most stores) they have very little affect on the overall markups being achieved. At over 40 percent of storewide sales the heavyweight that’s being carried is diamonds, with most other major departments achieving over 100 percent. Interestingly the two major areas (let’s ignore watches again) where jewelers receive the most amount of competition when selling product is the two departments that are showing the best markup – gold and silver.

Diamond sales and repairs, which are still largely the domain of jewelers, are showing the lower levels of margin achieved. To a large extent our greatest competition, or perceived competition, is still ourselves.

What if markup on diamonds could be lifted to keystone? Based on average industry storewide sales of $1 million and percentage of diamond product sales at 43 percent, an increase of 8 percentage points in diamonds by the average store would see an extra $17,000 approximately in gross profit – no small reward for protecting the markup on this product. Given the decline in average retail price being achieved for diamonds we can assume less top end product is selling, and therefore the opportunity to protect, or even grow margins in diamond product, is better now than it’s ever been.

One thing seems certain; the growth in silver volume doesn’t look like ending any time soon. Jewelers need to seize the opportunity that this product is presenting in terms of new customers and look for opportunities to grow their databases. The trend will not last forever.

The successful jeweler will use this growth in customers as a springboard to developing ongoing customer relations with people who they previously never had the opportunity to deal with. They will make sure that they implement an effective database if one doesn’t exist, and they will recognize that today’s bead customer can be tomorrow’s bridal buyer. The bead market has exposed jewelers to a level of growth in customer numbers that they have never previously enjoyed. Making these customers more than just a short-term paycheck is the key to longer term profitability. Beads may provide us with a longer legacy than the sales they are delivering now. They can be the catalyst for a return to higher end sales in our other departments, and a return to growth in average retail value.

This story is from the October 2010 edition of INSTORE.

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