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David Geller

David Geller: Get Rid of Those Duds

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Hasn’t sold in a year? Dump it. Here’s why.


Having a profitable year has a lot more to do with how well you handle inventory than making a profit on an item when you sell it.
So, let’s get something straight. If no one buys an item in your store within a year, it’s outdated. You buy inventory for only one reason: As an investment that will pay you a profit later. “Later” in a jewelry store is defined as within the next 365 days.  

 

Here’s why:

Buy an item Jan. 1 for $100 and expect to sell it by Dec. 31st for $225. After 12 months you should expect to get your original $100 investment back plus a gross profit of $125.

Look at it monthly, though, and you’ll begin to get antsy after a year. On the $100 item, we need $125 in profit. Divide the $125 in profit by 12 months, and another way of looking at it is that item needs to give us $10.42 a month in gross profit.

So for each month it does not sell, the item owes you $10.42. Think of it like loaning a friend $100, and each month he owes you $10.42 in interest. High rate? Yes, but this interest also has to pay for salaries, rent, advertising, etc., so it must be that much.

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So if you held the item for 18 months, the accumulated gross profit is $187.56. You’d need to sell it for $287.56 instead of $225.  If it stays there for three years then it has to sell for: 36 months x $10.42 = $375.12 + $100 original cost = $475.12!

It was tagged at $225 but now must sell for $475.12. If it does, you’ll make exactly the same amount as it should have just buying and selling it once a year, three times over three years.

Can you wait three years to collect your money and still pay your overhead? No!

Is a customer going to pay almost double for a 3-year-old dud? No!

If this item stays for another three years, you’ll be down another $475.12 in lost profits. So in the third year, let’s assume you get your cost out of it (give up on making a profit, Charlie) and you buy a different item for $100. But the difference is, now it sells every year. It’ll make $475 for the next three years rather than losing $475.

You can’t make up for what happened in the past, but you can make up for lost time and profits in the future.

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Take the hit and move on. This happens to be what other retail industries do. Clothing industries dump merchandise at the end of a season. How long is a season for them? Three to four months. So consider yourself lucky.

 


David Geller is a consultant to jewelry-store owners on store management and profitability. E-mail him at [email protected]

This story is from the October 2010 edition of INSTORE

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