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David Geller

David Geller: Memo Random

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To fight Internet competitors, start by reconsidering your approach to memo, says David Geller.

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[h3]Memo Random[/h3]

[dropcap cap=I]f you haven’t had a couple come into your store yet with printouts of diamond prices from the Internet, then you must have moved to Mars with the Rover. No longer do you have to worry about competing against the bigger retailers or even the so called “diamond importers.” Now you’re competing against the large and invisible Internet.[/dropcap]

[inset side=right]Amazon.com is now selling diamonds! Yep, buy Oprah’s book and throw in a princess cut while you’re at it.[/inset]Had lunch yet? Don’t. I wouldn’t want to upset your tummy.

Amazon.com is now selling diamonds! Yep, buy Oprah’s book and throw in a princess cut while you’re at it. You should go to Amazon.com and see the main page. Here they tell the public the “ugly truth”: that most jewelers have margins of 40-50 percent, while Amazon only has a 15 percent margin. Peruse the site; they are selling everything in jewelry. No matter how much you romance the sale, many folks use price as the final decision maker. After all, a “cert” levels most playing fields.

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So you can add Amazon.com to your existing list of Internet competitors, including the likes of Bluenile.com, Pricescope.com and an army of other diamond dealers selling to the public. Margins are shrinking and competing just got tougher.

One way to fight back is to consider buying more diamonds, and relying less on memo. The fact is, memo is an expensive and also painfully slow way to sell. Those who buy right and own their own diamonds are having greater success than many folks doing memo. (Of course, those who buy wrong can make their store’s problems worse … in a hurry. But that’s a subject for another column.) In general, however, if you’re a memo retailer of diamonds, the “good old days” are rapidly disappearing.

I visited a store two years ago that was doing a very good job with engagement ring sales — selling about a million a year with a memo inventory of $400,000. The store’s owned inventory was only about $190,000.

I told him that memo was expensive and his response was “No, David, I get as good a price on memo as others buy.” Fine, I wasn’t going to argue. But I did turn him on to a buying group with a diamond vendor that is very close to a sightholder. Diamond prices were substantially lower … but he had to buy them. Well, he started stocking these in November and during the Christmas season sold 17 of these diamond solitaires with an initial investment of only about five diamonds from the supplier. He did great turn. And at a 40 percent margin.

He called me and happily told me that he was now selling 1-carat diamonds at the same price he used to pay for them. Sales were much easier to make and his margin was 40 percent, with great turn and a very high closing ratio. Difficult to do that with memo.

[inset side=left]The Missouri jeweler told me that when he has a diamond in stock and can pull it out, they have an 80 percent closing ratio on that day.[/inset]If you can afford to buy and buy right, it will be the only way to compete. The people who are making the most money in diamonds overall are also those buying stones from the public. A small classified ad in your local newspaper can bring you loads of sellers of diamonds at prices that will lower your costs. (Do check your local laws for any restrictions that might apply.) You can’t get everything you’ll need, but this can dramatically improve your bottom line. Make 25 percent here, keystone there; it all adds up.

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This past week I spoke to two jewelers. One was in a very small town and she said she couldn’t sell a diamond to save her life. People were coming in with Internet quotes at prices she wouldn’t want to match and some had bought from Blue Nile and wanted a second opinion. She was trying for mark-ups in the range of 75 percent to full keystone.

Then the same day I spoke to a jeweler in Missouri who consistently got keystone on 1-carat stones. The difference? The small town jeweler owned maybe six to eight diamonds, and had to memo in any other requests, while the Missouri jeweler had a nice size wallet. The Missouri jeweler told me that when he has a diamond in stock and can pull it out, they have an 80 percent closing ratio on that day. When they memo in, their closing ratio drops by half. Ah, the joys of ownership.

By the way, the small-town jeweler who owned a few diamonds boasted that she bought only diamonds that she would want to wear herself. She commented on what “crap” her customers bought at the mall stores. I told her to buy for her customer, not herself. And to either lower her price points for diamonds … or raise the quality of her customers.

If you’re going to compete against the guy down the street or the World Wide Web, you had better get sharper pencils, tweezers, loupes and vendors. The ride is getting rockier.

[componentheading]BRAINSTORMS[/componentheading]

[contentheading]New Ideas For Your Store[/contentheading]

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Women 65 and older spent $14.7 billion on apparel in 1999, alomost as much 25-to-34 year olds. But where did a gigantic majority of marketing dollars and research and development dollars go? To getting those 25-to-34 year-olds. Here’s some advice to separate your store from the pack:

Go for the Old!

Think targeted advertising. Think appropriate styling(classy, not frumpy). Think larger clasps that can be fixed with less-than-nimble fingers. And, best of all, think higher price points to match the extra disposable income older jewelry buyers have.

David Geller is an author and consultant to jewelry-store owners on store management and profitability. E-mail him at dgeller@bellsouth.net.

[span class=note]This story is from the June 2004 edition of INSTORE[/span]

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David Geller

Here’s What’s Really Keeping You From Having More Money

If you think it’s low margins, you’re wrong.

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I WAS READING THE Big Survey in last month’s issue of INSTORE, and one question popped out at me: “What will be your greatest priority next year?”

Thirty one percent of respondents said, “Boosting profitability.” The money-savvy ones (21 percent) said, “Clearing old inventory.” Most jewelers just don’t get that there is a big difference between making money and having money.

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Someone once taught you that margin was your most important metric. Yep, that was a good thing when everyone made two and three times key, but no more. What hampers you from having money is not low margins as much as inventory level.

Your debt typically equals one-half to three-quarters of your inventory that’s more than a year old. It shows up as accounts payable, credit card debt, lines of credit, and money owed to you (the owner) for money you’ve personally loaned the company.

Having money depends on your ability to keep that debt to a minimum. How can you do that? As a jewelry store/shop owner, there are a few options.

  1. Repairs. This is a revenue stream that requires very few resources to produce income. Your ongoing costs are findings, small stones and your jeweler’s paycheck (plus the occasional equipment upgrade).
  2. Buying scrap. This really only requires several thousand dollars of cash on hand to make a profit. Buy it on Monday, mail it on Wednesday, get a check on Saturday and you’ve made a profit and replenished your cash to do it again.
  3. Inventory sales. This is likely your biggest cash outlay, and it needs to throw off revenue monthly. All of it must throw off revenue at least once a year. All of it. You can’t wait two and three years to have money come in to pay a bill or check tomorrow.

Look at 1 and 2 above. The amount of money required is small. You don’t keep scrap very long and most people order “just enough” in findings for jobs this month, maybe a few extra items.

But inventory piles up for years and causes debt. In a jewelry store, your average inventory level should be somewhere between your cost of goods sold and gross profit amounts for a 12-month period. Any amount above that will show up as debt and poor cash flow.

Keeping inventory within these two numbers (give or take) will increase positive happy cash flow, increase your checking account balance, lower total overall debt, remove stale and outdated inventory, and may actually increase sales as you have more leverage to buy new fashionable jewelry that pleases your customers.

That would be a good thing, right?

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David Geller

Can You Make Money at 12 Percent Margin? Yes, But Here’s What It Takes

As one factor decreases, another must increase.

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CAN YOU MAKE a living on a profit margin of just 12 percent? Did the word no come to mind? You’re wrong.

For coin or bullion dealers, 8-12 percent gross profit margin is the norm, and they make a lot of money with little debt.

The “magic triangle” includes profit margin, inventory turn and inventory level. The combination of all three tells your future in a store, how much money will be left over to pay all bills and have money in the bank.

Let’s take a simple store math example for a year using keystone. A typical jewelry store would have a net profit of 5 percent. Here’s how a P&L would look:

Total Product Sales: $500,000
Cost of Goods: -$250,000
Gross Profit: $250,000
Expenses (45%): -$225,000
Net Profit (5%): $25,000

Are you making money? Absolutely. Do you have any money left over after paying expenses? Depends.

Imagine if last year, you sold everything at Christmas, not a stitch of inventory left. January 2nd, you fly to New York with three suitcases and buy the $250,000 of inventory that the cost of sales above pays for. You’ll have no debt. If something sells within six months, you have the money to reorder the replacement for the case, thus always having a stocked showcase.

Divide $250,000 in cost of goods by inventory of $250,000 and you get one turn a year.

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Now assume the same figures above, but instead of three suitcases costing $250,000, you bring five suitcases and bring back $600,000 of inventory for the store. Same sales and profit numbers as before. Did you make a profit, make money? Yessiree Bob! Do you have money? No! You bought $100,000 more inventory than the sales you took in. So how do you pay for it?

  • Owe vendors way past the due date
  • Put it on credit cards
  • Go to bank and take out a line of credit
  • Personally skip paychecks
  • Take money from your personal checking accounts

In this scenario, your inventory is $350,000 higher than the cost of goods sold. Divide cost of goods by inventory level, and it shows you have a 0.41 turn. A turn of 0.41 means this store has more inventory than needed for two years.

So, what’s the secret to having money?

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The long and short of it is, if you’ll keep your inventory levels approximately equal to the gross profit dollars you’ll make over a year, you’ll both make money and have money.

The lower the profit margin, keep inventory lower, or if you must have a higher inventory level at lower margins, then turn it faster. Instead of taking 12 months to sell it, sell within nine.

It takes all three for The Magic Triangle to work magic in your store!

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David Geller

What You Can Learn About Turn from Clothing and Furniture Stores

Hint: Turn more, earn more.

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THERE ARE REALLY only three important numbers in a retail store: gross profit dollars, inventory on hand, and inventory turn. So who’s better at managing money among these three retailers?

Store                         Gross Profit %
Jewelry                      42.6%
Furniture                  45.0%
Clothing                    46.5%

Darn close, aren’t they? The grass isn’t so green on the other side after all. Or is it?

Let’s look at inventory turn, which means how many times a year an item sells. (These numbers are from stores doing “pretty well.”)

Store                            Turn            Days in the Store
Jewelry                   1.4                       260
Furniture               3.5                       104
Clothing                 4.3                       84

A clothing store won’t keep a shirt/suit/jacket/blouse in the store more than three to four months. They will heavily discount it at that point to get it out the door; they don’t just “squash” merchandise closer together to show more like jewelers do.

Furniture stores work the same way. They have a natural problem: available floor space. The biggest reason for high turn in a furniture store was told to me by a furniture store owner: “Where am I going to store an extra 100 mattresses?”

Clothing stores get rid of their merchandise every quarter. Furniture stores get rid of their inventory every four months, and a good jeweler turns their merchandise a little over once a year. But most jewelers I meet have had their total merchandise for two-and-a-half to four years! This causes terrible cash flow and piles of debt.

If you buy jewelry in January, it should sell at least once by Christmas; that would be a turn of 1.0. If it stays until after Christmas, discount it or give a spiff to the sales staff to unload it, or even return it to your vendor and exchange it.

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If it is still there in 18 months, scrap it. That’s what clothing and furniture stores do.

Let me show you the money-making power of turn. All three stores are going to buy an item for $200. For a jeweler, this might be earrings; for a clothing store, a nice jacket; and for a furniture store, it might be a chair. In the table below you can see the cost, profit margin in dollars, and what that brings in for total product dollars in a year.

Keeping an item long-term is a detriment. Even if someone buys it three years from now, you should have had that $207 in profit for each of the three years, totaling $621 brought into the store (not the measly $163.35 you would make by holding it three years).

When it’s over a year old, most things need to be disposed of and replaced. Maybe your customers just aren’t buying what you have in stock. Change that!

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