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David Geller

David Geller: Best And Worst

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David Geller’s tale of two stores highlights the importance of GMROI.

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[h3]Best And Worst[/h3]

[dropcap cap=H]ere are the best and the worst jewelry stores I have visited. I went to both stores in January. The facts are altered just a tad to protect the innocent.[/dropcap]

[componentheading]THE WORST[/componentheading]

Are you jealous of a store doing over $3.5 million? The owner is paid $350,000, which is 10 percent of store sales, a good number. When I arrived, though, he had just told the bookkeeper to cut his pay in half!

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Every January, Visa sends out blank checks for customers to pay off Christmas bills. This store owner gave several of the checks to the bookkeeper totaling more than $120,000. Why? To pay vendors for items bought during the Vegas show.

The store’s problems were in the numbers:

— Gross profit margin of 36 percent. They said they were in a competitive market.
— Turn of 0.33. This means it takes an average of three years for inventory to sell.
—Inventory level of about $1.8 million.
— This gave them a gross margin return on inventory (GMROI) of less than $0.40. It should be $1.00 or more.  

Sales staff negotiated with the customers on diamonds at the counter, and I think that was a big reason for the problems. Most sales staff would say “I sold a $5,000 diamond and they made $900, what’s the problem? Wish I could make $900.”

Making $900 on a $4,100 cost diamond is fine if you have a high turn, but at 0.33, it’s terrible.

The store had too much inventory and didn’t make much money when it sold. It also undercharged for shop labor.  

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I had the store reduce inventory by calling one showcase “Say goodbye to old friends.” Here they put 50 pieces a month in the case and told the staff, “All we want is our cost back. You can discount all you want and you can have anything you get over our cost.” So a $1,000 retail item (cost $500) usually sold for $746. If the sales person sold it for $595, the sales staff got $95 and the store its $500 cost. All 50 pieces sold each month, and the store rid itself of old inventory.

[componentheading]THE BEST[/componentheading]

This store was doing $2.5 million. Anyone jealous? When I visit a store I always stay in a hotel, but here the store owner told me I was going to stay with him, as no one else was in his home. He picked me up at the airport and told me his story of “woe.”

When I arrived, his home was beautiful. Sitting on 15 acres, it was easily 6,000-plus square feet.  

The reason no one was home was simple: After the first of January this jeweler and his family spent the winter in a warmer state where he owns a second home. A manager runs the store and calls him up around May 1 and says, “You can come back now, the snow has melted.”

The store is a bridal store in a strip center. The owner pays himself more than 10 percent of sales, about $275,000 a year. The staff is well trained, with two jewelers and the shop makes money (they have used my price book for years).

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Here are his numbers:

— Gross profit margin of 47 percent.
— Turn of 1.55. That means he keeps inventory for less than eight months. Not three years!  
— Inventory level of $785,000.
— This gave him a GMROI of $1.99.

The reasons for his success?

He advertises a lot, spending between 8-10 percent.

He makes a nice margin when he sells diamonds and bridal ware.

He watches inventory like a hawk and gets rid of it if it doesn’t sell within one year. His first and best weapon is this: All invoices from vendors have in writing, “If not sold within a year, will be returned for exchange.”

He uses fewer vendors so that each vendor is more important and so when he returns a box of inventory (say $25,000) it’s not such a big deal because he buys $100,000 during the year. If he can’t return the stock to the vendor, he doesn’t buy.

So his first thing is to return it when it’s one year old. Next thing is to give a spiff to the sales staff to sell old things. After that he discounts it to the public.  
And after that he has his shop take the stuff apart and make new bread-and-butter items. Unlike most jewelry store owner/whiners, he actually does these things.

So I asked him, “You’re doing great, why did you bring me here?”

His answer was beautiful.

“I brought you here for three reasons: 1. I want to make more money from the shop. 2. I want to personally make $350,000 and want you to help me. 3. I want to control my accounting from my winter home in the South.”

We did all three.

Ultimately the reason for his success was his GMROI of $1.99, while the higher volume store had a GMROI of less than 40 cents.

To be successful in a store, your GMROI has to be around $1. Way below a dollar, and things are tough. Above a buck, and life is good.

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

[span class=note]This story is from the October 2007 edition of INSTORE[/span]

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