David Brown President of The Edge Retail Academy

Inventory Imbalance May Be the Culprit for Third Quarter Sales Slip

Results for the third quarter for most stores appear down on previous years’ figures based on the Edge Retail Academy data collected at the end of September.

Year-to-date sales at the end of September were down 0.25 per cent on August, which itself was down 0.16 per cent from the end of July. Averaging the two months equates to an average annual sales drop of 2.4 per cent over 12 months. Trading for the month of September has been down for each of the last three years as the table below shows:

As the data shows, September sales have dropped by 6.4 percent over the last two years from a level of $90,524 in 2011 to $84,674 for this year. The total number of sales is the biggest cause for concern with unit sales dropping by nearly 30 percent from 590 units for the month of September 2011 to September 2013’s total of 416 units sold. Fortunately the average sale amount has increased from $146 to $196 (an increase of 34 per cent) but this has not been enough to bridge the gap in sales (please note repair figures are not included in the quantity but are part of total sales figures).

This is a continuation of the trend we have seen where some cheaper product lines have declined in popularity but we have seen a return of strong sales in diamond product, which is lifting the average.

So what effect has this had on the inventory holding for most jewelers? How has their product mix changed to accommodate the new demand at the higher end? As the graph below shows, there has been a noticeable increase in inventory held over the last couple of years as the economy has turned around.

As you can see, since April 2011 there has been a steady climb in the level of inventory held by the average store from just under $700,000 to its current level of just on $1.05 million, an increase in stockholding of 50 percent. During the same period, however, sales have grown … but only by around 25 per cent. This leaves the typical jeweler in a position of having a lower stock turn than he had two years ago, and the associated costs that having too much inventory can contribute to the bottom line…

…and that’s only half the story. Given the change in the makeup of sales (and the reluctance of most jewelers to reorder fast sellers) there is likely to be a lag between the makeup of product being sold and the makeup of what is in store. During 2009 to 2011, when higher-end sales were slow and at a lower level while higher volume sale items were popular, most jewelers were still laboring under the weight of too much diamond inventory relative to what they were selling. Now the boot is most likely on the other foot. While we don’t have an in-depth analysis of inventory makeup, it’s very likely that the typical store is carrying a lower percentage of diamond inventory than they are getting demand for.

This may not be the case at stores that have a lot of memo product (and a preference for buying diamonds rain, hail or shine) but if they are relying on cashing up old product to reinvest in new lines then the slow selling, cheaper lines could well be getting in the way of reinvesting in the product that sells: the fast selling lines that need to be reordered (or stocked in the first place).

Now is the time to re-evaluate your inventory and determine if your mix of product correlates to your sales. With the festive season on the horizon, this is not the time to be entering your best selling season with product that your customers don’t want to see anymore.

David Brown is president of the Edge Retail Academy, an organization devoted to the ongoing measurement and growth of jewelry store performance and profitability. For further information about the Academy’s management mentoring and industry benchmarking reports contact inquiries@edgeretailacademy.com or Phone toll free (877) 5698657