On Running Your Shop: Move Beyond Gold Buying

BY DAVID GELLER

Published in the October 2012 issue.

Start running your business in the 21st century.

The gold buying boom has been great for jewelers. I know a lot of store owners who now have no debt and $100,000 in cash in the bank, thanks to metal trading. But don’t get too pleased with yourself. The truth is you got lucky: Jewelers were in the right place in some bad times. And with the profits from gold trading drying up (see the Big Survey, page 78), you now need to get back to making money the old-fashioned way.

That means:

1. Selling merchandise, this time like a professional retailer: by controlling inventory.
2. Repairs. Take the shop out of the 19th century by demanding it become a profit center.

Consider these two scenarios:

AYou buy a bracelet for the showcase for $500 and sell it for $1,000.

BYou buy the customer’s scrap for $500 and you sell it to the refiner for $1,000, although, because of all the competition, it’s more likely to be $800.

So why do you have so much money in the bank right now? To make $500 in Example A you probably keep an inventory of $500,000. That’s half a million in a debt-causing assets to make a measly $500.

In Example B, to make $500 (or even the $300) in profit you have to keep in stock only $10,000. (That’s the 10 grand you have tied up, not to be used for anything but buying gold.)

There’s one more aspect to think about in the gold versus showcase comparison: Time. That $500 bracelet may sit in your store for three years before you get your profit, whereas you may make $300 to $500 every few days on a gold trade.

My brother and I started working in our father’s wholesale manufacturing shop in the 1960s. Many of you probably learned the business from someone like our father. Toss those lessons.

Why? Because in the ’60s and ’70s to make keystone on a 1- or 2-carat diamond was like rolling out of bed. Jewelers in those years had gross profit margins of 60 percent to 72 percent. At these margins, you can afford to buy more inventory than you’d sell in a year. And when you cashed out on retirement you’d enjoy a nice pay-off.

Today, the typical jeweler is making only 42 percent to 47 percent gross profit margin. When your day comes to cash out you’ll have too much debt to pay off.

Here’s the secret to having money in a modern jewelry store: Your average inventory level for the year should be no higher than the profit you’ll make from selling that jewelry. Memo is not added into this equation. So if you sell $1 million and make a 45 percent gross profit margin, your gross profit will be $450,000.

That means you should not have over $450,000 in inventory. More than that, and it’s unlikely you’ll be able to boost sales enough to pay for the additional accounts payable.

To keep your inventory level lower than gross profit you have to sell like a pro and dump items that become old. “Old” is over one year. “Dead” is over 18 months.

Now, let’s turn to the shop.

Remember the story of my dad’s generation of jewelers? The margins they made on diamonds allowed them to give away small shop jobs. You can’t do that anymore. Charge customers enough to pay for your jewelers, findings and shop costs, and then double that amount for your profit. That might mean raising your $28 sizing price to $39! But as I’ve always said: “Repairs are not price-sensitive, they are trust-sensitive.” Think if you give away bench services cheaply, the customer will be back to buy a diamond? There’s no loyalty anymore, and diamonds, like other showcase items, are price-sensitive, not trust-sensitive. Don’t believe me? Compare your sales-floor closing ratio with your shop closing ratio.

It’s almost 2013. Start running your business like it’s the 21st century.

You now need to get back to making money the old-fashioned way.