M & M

N ot those colorful candy treats, but two other enticements that can please us, provided we do not overindulge.

I refer to Margin and Memo. I capitalize these two words because of the frequency with which I heard them at The JCK Show in Las Vegas, and otherwise in the press. This month, I offer some thoughts about margins, next month about memo.

Sam Walton’s concern about margins was bottom-line dollars—net profit. To achieve his targets, he believed in lowering prices as volume rose, and that volume would rise as he lowered prices. That concept obviously had something right. He built volume, in part, by selling many categories of products, most either generic or branded. He wiped out most of his competitors by rigorously controlling costs, at times brutally so.

Wal-Mart sells jewelry, but it has not wiped out competition. Unlike soap or garden hoses, jewelry is an endlessly diversified product with a large element of service and knowledge. It’s also easy to get into, as scale or major capital investments are not necessarily required or advantageous.

While that’s part of the beauty of the business—its wonderful, personal artistic expression—it also assures that there’s always more capacity than demand. Too many people get into the business, and that is true throughout the pipeline, excepting mining. These days, excess capacity creates acute problems because of sharply reduced consumer demand. This may be the long-term reality.

A small decline in business in a jewelry store is probably manageable. Creative use of inventory, carefully planned buying, trimming costs, and guerilla marketing can bring things into line. But in a severe recession, one’s thinking needs to go back to basics. Only so many costs can be cut.

I always think of showcase space as real estate—most retailers do. How much rent can be extracted from any particular square foot? All the variables need to be considered. Lease line space, for example, is more valuable than a case in the back. Some products can generate more turn than others. A sit-down case for bridal jewelry often dictates where it can be located. Sight lines are important. Merchandising and visual displays that appeal to particular consumer lifestyles should not clash. The list of factors goes on.

The first decision, however, should follow Sam Walton’s idea. How many dollars of profit does any square foot produce? That comes down to that big word, Margin, and turn. For example, a totally adequate display of diamond stud earrings can be displayed in a small space. But studs are what I call a “naked” item—a product that consumers can price shop, just like a Tiffany-style solitaire or a solitaire pendant. That has driven many retailers to lower margins on such generics for two essential reasons. They want to capture whatever business they can, especially in an over-stored market. More importantly, when consumers price a “naked” item, it establishes in their mind, consciously or not, just how competitive that retailer is with everything in the store.

Every department in Wal-Mart has a loss leader, and it changes regularly. The rest of the department is not discounted. Competitors are often priced lower than Wal-Mart on many items.

That doesn’t work well in a jewelry store. It’s easy for a consumer to buy only the special. Nobody goes to Wal-Mart to buy one item.

The judgment needs to come down to value and bottom dollars. Look at a product and decide the best price for that piece, not by using a flat markup. Then apply the turn you think you can attain. Silver, for example, has become popular because in many cases higher markups can be attained and important price points held. But turnover may have to be very high to earn those net dollars. Unique items or exclusive lines might have good margin potential. But always work with perceived value as the final arbiter.

This kind of exercise is essential in determining where money is being made and where space is being wasted. When you identify losers, look for replacements. It might work to have some case space dedicated to new lines that might prove to be big earners. And don’t compete with yourself—eliminate pieces that are too close in price and style. Less can be more.

Make those showcases earn their keep!