Business Report

Are Expensive Items a Drag on Profits?

In a classic example of the counterintuitive, fine jewelers are boosting profits and accelerating inventory turnover by offering more lower-priced jewelry.

Joe Romano, president of the jewelry consulting firm Scull and Co., uncovered this surprising trend after a five-year analysis of 60 clients representing more than 100 stores. His conclusion: “When the average price point comes down from $500 or $600 to $200 or $300, the gross profit goes up, inventory turn goes up, and the jeweler makes more money.”

Romano recommends that jewelers fine-tune their open-to-buy purchase budgets by adding two steps to their monthly fiscal management routines. First, analyze inventory turnover (number of times an item sells in a year) by price point. Second, analyze gross margin return on inventory (money earned on jewelry holdings). “The jewelers we track who have provided the opportunity to buy jewelry at lower price points seem to be doing very well. The strategy, very simply, is to focus on what customers are purchasing—not on what the jeweler thinks the customer wantsto buy.”

Lower prices aren’t necessarily out of sync with the high-end image of fine jewelry stores. “I’m suggesting there’s a balance,” says Romano. “Not that the lower price points replace the higher price points, but the open-to-buy strategy should involve an ongoing analytic process to evaluate customer needs, wants, and desires. Most people don’t think twice about spending $200 or $300 on themselves to make them feel good.” In fact, $300 is the cost of the typical “impulse” jewelry purchase, according to jewelry sales trainer Shane Decker.

Does this mean fine jewelers should offer costume jewelry? Not necessarily.

Romano contends that the jewelry industry’s paradigm of “fine” allows for plenty of lower-priced gold and silver jewelry—though perhaps not platinum—with colored gemstones and diamonds. Besides, he says, “Who defines ‘fine’ jewelry such that independents will only sell finer jewelry at higher price points and not make as much money?”

Even if financial analyses affirm the benefits of increasing lower-priced offerings, some jewelers might worry that such a strategy will detract from store image. Romano’s answer: “If you define yourself by the inventory you sell, you’re making a tragic mistake. You define yourself by service, by the incredible ‘wow’ experience you provide. That experience is becoming increasingly important in light of the Internet.”

Technical financial analyses of inventory turnover by price point and gross margin return on inventory are best done with an inventory management software program (see article on page 152 for more information). If you need to crunch the numbers by hand, the JCK Jewelers’ Inventory Manual, available by calling (610) 964-4278, provides step-by-step instructions. But number crunchers should heed this proviso from Romano: “The point of analyzing the numbers is to understand how customers are spending their money and how to make them happy.” Not understanding those issues, he adds, is “how you lose the campaign.”

Four Steps to Wise Buying

Use these strategies to help you build your open-to-buy shopping list and determine whether to add more lower-priced goods to your inventory:

“When the average price point comes down to $200 or $300, the jeweler makes more money.” —Joe Romano, Scull and Co.

  1. Evaluate how business is trending compared with earlier quarters and years. Look at inventory turnover, gross margin return on inventory, and overall sales history by price point, vendor, department, product classification. Analyze which items are selling and which are gathering dust. Factor out unusual and nonrecurring items—such as a one-time-only 5-ct. diamond sale—and focus on trends in your sustaining and recurring revenue base.

  2. Create three-tiered sales projections. This helps you set goals and monitor progress on a monthly basis and continually fine-tune your open-to-buy budget. After factoring out nonrecurring items, create a projection for flat sales, your worst-case scenario. Next, crunch the numbers for a realistic continuation of growth, coming in a percentage point or two below last year’s growth. (This protects you from betting on continued growth.) Finally, compute your most hopeful scenario. This helps you to rapidly step up buying plans when growth exceeds your “realistic” projection.

  3. Maintain buying ratios. Set aside 80% of your purchase budget for base stock that sells on a consistent basis, 10% for special orders and custom work, and 10% for buyer’s discretion. This ratio helps maintain financial discipline while allowing you to experiment with new items. Special circumstances might affect the ratio; for instance, stores specializing in custom work might allocate 35% to that category.

  4. Gather insights about consumer preferences. Ask your managers, buyers, and salespeople which products are hot and which are cooling off. Consider the health of the local and national economy, and check out your competitors—what are they offering?

Source: Joe Romano of Scull and Co.

Joe Romano, president of Scull and Co. Inc., 8400 River Rd., North Bergen, NJ 07047; (800) 648-9329.

Cork-Popping End to ’98

Jewelry sales nationwide were effervescent in December, topping ’97 sales by 11%, according to the U.S. Commerce Department. The final quarter of ’98 was nearly as bubbly, with retail jewelry sales up 9% over the figures for the final quarter of ’97.

It was a welcome end to a retail year that stalled in the third quarter as the stock market swooned and President Clinton’s political future teetered. Although first-half jewelry sales were 9% higher than in ’97, by the third quarter that rate of growth had slowed to 6%.

With the strong fourth quarter factored in, Commerce Department data show full-year jewelry sales of $22.3 billion, up 8.5% over ’97 sales of $20.6 billion. Those figures are just slightly lower than the 9.3% gains reported by 400 jewelers surveyed by Jewelers of America. They’re also close to the 8% growth reported by the nearly 300 members of JCK’s retail panel. Similarly, the World Gold Council reported unit sales increases of 8.4% for the year, with a 7.7% increase in the dollar value of those sales.

Commerce Department data cover only sales by retail jewelers, which account for only about half of jewelry sales today. Figuring in department stores, mass merchants, television shopping, catalogs, and the Internet, the value of jewelry sold in ’98 is closer to $45 billion.

The brightest note in the sales figures comes from a look backward at the decade before 1998: Jewelry sales shot up 56% for the period.

At least for the short term, consumer confidence levels are cause for optimism. More than half of the jewelers responding to the JA survey in January said they expect sales to increase in the first half of ’99 (with the expected increase averaging 10.9%), while 41% expect no change. Only 9% forecast a decline. One harbinger of hope: In February, the Conference Board, a New York business research group, found that consumer confidence about current economic conditions was at its highest level since the organization began polling Americans more than 30 years ago.

Jewelry Store Sales Soar
December SalesGrowthAnnual SalesGrowth

1995 $4.445 5.9% $19.072 6.1%
1996 $4.476 0.7% $20.168 5.7%
1997 $4.893 9.3% $20.550 1.9%
1998 $5.445 11.3% $22.295 8.5%
Data in billions
Source: U.S. Commerce Department

Metal Trends

White metal’s popularity is growing rapidly, but many consumers still prefer yellow gold, according to recent surveys conducted by two groups.

A study by Taylor Nelson Sofres Intersearch provides a snapshot of consumer tastes. In January, the firm interviewed 1,000 consumers, of whom more than 350 had purchased jewelry in the final quarter of ’98. Of these, 65% purchased yellow gold, 8% purchased white gold, 1% purchased platinum, and 16% purchased silver. Another 2% said they purchased stainless steel, while the remaining 8% didn’t name a metal. The pattern held throughout the United States. The only significant variation occurred in the South, where 70% of consumers purchased gold.

Sales gains reported by jewelers provide a useful point of comparison for overall metal trends. Jewelers of America’s 1999 annual business survey of more than 400 jewelers, conducted at the close of the ’98 Christmas season, shows white metal sales gains rapidly outpacing karat gold sales gains. Survey respondents reported sales gains of 18% for platinum, 9% for sterling silver, and only 4% for karat gold.

Build a Network to Watch for Crime

Sharing information about criminal or suspicious activity at your store with other jewelers in your area is a good way to fend off future crime. It’s an approach that the Jewelers’ Security Alliance recommends, with one important caveat: Keep your network small, with no more than 10 or 12 participants passing along information by telephone, e-mail, or fax.

That recommendation comes after the recent collapse of several larger alert networks in San Francisco, Detroit, Houston, and Atlanta. According to JSA, the networks failed because of the expense and time associated with managing large contact lists and posting crime-related information. Jewelers also lost interest as memories of criminal incidents faded.

Still, says John Kennedy, JSA’s president, “We want to encourage local jewelers to maintain small networks because that is their first line of defense against the bad guys who come into town. We’ve had innumerable instances of criminals being caught because the first person they reached in town alerted the others and the police as well. People have their heads up in advance, and when the criminals go to the second or third store, they get caught.”

When jewelers pass along information about suspicious behavior to colleagues at nearby, similar stores, it can really help. A jeweler who recognizes a “customer” from a description on a crime-alert network can be “especially attentive, shake their hand, ask their name, and make it seem you’re on to them. Focusing attention on people who don’t want attention often will discourage them,” says Kennedy. “And if they think you’re suspicious, they’ll often go somewhere else.” Because of the small, informal nature of these networks, JSA does not track the number operating nationwide.

For information about how to set up a crime-alert network, contact JSA at (800) 537-0067 and request a copy of the organization’s Feb. 8 crime prevention bulletin.

Key Stats

$296 – Average price of gold in 1998, down from $333 in ’97 and $388 in ’96.

$192 – Cost per ounce for producing gold in the United States in ’98, down from $214 per ounce in ’97, $234 in ’96, and $256 in ’95. (Producers focused on lowering operating costs to maintain profitability as gold prices continued to drop.)

2,000 – Jobs lost in the U.S. precious metals mining industry over the last three years. A decline in exploration and development activity and other indirect losses eliminated an estimated 20,000 additional jobs.

6.7% – Growth in U.S. gold production in 1997, compared with 4.6% growth in gold production worldwide.

40% – Drop in money spent on worldwide gold exploration between 1997 and 1998 with $1.56 billion spent on worldwide gold exploration in ’98, compared with $2.61 billion in ’97.

28.5% – Of the dollars invested in worldwide gold exploration were spent in Latin America, which was the site of the most spending for gold exploration over the last four years.

$441.2 million – Amount spent on gold exploration in Latin America in ’98.

11,000 – Metric tons of gold valued at more than $100 billion are owned by India’s 1 billion people. The demand for gold (thought to be the country’s second-biggest import after oil) is said to stem from distrust in banks and government economic policy.

50,000 kg – Of gold coins were sold in North America during the first nine months of 1998, on track with 1986’s full-year coin total of 60,000 kg.

1410 b.c. to 1090 b.c. – Earliest archaeological evidence of metalworking in gold, discovered by Yale University archaeologists at a site in Peru. This was 1,000 years earlier than previously thought.

Sources:

(Numbers represent order of data presented)

1 Platinum Guild International (USA) Inc.;

2,3,4 Natural Resource Industry Institute;

5,6,7 U.S. Geological Survey Mineral Industry Surveys;

8 Wall Street Journal;

9 American Metal Market;

10 The Gold Institute.