It’s impossible to make a profit selling diamonds.
That seems to be the relentless mantra we hear from one end of the diamond world to the other these days. But, believe it or not, there still are American jewelers selling $10,000 loose diamonds for $25,000 and $10,000 pieces of diamond jewelry for $30,000.
They obviously haven’t gotten the message.
To be fair, such sales are the exception. But, by and large, jewelers across the country are actually a little more pleased with their diamond profits than they were just three years ago. A poll of retail jewelers – members of our retail panel – reveals that only 16% say their diamond jewelry sales aren’t profitable enough. That’s down from 25% in 1995. Moreover, 72% report that sales are “reasonably profitable,” up from 63% three years ago. The remaining 12% in each year’s poll say their diamond jewelry sales are “very profitable.”
This isn’t to say that gross margins at the diamond counter aren’t under pressure. Mall jewelers have to sell against a half dozen or more of their colleagues, including chain outlets, as well as department stores ranging in ambiance from a Sears Roebuck to a Nordstrom. Add in stand-alone discounters such as Wal-Mart and Costco, “upstairs wholesalers” willing to work on sliver-thin margins, and upstart competition from the Internet and you’re looking at a highly competitive market.
Operating in the heart of such competition, jewelers rely on two tactics to survive: quality and custom work.
At Espling Jewelers in Jacksonville, Fla., Joe Espling credits strong sales growth to a combination of these two factors. “We sell high quality,” he says. “A lot of the other stores around here sell garbage.” He’s also a custom specialist, something that the business promotes through a well-constructed and informative Web site. His store gets keystone or better on diamond jewelry up to $1,000 wholesale cost.
In Belleair Bluffs, a less competitive Florida community, Robert Young Jewelers is enjoying explosive sales growth with a similar emphasis on quality and custom work. His typical diamond has an SI1, VS grade and is well made. “Cut is very important for our customers,” Young says. Provided the cut is good, he finds he can make ready sales of K and L color stones mounted in 18k gold settings.
For diamond jewelry sales up to $2,500 retail, Young works on a very comfortable 58% gross margin, far above the industry average.
The margin story. Jewelers of America’s annual Cost of Doing Business Surveys provide an illuminating picture of what’s happening to jewelers’ gross margins at the diamond counter. It’s a bit depressing.
Here’s how JA recorded average gross margins for all jewelers on both diamond jewelry and loose diamonds for the years 1992 through 1996 (the latest available):
Year Diamond Loose Jewelry Diamonds
For both product categories, the biggest drop came between 1995 and 1996. Average figures, of course, don’t tell the full story. Consider, for example, that in our latest poll, median gross margins ranged from a high of 55.5% for diamond jewelry costing the retailer $100 to a low of 33.3% for items costing the jeweler $10,000.
It’s also important to think in dollars as well as gross margin percentages. At the low end of the scale, where the wholesale price of the diamond jewelry was only $100, panelists’ profit ran from a minuscule $5 to a bountiful $400. At the high end of our study, where the wholesale cost is $10,000, profits ran from as low as $300 to as high as $15,000.
Again looking at the dollars, there’s another significant finding. Up to the $1,000 wholesale mark, panelists’ retail price points only held even with or fell below the comparable 1995 figures. Above that wholesale mark, prices were higher than in 1995 at four out of five points.
One possible conclusion: Jewelers are finding it hard to get price increases in the lower end of the market, where competition is intense and includes department and discount stores as well as TV home shopping programs. At the upper end of the market, where jewelers compete largely against other jewelers, better markups are possible.
Dan Donaldson of Donaldson’s Jewelers in Topeka, Kan., for example, says he routinely gets keystone or better on any diamond jewelry, no matter what the price. “We deal in extremely high-quality merchandise,” he explains. Likewise, Stephen Alie, who operates stores in Dover and Portsmouth, N.H., says he’s been getting slightly better margins at the higher end of the diamond jewelry market. “You’re dealing with more sophisticated buyers,” he says. “They accept the higher prices because they understand [that they must pay more for] quality.”
Where the competition is. Panelists agree overwhelmingly that competition is putting tremendous pressure on diamond counter margins. As in 1995, they identify other independent jewelers as their prime competitors, followed by regional and national jewelry chains, upstairs diamond merchants, and diamond dealers who sell directly to consumers. Surprisingly, they say TV home shopping shows are less of a threat than they were three years ago.
Mall stores are especially concerned about competition from the jewelry chains. Larger malls may have outlets from three or four different chains.
Markups on diamond jewelry
Retail median selling price
To fight for their share of mall business, some independents and small chains are adopting a two-tier policy. They stock higher-quality, more expensive diamond pieces for more discriminating buyers and a basic bread-and-butter line for price-conscious shoppers. There are many such consumers.
Jim Nielsen at Condon Jewelers in Madison, Wis., for example, says, “The lower-priced items do very well. It’s easy for someone to spend $500.” His selling price for a $100 wholesale piece of diamond jewelry runs between $250 and $350 and for a $200 wholesale between $450 and $600.
Nielsen says the main reason his diamond jewelry sales are reasonably profitable is that he buys well. “We buy a lot from Polygon,” he says. “But we only buy if it’s 40% off Rap. We shop around.”
Competition also makes a mess of retail price tags. The head of an aggressive Midwest chain concedes that his stores routinely knock $500 off a $1,995 price tag, though even after the reduction there’s a fairly substantial margin. “You can’t survive on keystone any more,” he says. In Alexandria, La., Carl Carstens at the C.A. Schnack Jewelry Co. explains that “we would try to sell [a $7,500 wholesale] diamond for $12,000, but probably end up pricing it between $10,000 and $12,000. We’ve made some selective markdowns and probably are going to continue to do so.” Indeed, for many jewelers, it seems that almost any diamond price is subject to negotiation, certainly at the higher levels.
Contradictions. For all the talk about price shopping, a third of the panelists responding say their customers believe the diamond jewelry in their stores is priced just about right and 43% say their customers believe diamond jewelry is even of better value than most other jewelry store products. Further, more than half these jewelers say their customers are reasonably aware of just how much diamond their money will buy. Another third are “shocked” at how little their money will buy – and a most desirable 14% are “pleasantly surprised” that their money will buy a larger diamond than they expected.
There is another contradiction: For all the talk in the trade about falling diamond margins, a lot of jewelers still think dollars rather than margins. “I know I probably should think about margins,” confesses one successful and sophisticated retailer, “but, quite honestly, I think dollars and cash flow.”
Maybe if more jewelers thought in terms of margins, they wouldn’t have to be so concerned with cash flow.
Assistant editor Barbara Wenger provided research assistance for this article.
|Jewelers’ cost||Retail range||Median|
How jewelers have changed their diamond inventory
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|Use memo less||3||2|
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How jewelers’ margins compare to 1995
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