Replacement: A Revenue Engine or a Store Headache?

Sometimes jewelry comes to a bad end. It?s stolen, lost, or damaged beyond repair. If the item is covered by insurance, there?s a good chance the person who suffered the loss can be made whole again. There?s also an opportunity for the jeweler who replaces the goods to make a modest profit while simultaneously building a relationship with a new customer. On the other hand, the ?replacement? process is fraught with jeopardy every step of the way, putting both profits and the jeweler?s reputation at risk. If you?re struggling with replacement services at your store, here?s some advice.

What a JCK poll shows. How many jewelers make replacement part of their business? No one knows for sure, but in a recent poll we conducted of 100 jewelers, 72 said they provide replacement services. Revenues generally range from $10,000 to $20,000 a year, with one store reporting an intake of $350,000! Profit margins, though, are tight ? from only 5% to 40%, depending on the value of the item and the insurance company involved. Counterbalancing this is the fact that many customers add their own money to the insurance payout to trade up to a more valuable piece of jewelry.

For many jewelers, profits are less important than finding and developing new customers. Says Gilbert Davidson Jr., owner of Klar Brothers in Muskogee, Okla., ?Replacement is not as lucrative as the retail end of the business. But on the other hand, it?s business I otherwise wouldn?t do, so I sure wouldn?t mind more. It has helped expand our customer base, and that?s the lifeblood of any small independent jeweler.?

One store responding to our survey reported gaining 50 customers during the first six months of 1998. The median number of new customers gained was five. ?The clear benefit to the jeweler is the obvious opportunity to bring a new customer into the store,? says Joe Romano, president of Scull & Co., a 200-client jewelry consulting practice in North Bergen, N.J. ?The cost of developing the customer [through replacement services] is quite cheap compared to other new-client-development techniques.?

Sometimes a jeweler just gets lucky. Tim Kreps, owner of Minneapolis-based Custom Creations, helped a customer replace his wife?s insured $600 gold omega bracelet that was lost when a link broke. One month later that customer purchased $35,000 worth of diamond jewelry. Says Kreps, ?A lot of stores aren?t willing to invest the amount of time and effort it takes to work insurance replacement. But the business gives you an opportunity to provide a real service at an emotional time. It really develops that small-town-jeweler type of rapport.?

When customers cash out. On the downside, jewelers can lose valuable time away from the sales counter researching replacement values for insurers and meeting with replacement clients who may ultimately cash out, taking the insurance payment instead of replacing the jewelry. A key consideration is whether you have the replacement items in stock when the customer visits your store. Glenda Stevens, who oversees jewelry replacement for State Farm Insurance Co. of Bloomington, Ill., consults with jewelers who bemoan the high rate of cashouts. She finds that problems often occur when jewelers show clients the merchandise in a catalog. ?Having the merchandise ready improves the success rate,? she says.

If you suspect a customer is obtaining replacement bids when all he really wants is the insurance check, clear the air right up front. Explain what the replacement value policy means and indicate the choice of merchandise vs. money. ?That saves us a lot of grief because we could spend many hours putting together a proposal when the customer wants the money instead,? says Fred Weber of Weber Jewelers in Dayton, Ohio. ?We also tell him, ?We?re here to serve you. You?re not compelled to do business with me.? Now I?ve made that person a customer, not a captive.? Some 30% to 40% of his replacement customers opt for the check.

Another peril: bearing the brunt of customers? anger and confusion about their insurance coverage and the burdensome process of filing a claim. Many customers don?t realize ?replacement? insurance means that after a loss they?ll receive jewelry or a check equivalent to what it costs the jeweler to replace the item. They?re often furious that the cash-out amount is lower than the original purchase price. Among jewelers responding to our poll, 63% said insurance companies disclose this price information to their customers. Nearly half of the respondents (48%) see this as a serious problem that can damage client relationships. Almost as many (44%) regard it as merely a minor problem, and only 8.5% don?t consider it a problem at all.

How can a jeweler prevent or defuse these situations? Simon Katz, owner of Simon Katz Jewelers in Clayton, Mo., a St. Louis suburb, educates adjusters about why they shouldn?t quote cash-out amounts before the customer visits the jeweler. ?If you tell customers they?ll get 60% to 75% of what they paid for their jewelry, you?ve got a battle on your hands. But if customers don?t have that negative attitude from the beginning, it?s much easier to adjust the losses. The adjuster can always quote a cashout after the fact if they don?t want to replace. The adjusters who understand this process have resolved a lot of problems quickly.? Of the customers who turn to Katz?s store for a replacement, only 15% elect to cash out.

In instances in which customers know the replacement amount before walking in the store, Katz tells them, ? ?Let?s just see how we can make you whole.? As long as the customer gets what she had and maybe a hair more, she?s usually happy. What the insurance company pays for the item should never become an issue.?

However, when the difference between the replacement value and the purchase price is an issue for the customer, consultant Romano of Scull & Co. recommends that jewelers ?tell them the truth ? it?s okay to make a profit. To imply that you would sell to your customers at cost is insulting to their intelligence when you think about it.? When that still doesn?t help, some jewelers simply put the claims adjuster on a speaker phone to explain to the customer the limits of their coverage.

Empathize with the customer?s distress while establishing your credibility as someone who will work in his interest. The customer may be traumatized by a home burglary or robbery and may have had to file multiple police reports and obtain competing bids to replace the jewelry. Jewelry often has sentimental value, and losing it can be devastating.

Jewelers who gave it up. For some jewelers, the frustrations associated with replacement just aren?t worth it. Ronald Greenberg, CEO of Curtis Greenberg and Son Jewelers Inc. in Steubenville, Ohio, says his firm no longer provides replacement services after nearly a decade of doing so. ?We have found that you put a lot of time out for not a lot of return and a lot of aggravation.?

Bill Brundage, owner of Bill Brundage Jewelers in Louisville, Ky., is another dropout. ?Obviously, jewelers are making a profit. But sooner or later the replacement process will turn around and bite you in the rear end. Customers interpret the jeweler?s discounts for the insurance company as the jeweler cutting them out on the cash settlement.?

Brundage is also concerned that the process exposes retail markups ? especially when insurers ask claimants to obtain competitive bids from three different jewelers. ?It truly doesn?t make sense that here we are as a business that sells itself on trust and integrity and this replacement process tells our customers we don?t have it. Jewelers end up in a price war against each other to serve the insurers.?

Michael Dunn, vice president of Continental Jewelry Replacement in Tampa, Fla., sums the issue up this way: ?A very big concern is whether you?re willing to focus a qualified person?s time and energy to do this properly. If you?re not, you?re going to waste a lot of time trying to fool around on the fringes. Unless you can create an atmosphere that builds confidence, unless you can treat people absolutely honestly, the customer wonders why they were sent to you and whether you?re in some kind of collusion with the insurance company.?

Three Ways to Increase Replacement Profits

Some jewelers increase their replacement businesses independently by cultivating relationships with insurance companies and their claims adjusters. That?s what Simon Katz of Simon Katz Jewelers of Clayton, Mo., did as he aggressively pursued replacements over the past six years. ?It?s almost like having a salesman out there bringing customers to your door,? he notes. Katz assigned his replacement business to one associate and helped insurance adjusters ?resolve claims in a very quick and orderly manner with minimal problems on their part.?

Some jewelers work to get referral business from insurers such as State Farm. The Bloomington, Ill., company has thousands of participating jewelers who handle claims. Other jewelers build a replacement practice through Jewelers Mutual Insurance Co., which offers personal jewelry insurance policies exclusively to customers of the jewelers it covers. The benefit of the State Farm and Jewelers Mutual arrangements is that the insurers pay jewelers on a sliding scale from 5% to 40% over cost for handling insurance claims. Jewelers Mutual says that 99% of its claims result in replacement so the jeweler doesn?t have to discuss cash settlements with the customer or the insurance company.

Another approach: Buy a territory from a firm like Continental Jewelry Replacement Co., which has 50 stores nationwide handling more than $12 million in jewelry losses annually. The Tampa, Fla., firm provides training and ongoing support to affiliate jewelers and markets their services to nearly 100 insurance companies. Continental says its affiliates? margins are 5% to 40% on volumes of $5,000 to $70,000 in replacement business each month. The cost to buy an affiliate territory, depending on the location and size, is $12,500 to $30,000 plus monthly fees of $250 to $300.

Jack Schatzley, an independent retailer in Toledo, Ohio, says his store posted revenue increases of 20%, 21%, and 27% in its first three years as a Continental affiliate. Last November alone the store did $37,000 in insurance business. Another firm, Custom Creations, signed up as a Continental Jewelry affiliate in 1993 to serve a four-county territory in Minnesota. At the time the firm was a wholesale trade shop serving retail stores. ?We wanted to expand yet not compete with the retail stores we do business with,? says Tim Kreps, owner of the firm, which now posts $1 million in annual revenues ? half from the trade shop, $300,000 from replacement services, and $200,000 from retail sales to former replacement clients.

Some 500 insurers throughout the United States cover jewelry losses, typically through personal-article floaters to homeowners insurance policies. Many of these companies, however, are centralizing their claims offices. This will mean that many jewelers will no longer be able to develop relationships with claims adjusters in their own communities.


Continental Jewelry Replacement Co., (800) 388-9363, Jewelers Mutual Insurance Co., (888) 884-2424, State Farm Insurance Co., (309) 766-9878