Ramble On Ron

Diamonds, Music and other Facets of Life

Message To Retailers: Buy Diamonds For Stock!

Posted on | January 28, 2012 | 4 Comments

In today’s economic climate, jewelry retailers need to find new ways to increase margins, while still competing with e-tailers and everyone else in their market. Buying gold has become a necessity for a lot of traditional retailers in order to keep cash flow positive. However, the gold buying train won’t last forever. Even the popular website/company Cash4Gold seems to have run it’s course.  Don’t get me wrong, there is still money in gold buying, but the frenzy that went on for the past ten years is over.

Round Diamond with Baguettes

Round Diamond with Baguettes

So what else can retailers do to increase profitability? BUY DIAMONDS FOR STOCK! Most jewelry stores do not do this – they either have diamond companies leave stones with them and pay when they are sold, or they call a dealer when they have a specific need. This practice is old and antiquated and in my opinion; those days will be over soon. Twenty or thirty years ago, jewelers could get items on consignment and make DOUBLE their money on it. Not anymore! Consumers are too educated for that. The internet has leveled the playing field in a big way.

In my business, we’re kind of a hybrid between a retailer and diamond dealer. We buy a lot of diamonds from the public, at auction, from dealers, from other jewelers, or any place where we can find good deals. So we OWN all of our diamond inventory. We sell to retail customers and to the trade on a regular basis. It gives us a huge advantage in the diamond world because we know where diamond dealers will buy (because we sell to them) and we know what their prices are. Any savvy jeweler can buy diamonds from dealers at a better price than their “list” or “consignment” prices. How? Pay cash up front. It’s that simple – just buy for stock.

How much can you save? That all depends on the stones you are buying. In my estimation, you can save anywhere from 10-30%. Think about it, diamond dealers/manufacturers are GIVING you inventory and WAITING to get paid. Don’t you think there is a HUGE premium on those stones for that reason? Well there is! Everyone wants to get paid right away these days.

If you were in your diamond inventory for 20% less, not only would you be increasing your margins, but you could also give your customers better deals, and these days, that’s important. Go try to tell Rolex, Cartier or Tacori that you want to pay them right away but want to get 20% off – hell, they won’t even give you 5% off!

Now, the argument against this is that jewelry stores have to pay for their high end jewelry lines and watches, so their cash flow doesn’t allow them to buy diamonds. This doesn’t make sense to me. If you buy into a bridal, jewelry or almost any watch line, (expect a few that hold value) you are usually buying a name brand. If you get stuck with items that you can’t sell, you have to take pennies on the dollar when you liquidate. Diamonds, on the other hand, are very liquid and if you buy right, you won’t lose a nickel when you have to sell. Doesn’t that make sense? It’s important to own something of value and pay a good price for it.

I would love to hear some thoughts from retailers on this subject.

P.S. I own a lot of diamonds and can sell to you for less than any dealer! :)

Comments

  • David Geller

    Making better margins are always a good thing. But jewelers typically don’t have money problems because they don’t make good margins. “Typically”. The real reason for having money problems is having too much old inventory.  
    If you buy a diamond for $1000 and sell it for $1500, fine.

    But if you can buy it for $800 and sell it for $1500, even better, right? 

    But not if every time you sell a $1500 diamond you buy TWO MORE. No matter if you bought the original $1500 diamond for a buck, you’d still wouldn’t have enough money in the $1500 to pay for two $800 diamonds as they cost $1600. 
    The more margin/money you make the better off you are but you can make money and go bankrupt.  

    So how much inventory should you have? 

    Look at TOTAL sales (without memo’s) of PROUCT for 2011. Exclude buying/selling gold and repairs and memo.  
    Look at TWO numbers.

    Gross profits from product sales
    and
    cost of goods for those sales 

    (cost of goods for 2011 is NOT what you PAID for stuff, it’s the cost of what you sold. BIG difference). 

    So lets say you sold in jewelry in 2011 $1,000,000 in sales and your profit margin was 48%. Therefore your two numbers would be:

    Gross Profit (48%) =   $480,000
    Cost of Goods      =    $520,000

    The correct amount of inventory to have is either $480,000 or $520,000 or any number in-between.

    Inventory levels should really be no higher than your gross profit dollars. In this example $480,000.

    If you had this inventory level you’d have less debt and more money in the bank and fresher inventory.

    Here’s a secret. Add up inventory over 1 year old in your store. Multiply it by 80% (multiply by “.80″). Now look at your total debt:

    Accounts payablesCredit Card DebtLines of CreditBank LoansMoney owed to owners.

    Add it up and typically 80% of the value of aged inventory is equal to your stores total debt.

    Get rid of aged inventory and
    1.   You’ll have the right amount as stated way above.2.   You’ll have much less debt.3.   Because you have much less debt you’ll have the ability to buy newer stuff and your store will have fresher merchandise.
    Going back to the right amount of inventory from above:

    Gross Profit (48%) =   $480,000
    Cost of Goods      =    $520,000

    If you keep the Gross Profit number ($480,000) as I suggested you’ll have a little lower inventory selection level and MORE money in the bank.

    If you keep the Cost of Goods number ($452,000) as I suggested you’ll have a little higher inventory selection level and LESS money in the bank.

    Your choice but both are good choices. This is how GMROI is figured (Gross Margin Return On Investment).

    So make good margins but if you want to know how many jewelry stores are doing well in this economy is because how well they handle inventory. If you’ll do this you’ll also increase your TURN, the amount of times product moves in and out of your store each year.

    So make your margin but don’t lose sight of inventory levels.

    And yes my fellow jewelers diamonds way over a year old is dated merchandise. Just because it’s a diamond doesn’t mean squat. If a $1000 cost item would sell for $1600 and its 2 years old, does it matter if its earrings, a jade ring or a diamond? No as when it sells it only generates money. There’s nothing special about diamond money versus earring money. If it takes over a year to generate money, it’s a sad thing.

    David Geller
    Director of Profit
     

  • http://www.facebook.com/ronsamuelson Ron Samuelson

    Thanks David for your comment. I agree with you – my point was that if jewelers were to stock diamonds, chances are they can get their money back if they haven’t sold the stone in a year. There are VERY few jewelry lines where this is true…

  • umesh. g.chavan

    Diamonds, Gold, & other metals are appreciating assets.. Inventory management coupled with designs specifically targeted to sell the goods is very much essential. The cost of the funds used to buy the diamonds has to be taken into consideration. The biggest advantage with inventory is your reaction time is very little with respect to manufacturing jewellery thereby the customer can be assured quality at a competitive price. Throughput Turnover time improves.    

  • http://www.created-diamonds.com/cultured_diamonds.html diamondboy

    The points above Ok when we talk about mounted gems but when business comes to standalone gemstone the system described above is not working correct. The first thing  when some body purchase the diamond is to find something special. Every person has own thinking about what kind of diamonds they are need. Some times the people don know what they are looking for. And this thing is turn off all stock system.