How are you going to make money in your store? When everyone has finally sold all of their scrap gold!

I don't think the gold selling bug is over yet but I'm writing this at the end of April and many jewelers across the country have reported people selling their jewels have dropped off as much as 30%. Many have said the quality of items is also lower and lower price points. There is a gleam of happiness with some jewelers as a few have said people selling their 2 ct and above diamonds have increased.

If you're among other jewelers who have been buying gold then you may probably be almost debt free or have the lowest debt you've had in years. That's a good thing. No, I'm sorry that's a great thing!

But don't ask InStore Magazine to put you on their front cover as the savviest jeweler just because you have no debt and a hundred grand in the bank. All you did was win the Lottery. It also has helped that so many American's are out of work or have reduced paychecks. I'm not happy about it but if this was the Bill Clinton years you wouldn't have bought as much gold. So the buying scrap bug will decrease but when no one knows do you have another game plan in place to make a living?

How about Making money the old fashion way?

1. Selling merchandise but this time not doing it the way your parents did it (if your folks were jewelers as well). How about selling jewelry like other retailers in the country controlling inventory. Control it with what sells and what doesn't along with what's new, fresh and sells rather than items that just sit and cause accounts payables to grow.
2. Time to take the shop out of 19th or even 20th century and get it to the 21st century by using technology along with demanding that the shop become a profit center, just like it is for car dealer

I want you think hard about one concept and that's why you've made so much money in buying and selling scrap. It’s not because "there's a lot of money to be made in buying gold." There's not a lot of money in most cases, think about it. The margins are many times lower when you sell the gold to the refiner than when you might sell it as new, dollar for dollar.

1. If you buy a bracelet for the showcase for $500 you'd sell it for $1000.
2. If you buy the customer's scrap for $500 if you're lucky you might sell it to the refiner for $1000 but with all of the competition you might get $800, 20% less.

So why do you have so much money in the bank? To make $500 in example "A" above (selling from the case) you probably keep in inventory $500,000. You keep 1/2 million in a debt causing asset to make a measly five hundred bucks. In example "B" above to make $500 (or even the $300 in profit) you only have to keep in stock a measly $10,000 in inventory.

You might ask "where David do you get '$10,000 in inventory'"?

It’s the cash you have on hand. You've tied up ten grand, not to be used for anything but buying gold. I help folks with their QuickBooks and its evident. They have opened up a checking account called "Gold Scrap" or they have a box in the safe with $10,000 in it.  Big difference in how much inventory you have to have to make $500.00. There's one more aspect to making money in buying gold versus the showcase.

In example "A" above, you buy a bracelet and expect to make $500 in profit but that bracelet will probably sit in the store for about 12 months maybe even 3 years before you hear "show me the money".

Whereas with the gold scrap you'll make $300 to $500 when you sell it to the refiner, it typically will sit in the store for only 1 to 3 months.Making money in gold scrap versus showcase sales is "reverse osmosis". What's that? In selling from the case you buy at your leisure and then sell it whenever customers come into the store. The second part of this sentence can be tough.

In buying gold you buy it when the customers come into the store and sell it at your leisure. The first part of the sentence can be tough but luckily there's more demand for people getting money that spending money.

So which business model would you like to be in?

1. Make $500 in profit and buy & keep $500,000 in inventory and wait on the average 12-36 months to make that profit. If you're lucky you'll do this once a year.
2. Make $500 in profit and keep $10,000 in inventory (cash) to make a profit but do this 4-12 times a year!

So it's now time to plan for the cash cow to fall over dead and we'll eat hamburger. Relax, the cow is only a heifer at 5 years old, it may last until its 8 or just die from a new disease called "everything's better now". But plan we must.My brother and I are 14th generation jewelers and probably the last in the family to do so. We started working in our father's wholesale manufacturing shop at the age of 10, this was in the 60's.

Many of you may have either had parents who had a store back then or have learned the business in another job from someone like our father.

Don't imitate dad and mom or your previous mentor. Why? Because in the 60's and 70's to make keystone on a 1 or 2 carat diamond was like rolling out of bed. I worked at Neiman Marcus as their jeweler in 1971-72 and they sold a $100,000 diamond engagement ring and it had a 3 time markup on it.

Jewelers in those years had a gross profit margin of 60 to 72%. You can afford "stupid".At these margins you can afford to buy more inventory than you'd sell in a year. In fact your dad bought and paid for so much inventory and made a good living to boot that when he cashed out recently with a GOB sale he was able to retire. But if he had managed his inventory better he'd have a lot more in his 401k plan that what he cashed out in his store.You won't be so lucky because if you buy like dad and keep it forever thinking you won't be able to make a good living and have "manageable debt". Debt has caused many a jeweler to close up shop.

Today the typical jeweler is only making 42 to 47% gross profit margin. If you make 50%, big deal, 3 more points. When your day comes to cash out you'll have too much debt to pay off. You won't be like dad.

So what should you do?

Consider this question asked of you at a party: "So, how do you make a living?" If you answered "I'm a jeweler, I make or sell jewelry" you'd be dead wrong!
You should have answered "I'm a banker".
Why? Because your job is to make, keep and pile up money. That's a banker's job.
Jewelers think their job is to sell or make jewelry to make money. If that was so a banker would say
"I make loans". Neither is correct. Can you go bankrupt selling jewelry? Plenty have.
Can a bank go under making loans? Look at the past 3 years, need I say more?
Like a banker your job is to manage the money entrusted to you. The banker handles dollar bills (as you do), it handles credit card transactions (as you do) and manages an assortment of metals (as
you do). Its metals of course are nickels/dimes/quarters while yours is gold/silver/platinum.

Your job is to handle money.

A banker stock piles money by offering interest on savings accounts and later selling that money for a profit, called loans.
A banker must not build up its inventory of cash by going out and offering all 200 million people in America 4% on their savings account (a good return today).  There's no way it can make enough loans to Americans to make enough interest (sales to a jeweler) to make the interest it owes its
savings account holders (called vendors).

There has to be a balance between how much you sell (loans to a banker) versus how much inventory you stock (called interest to a banker. Every jeweler makes money when they sell jewelry. But not all jewelers have money.

Here's the secret to having money in a jewelry store:

Your average inventory level for the year should be no higher than the profit you'll make from selling that jewelry.
Memo is not added into this equation. So if you sell $1,000,000 and make a 45% gross profit margin your gross profit will be $450,000. You should not have over $450,000 in inventory levels. You will then make money and have money. If you keep $600,000 of inventory with those same sales you'll make money but have less money. In fact your accounts payables will be a lot higher.

There's a really great chance that increasing inventory from $450,000 to $600,000 won't increase sales enough to help pay for the additional accounts payable increase. To keep your inventory level lower than gross profit means selling like a pro and dumping items that become old. Old is over 1 year while dead is over 18 months.

Let's talk about the shop.

Remember the story of my dad and others like him, where they made 2-3 time markups on 1 carat diamonds? You can bet at those margins your dad gave great customer service! He was smiling all the way to the bank.

What constitutes great customer service?

"Oh, Hi Mrs. Smith. You're a good customer; we won't charge you for that repair".or "We need traffic, let’s charge little for the repairs, that will bring in traffic and we'll get'em on the sale of the diamond" Those days are gone.

The shop needs to be a profit center; it has to pay its own way. There are no more sugar daddies to go around. There are far less bench jewelers around today and in my experience that reason comes from one point and one point only Bench jewelers aren't paid enough nor have good enough benefit packages that compete with a job in another industry.

So if you've got a good one; your first and foremost goal is to keep them by paying very fair wages. Then charge customers enough money to pay for the jewelers, findings and shop costs PLUS double that amount for your profit.That just might mean raising your $28 sizing price to $39! But again as I've always said "Repairs are not price sensitive, they are trust sensitive."

Even in today's economy my jewelers are still finding the closing ratio is about 90% on repairs. Yes you'll have MORE walks on some pricier items but remember you're not a jeweler, you're a banker. Five years ago a woman might spend $145 to replace half shank on her first small diamond engagement ring or her mom's hand me down ring. But that was gold at $600 and today at $160 that shank is now $250. If she doesn't think it doesn't warrant spending it don't sell it for $145 to keep a customer, your cost on the gold is $60, triple that and just the gold sells for $180. So far you sold a shank for less than you would a $60 cost chain and you gave the labor away for free. So you think "they'll be back to buy a diamond?" There's no loyalty anymore and diamonds for the most part, like other showcase items, diamonds are price sensitive, not trust sensitive.Using my price book, showing the price in the book to the customer gives credibility and they will pay.

Technology

Its important to be efficient, especially at today's cost. Every shop should have a laser welder. It doesn't cost, it PAYS.  Leasing is under $400 a month and that's easily made up in a weeks repairs.

1. A laser will make 75% of your work go faster.
2. You will be able to do work that you had to turn down before (increase even farther your closing ratio).
3. Work that goes slower you can charge MORE for it, in our book its 50% more.
4. You can make more money saving the customer money. How? If you retip a ring with an emerald and you would charge to remove and reset the stone plus tipping charges and it would take 1 hour you might charge $156. But with a laser it can be done now without taking out the stone, you'd charge the customer $108 thus saving her money but this job now took 15 minutes.

At $156 you're charging $156 an hour.
At $108 you're getting $432 an hour!

In addition there's big money in customized jewelry. About 75%+ of my jewelers say custom is up in sales and still doing great and competes with profit margins with repairs. But you have to be well trained at this and have the right tools. On Polygon.net many jewelers have had great success using these Cad programs in order of ease of use:

Firestorm Cad
http://www.3dspacepro.com/news.php

Stuller
http://www.stuller.com/customization

CounterSketch A Gemvision/Stuller collaboration
http://www.gemvision.com/html/products/countersketch_studio/countersketch_studio.html

Gemvision Matrix
http://www.gemvision.com/html/products/matrix/matrix.html

Customers will pay to have items made as they like it. It will help you to sell more diamonds.Think back to the idea of selling a $1000 item from the case. Remember how you need $500,000 in inventory to make a $1000 sale? Well to make a $1000 custom sale requires virtually no inventory. What does it take? Training and knowledge.

For little money and an amount of time you can buy knowledge.While you're still paying the bills with scrap gold sales or "just plain luck", time to get some more knowledge. Knowledge on how to handle your inventory, in the 21st century and how to make a lot of money from the shop.

I'm reminded of 3 phrases:

"We make money the old fashion way, we earn it."
"Insanity is defined as doing the same thing over and over and expecting different results."
"Stupid is as stupid does!"

Sincerely,

David Geller - JewelerProfit | May 3rd, 2012