More than eight years ago (April, 2011) I wrote the original “Death of A Thousand Cuts” since gold prices were climbing and the impact it was having on margins were not apparent to many retailers as the price of gold continued to increase over time. The impact wasn’t noticed because of the way point of sale systems would keep track of “cost”, often averaging the cost of the items that were purchased over time. Each time the item was reordered, at higher costs, margins would take a hit. With gold prices going up nearly 30% over the past year ($1,176 last August to just under $1,500 on August 8th of this year), I thought it important to re-release this newsletter. I’ve made some edits to the original.
(Original Release: 4/26/2011)
We’ve all gotten our share of small paper cuts, which might sting a bit, but are quickly forgotten. Even if you get these frequently throughout, say, the course of a year, you may not pay too much attention to them. However, if you were to receive 1,000 of these small paper cuts, all over your body at the same time, you would certainly notice them!
We are seeing a significant problem in the industry and I’d like you to avoid waking up in 6 months to the painful realization. As I write this, gold is hovering at (updated) $1,500/oz. What’s been happening is the ongoing increases in metal prices have been steadily raising the costs of inventory, which is to be expected, of course, but for jewelers who are reordering regularly, these costs have been creeping upward, a few dollars at a time. Unless you are revisiting your margins from time to time, or are tracking the cost of your vendor styles, these incremental increases are slowly eroding your margins.
Creeping cost prices that go unobserved, or worse, ignored, are not having the corresponding impact on retail prices. The result is that retailers are very slowly, but steadily bleeding margin! Three dollars here, ten dollars there – we are seeing 1, 2 or 3 points of gross profit margin evaporate without being noticed. Take this out over a couple million dollars in sales and you’re giving up $40,000 of GP over the next 12 months! (That was at a 2% margin loss of $2 Million in sales)
(Note: The average cost is $204 in this example)
I’m writing about this now since a lot of you have been restocking inventory and the price difference between current inventory and inventory purchased 6-12 months ago has become very noticeable.
Please start analyzing your inventory by Vendor Style, at cost. Look at your retail prices of those items that have been in stock multiple times and decide if you have been adequately covering the cost increases. It should go without saying, but send an inventory list off to your primary suppliers to get current cost prices and make adjustments to your on-hand accordingly.
You are also going to have to revisit each style to determine if the items are still attractive at the new retail prices (their perceived value). This is going to be tricky as some of your former “fast-sellers” may hit a wall and stop selling as they are being priced above their perceived value that made the item a fast-seller in the first place.
Also, please pay attention to the number of days it takes for your known fast-sellers to sell. If the price increases are slowing the sell-through days, you may have to start adjusting your fast-seller lists and look for new merchandise within the category/price point.
No, this isn’t fun and I don’t anticipate it’s going to end anytime soon. But while we are on this roller coaster ride, you can be making additional margin on the inventory you had already invested in – but please be aware of the margin slippage on new inventory.
Finally, a word on how to price new goods. If you expect the current run up in gold to continue, ask your suppliers to give you pricing at, say, $1,600 gold (of course, bill you at current gold!), which will allow you to see what these items may be selling for before too long. If, for example, you are buying with 50% margins in mind, by using the higher gold price, you will give yourself a cushion of a few points of additional margin built in and will also be able to keep your retail prices steady as gold bounces around. Because you are building in higher margins up front, you will be able to stand slightly less margins 8-12 months from now. If gold should shoot up even higher, you will have to do this exercise all over again!
The jewelry industry is heavily dependent on gold prices. We can’t control (or even know) what’s going to happen with interest rates, bond prices, trade wars, overseas conflicts, unfunded liabilities, infrastructure attacks, or valuations of domestic or foreign currencies. But we do know that each one of these subjects has an impact on the price of gold. All we can do is pay attention to the rise and fall of gold prices and hedge our bets.