[Jewelry making - Article 00958] - [Orchid] Diamond Dealer Profits

[David S. Geller]

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    Had a long conversation with a N.Y. diamond dealer today, one man
    shop. He had been reading my writings in InStore magazine and wanted
    to pick my brain on inventory levels. 

    Diamond dealers also buy too much it appears. 

    He told me that he'll find a real steal on the market for a stone
    and will buy it because it's such a deal. 

    He'll continue to buy these steals because they are a steal until he
    chokes, then he stops buying. 

    I told him he needs to buy steals but don't buy more than he can
    sell in a year. He understood that but still buys. 

    I figured his Gross Margin Return on Investment and because he makes
    LESS markup than retailers that he needed less inventory than we do
    for the same sales as we do.  

    Gross Margin Return on Investment is how much money the total
    inventory (not what sold, the total inventory) makes for you in one
    year. 

    It is found by dividing your gross profit DOLLARS from items you own
    divided by your inventory level. 

    You always want to have a Gross Margin return on Investment that
    exceeds a dollar. You always want your investment to bring in more
    than what you have invested in it. 

    You would normally think inventory should bring in DOUBLE cost,
    right? But as we all know, not all inventory sells. So we want to at
    least make "decent money" on inventory. 

    Let's say you sell $1,000,000.00 in inventory and your cost of goods
    on that inventory is 50%, so your cost is $500,000.00 as is your
    gross profit. (Because we keystoned it all). 

    If you have inventory of $400,000.00, divide the gross profit of
    $500,000.00 by the inventory of $400,000.00 and you get $1.25. That
    means for every invested in inventory you get back $1.25. That's
    cool numbers. Average successful jeweler in America gets $1.14 GMROI. 

    Coincidentally, if you divide the cost of goods ($500,000.00 divide
    by the inventory of $400,000.00) you get a TURN of 1.25, which is
    also good. Good turn means good GMROI. It doesn't always equal the
    same number as this did because cost of goods and gross profit are
    usually never the same numbers. But a good turn means good return on
    investment on inventory. But if you have the SAME cost of goods and an
    inventory level of $600,000.00 then your GMROI is only 83 cents.
    Which means for every $1.00 in inventory it brings back only 83
    cents. :-( 

    So going back to the diamond dealer. Dealers make less gross profit
    dollars on their inventory because their markup is less. That means
    they need a HIGHER turn to make money. 

    This fellow had a gross profit of $333,000.00 and his inventory was
    $500,000.00. 

    His Gross Profit Return on Investment was .66 (66 cents). That meant
    for every dollar invested into inventory he got back only 66 cents. 

    Why? He buys. When Israeli diamond dealers come to his door in NY. ,
    he feels like if he doesn't buy, they won't sell him in the future
    and he'll lose touch with pricing. 

    He just buys. 

    His sales are hurting real bad. All he stocks is diamonds and they
    never get old. He has stock he said that was 5 years old. 

    I told him to get a "return on his inventory investment" of $1.25
    that he needs only $275,000.00 in inventory. He needs to stock less
    but reorder more quickly. 

    When he gets these "steals" (really good buys) he still tries to
    make his regular markup. To make a "homerun" as he put it. I told him
    that's always great but you'd do better to pass the savings onto the
    customer and unload it for a good profit, not a fabulous profit. When
    you sell something you bought cheap in the first year it's a
    "fabulous profit". After one year it's no longer a fabulous profit,
    it's either an O.K. profit or so small it's not worth the effort. 

    He said he "got it" but keep telling me "you don't understand." I
    kept telling to forget he's in the diamond business, to think in
    terms of "gross profit dollars" not markup. 

    Personally I don't think he'll break the habit. Why? He made money
    in the 90's when everyone was buying diamonds. He's used to making
    money the easy way. Today you make money by managing your inventory
    levels and that's real foreign to him. 

    Gross Margin Return on Investment shows you how much you're making
    on your total inventory investment. To find yours find the GROSS
    PROFIT from showcase sales only (not special orders or shop sales)
    and divide that by your average inventory level. If it's $1.14 or
    more you're up there with other successful jewelers. 

    Less than a dollar is pitiful. 

David Geller
www.jewelerprofit.com



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