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Retail Profit Margins
Sep 5, 1997 12:23 PM
By Martin Rapaport
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RAPAPORT...
Retailing in the United States has evolved greatly over the past few
years. In general, large firms have increased market share at the
expense of smaller single unit 'Mom and Pop' stores. In many instances
large mass merchandisers such as Wall-Mart and Sears have
significantly increased their offering of jewelry products and become
price leaders for inexpensive jewelry categories. Large discounters
such as Price Club and BJ's have also established strong jewelry
retailing divisions that are beginning to offer better quality larger
diamonds at their traditional 12% to 15% markups. Large jewelry chain
stores have also introduced sophisticated computerized inventory and
sales management programs which help them compete with the mass
merchandisers and discounters.
The proliferation of all these large firms selling jewelry has
resulted in a severe 'oversupply' of jewelry stores in the U.S.
market. Every mall has too many stores selling almost identical
products. While overall U.S. retail jewelry store sales are healthy
and increase at about 3% to 5% per year more firms are doing less
business because there are simply too many stores selling jewelry.
Naturally, the overabundance of retailers has created tremendous
competition for market share. While some firms compete with better
quality product, unique design and name brand recognition that allows
them to maintain profit margins, the vast majority of firms compete on
price. The price competition has grown so severe that firms are forced
to sharply reduce profit margins in order to maintain market share.
Jewelers are killing each other to stay in a market that has become
less profitable. Undoubtedly, a huge shakeout is developing in the
U.S. market. Price competition and the resultant lower profit margins
will not cease until there are fewer retailers.
Many of the big firms do not bother starting out with high prices.
They simply attack the market with the lowest possible price, first
time out. The buyers look for killer categories and they will not
stock items unless they know they have it at the lowest possible
price. This puts tremendous pressure on the diamond cutters and
wholesalers that sell the large firms. The price competition rampant
in the retail market has worked its way up the distribution channel.
The growing market share of large retailers at the expense of small
retailers has also had a negative impact on profitability.
Traditionally, large wholesalers and cutters were bigger and had
greater market power than small retailers who allowed the seller to
set prices and conditions of sale. All of this has now changed. The
large retailers are now dictating terms and prices to the sellers.
They are using their size scale advantage to enforce a buyers market.
In fact, many large retailers no longer buy diamonds they buy diamond
jewelry programs. The programs allow retailers to return unsold
merchandise and offer advantageous memo/credit terms (see last months
Cash or Trash article). Finally, it has become almost impossible for
small wholesalers or cutters to sell directly to the large firms. The
small sellers cannot offer jewelry programs, massive quantities of
same size/quality diamonds, or EDI computer linkups. Large retailers
work exclusively with large suppliers. As large firms gain market
share small sellers have fewer customers to sell to and find
themselves locked out of the market.
One positive aspect of the developing U.S. retail market is that many
smaller independent retailers and some large chains are turning to
quality competition instead of price competition. These firms are
developing a growing market niche that offers well designed quality
products at reasonable profit margins. Small retailers have an
advantage in this boutique market because they have better
personalized customer contact and custom product development skills.
In some instances grading reports and price sheets have severely cut
into profit margins for important center stones. One hears the refrain
" We used to give away the mounting in order to sell the diamond - now
we give away the diamond to sell the mounting." In any case, the
overall outlook for this sector is most positive and it will provide
critical relief to smaller suppliers that specialize serving these
specialty retailers.
The profitability problems of the U.S. retail sector will take time to
resolve. Two things will have to happen. Firstly, there must be a
significant reduction in the number of stores selling similar items.
Secondly, diamonds must become scarcer so that a sellers market can
develop. The current glut of small inexpensive Indian polished has
empowered mass merchandise buyers.
One cannot blame De Beers for the restructuring of the U.S. retail
market or for the glut of inexpensive small goods resulting from
Argyles departure from the cartel and the resultant free market for
small rough. However, we can hope that De Beers will do something
about the market for 1/3 and larger polished. The CSO can decrease the
quantity of rough available to firm the market or decrease the price
of rough so that that there is rational relationship between rough
costs and the prices retailers are willing to pay for polished given
the current quantity of polished available in the market. Finally, De
Beers might pay more attention to the growing segment of specialty
retailers that are maintaining profit margins through quality product
and service. Advertising and promotion that focuses on quality would
help this sector.
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Tags:
De Beers, Jewelry, Martin Rapaport, United States
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