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Rapaport's Markup Survey

Jan 13, 1999 11:25 AM   By Martin Rapaport
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RAPAPORT... Rapaport's Markup Survey


Surveys are always interesting because they present a cross-section of information from a variety of market participants. The Rapaport Markup Survey results are particularly interesting because they deal with what is probably the most sensitive subject in our industry. Profits. Specifically, how much money is our trade making on the sale of diamonds, gems and jewelry.

Aside from the hard data tables with average percentage markup figures for various price points (p. 30), the survey provides a number of insights into how small to medium-size U.S. jewelers make decisions regarding markups. While the survey is very limited, it does seek to go beyond the mere markup numbers and gain an understanding of how jewelers adjust markup levels to maintain market share and optimize jewelry sales.

Before we take a look at the survey results, we should consider the limitations of our survey, I also take this opportunity to personally thank all those that took the time to complete the survey and

return the form to us.

Surveys are just one way to discover empirical price information. It can be argued that a survey is not the best way to discover retail markup levels. From a purely empirical-statistical perspective, objective market observations do a better job of evaluating prices and resultant markups. One very simply way we at Rapaport discover retail markups is by buying a piece of jewelry, breaking it up, and evaluating the differential between wholesale market cost and the retail sales price. The advantage of this method is that all the data is hard and not based on the opinion or memory of the person completing the survey.

While the survey does not tell us the exact level of markup for a specific item in a specific store on a specific day, it does communicate the overall levels of markup rather well. Another advantage of surveys is that they allow us to go beyond the mere numbers and ask questions about the motivations, opinions and perspectives of decision-makers.

Our Rapaport Markup Survey results are based on data collected from June 1997 through June 1998. Three hundred and forty-five firms from around the world completed survey forms. After careful consideration, we decided to focus our survey results on a specific market and level of distribution and have therefore limited the survey results to the data from the 230 U.S. retailers that responded. These retailers were mostly independent single store firms (82 percent) and small chains with 2 to 9 stores (17 percent). Annual sales level of respondents were $100,000 to $250,000 (12 percent), $250,000 to $500,000 (20 percent), $500,000 to $1 million (22 percent), $1 million to $3 million (33 percent), $3 million to $5 million (6 percent), and $5 million + (7 percent). Surprisingly, the median annual sales level was $1 million to $3 million, so we are dealing with a select group of highly successful independent jewelers.

Tables 1 and 2 below show average retail markups for a variety of products at different price points. It is immediately evident that markup decreases as price increases. This implies a normal downward demand curve for all jewelry products. You must lower price (i.e. markup) in order to sell more expensive items.

Markups for diamonds fall more than any other item once costs are over $1,000. At these price points the markup for diamonds is lower than the markup for any other jewelry item. Relatively speaking, jewelers are giving away diamonds compared to the profit they make on other items. This may be because expensive diamonds are a loss leader for many jewelers. They keep their rich customers by giving them a relatively great deal on their once-in-a-lifetime expensive diamond purchase. While markups for diamond jewelry also plummet as value increases, they are significantly higher than markups for loose diamonds (average 17 percent, median 21 percent). This seems to justify the trend by diamond manufacturers to expand into jewelry manufacturing as there is more room for profit in the diamond jewelry sector. A note of caution however: jewelry manufacturers make extra margins due to their specialized skills. Just because one can manufacture diamonds does not means they have the skills and ability to manufacture jewelry.

Significantly, two thirds of the jewelers said competition from other jewelers is the primary factor limiting markups on diamonds. Only 28 percent cited consumer price resistance. This appears to support De Beers contention, that if diamond supplies are tightly controlled (i.e. there is less competition among sellers) then diamond prices and markups would increase. The flip side of this argument is that if diamonds are too controlled, overall sales levels and employment in the industry decrease significantly.

Certification also plays a role as jewelers indicate that markups are lower (by 7 percent) for diamonds with grading reports. From the consumer perspective this justifies the costs of grading reports and the role that laboratories play in the diamond industry. Markups are lower for certs due to the increased competition they generate among sellers as well as the jewelers ability to sell their enhanced liquidity.

Citing their most important consideration when pricing diamonds, jewelers were equally divided regarding cost, market value and competition. The old days when jewelers simply added a standard markup based on cost, are clearly behind us. Competition is clearly not a major factor for colored stones and estate jewelry. This helps explain their significantly higher margins as price points increase. Market value is the most important consideration for jewelers pricing estate jewelry because it is often bought off-the-street, or from dealers at below market prices. The better the deal when buying something, the more you must know about market value to price it properly.

The fact that 81 percent of respondents said they make an average of 20 percent more when selling diamonds they own, rather than diamonds on memo, is the strongest case yet for jewelers to take the plunge and invest more of their resources in inventory. Of course jewelers have to be sure that they buy the “right” inventory at the “right” prices and this is much more difficult than simply sitting in the store and pushing goods. Given the high level of competition in the retail jewelry trade, it appears that “knowing how to buy” will be the decisive factor insuring the survival of jewelers into the next millennium. Simply put, you can make more money by owning the goods. Over time your competition will eat you alive if they buy right and enjoy the higher profit level.

While 47 percent of respondents maintain firm prices, 53 percent are open to negotiation. This reflects the fact that most of our respondents were independent jewelers that have the ability to make pricing decisions at point of sale. One of the advantages independent jewelers have over large chains is that they can personalize pricing as well as service. The ability to be flexible and meet the budget requirements of specific customers is a benefit to consumers even though it tends to depreciate the value of firm prices over the long term. Jewelers that sell at firm prices have the advantage that consumers know that they are always getting the best deal. Customers do not walk out of the store thinking, “could I have bought this jewelry from this store at a better price?”

A remarkable 71 percent of jewelers said that they charge the same markup for loose diamond sales as they do for diamonds set in jewelry. This appears to contradict the information in Table 1, which shows higher margins for diamond jewelry. It is likely that the jewelers responding to this question are relating to the types of diamonds that are most easily sold either loose or in jewelry, namely simple earrings and pendants. This indicates that markups for very simple jewelry are probably significantly less than for more complex jewelry. Markups for designer jewelry are also significantly higher than diamond jewelry.

All respondents indicated that they accept returns. Three percent said that they have a no time-limit on returns and the majority indicated 30 days as the cut-off point. Respondents said they held a total of 31 sales days a year with an average discount of 23 percent on sale items. A surprising 4 percent said that they held sales on 330 or more days per year (i.e. they are almost always on sale). In general, the sales days and discount levels in our survey seem understated compared to the “goings-on” in the average mall. This is probably due to the fact that only 10 percent of our respondents were mall jewelers. Independent, urban and shopping strip jewelers appear to hold fewer sales at lower discounts than your average large-chain mall store. While sales are an attractive way to move excess inventory, it appears that independent jewelers are waking up to the idea that sales are an overused and abused marketing method.

We hope that you have enjoyed reviewing our survey results and the series of articles on markups. Our next survey will be sent out this June. Should you have ideas or suggestions regarding survey questions, please email them to rap@diamonds.net or mail them to our New York office. Once again I take this opportunity to thank all those who took the time to complete our survey form and encourage everyone to participate in our next survey.
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Tags: Consumers, De Beers, Jewelry, Laboratories, Manufacturing, Martin Rapaport
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