Columnists George Prout Applied Marketing 101: Armageddon

Applied Marketing 101: Armageddon

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The Serengeti ecosystem resides in a geographical region in northern Tanzania, extending to southwestern Kenya, and spanning some 12,000 square miles. In a repetitive scenario that has played out countless times during the Cenozoic Era (the paleontological name given to the Age of Mammals), native herbivores, predators and scavengers all benefit from the wide diversity of life on the African plain, as the Circle of Life distributes nutrients throughout the environment. But at certain times, events occur that disrupt the ecosystem, placing tremendous short-term pressure on each layer of the food chain.

Occasional episodic events like extreme drought produce reductions in the herd population that inevitably result in similar displacements in the predator and scavenger populations, but the periodical thinning of each sector actually strengthens the overall bio system, since weaker animals in the food chain are the first to go, leaving stronger representatives to pass their demonstrably superior genes on to subsequent generations. And measured over millennia, these periods of “pressure” have actually served to guide the invisible hand of Darwin’s natural selection, ensuring the subsequent creation of new species with just the right set of attributes to weather the strains of cyclical environmental challenges.

I see parallels to the Serengeti when I reflect on the impact of economic recessions on the “jewelry ecosystem”, in which each downturn has produced a predictable “thinning” of businesses at every level of the supply chain. Of course, these “thinnings” are downright disastrous if it’s your company - or your sector of the business - that’s being weeded out. But during subsequent upturns, the survivors benefit from the cleansing of the business community, especially with subsequent redistributions of market share from those entities that failed to survive. I had actually expected just such a cleansing to occur at the retail level in 2009 after the catastrophic economic events during the Fall of 2008. But the mass cleansing didn’t occur, did it?

In fact, the Darwinistic catastrophe that should have taken place failed to materialize, a circumstance that has caused me to wonder ever since when the other shoe was going to drop. Unfortunately, I now see alarming signs that the destruction of a significant portion of the independent retailer community is about to occur, even though the overall state of the economy is actually much stronger than it was during the exceedingly rough stretch six years ago. The signs are everywhere, and recently aggregated data from a fairly large group of independents shows very clearly that unless something really good happens in the overall economy pretty soon, our industry is about to experience a series of events that could result in a precipitous decline at each level of the supply chain.

In order to understand what’s about to occur, as well as the specific parts of the industry that will be most profoundly impacted, let’s consider the factors that prevented a massive cleansing in 2009. Chief among them was the extraordinary increase in revenues provided by consumers who, faced with an extremely uncertain economic environment, problematic job outlook, and massive increases in precious metals prices, spontaneously decided en masse to sell their gold. For most jewelers, this sudden new revenue stream was like a life preserver for a drowning swimmer, providing precisely what was needed at just the right time. And amazingly, the gold buying frenzy lasted almost exactly long enough to plug the revenue, profit, and cash flow hole that had been created by the sudden economic downturn. And given the unique challenges that are intrinsic to gold buying, the revenue and profits from this new income source were funneled almost exclusively to the independent sector, as the major chains and department stores couldn’t recalibrate their personnel’s skill sets to take advantage of the trend. Best of all, gold buying produced an instant, reliable revenue stream with almost no investment, so that the dollars required to buy the gold could turn 10-12 times per year, producing massive GMROI.

Concurrent with the gold buying frenzy was another trend that was, in a variety of ways, unique in modern jewelry retailing. I am speaking, of course, about beads. Yes, our industry has seen a variety of fad items before (although none with the combined size and longevity of Pandora), but in a wonderfully convenient way, beads were exactly the right answer to the consumer who wanted to make a jewelry purchase at a lower retail price point during the depths of the Recession. But the real magic of the sudden influx in the bead business was that it transferred what was commonly thought of as a department store “Bridge” product into the “Fine” jewelry environment. Which meant that both traffic and sales transaction counts, which typically decline in independent jewelry stores during recessions, actually increased. Beads kept stores busy, allowed owners to keep their staffs intact, and provided sorely needed traffic, in some instances with little or no advertising.

Now, of course, the bead business is evolving, and is likely to undergo extremely rapid change. Bead lines other than Pandora are now, with few exceptions, generating paltry numbers. And while Pandora is reporting modest sales increases, to what extent is their business now consolidating in the concept stores, creating a revenue hole in the gold and shop in shop dealer stores?

Even worse, will the new challenge from Endless cause brand-loyal Pandora consumers to reappraise their emotional connection with their bracelet? These unanswered questions all give me pause, as well as the fact that many really good retailers who’ve been surfing the bead wave may have lost the will or advertising acumen necessary to create traffic in a post-bead world. And can a sales staff that has grown accustomed to “clerking” beads suddenly revitalize itself when it’s time to start actually selling jewelry again? Only time will tell.

What we do know now is that gold buying is essentially gone, and the bead market is problematic. Both facts are sources of major concern. But what really has me spooked is what’s happening to margins in certain sectors of the independent jeweler community.

In smaller stores, margins are actually holding stable. What’s deeply troubling is the reduction in margins in stores in the 1 million to 5 million dollar class. A review of historical data from the Edge Retail Academy shows that these stores typically had an average markup of about 90 percent, producing an average gross profit margin of about 45 percent. (Similarly, if you study the JA Business reports from recent years, you see independents in this volume range running average margins of about 46 percent). So you can imagine my dismay when I recently studied the Edge Retail Academy’s KPI (Key Performance Indicators) report for stores in the higher volume class - an aggregated report from sales of a large group of stores from around the country - and saw that during the past two years, their average markup had declined from 89 percent to just over 80 percent. This is unsustainable.

What appears to be happening is that as the beneficial impact of beads and gold buying that kept these stores in positive cash flow during the post-recessionary era started to erode, the store owners responded by dropping margins in order to retain revenues, and keep themselves in cash. But given the fact that these stores typically produce about 6 percent in net profit when their markup is running at 90 percent, the new reality these stores face with a margin drop of ten percent is that they are no longer profitable, and they are running out of cash.

The psychological trap has been set, in the form of an environment in which owners can’t afford to miss a sale, and so now as the brakes on discounting have been completely removed, margins are spiraling into the ground, and as equity converts to cash flow, there will be an inevitable train wreck.

I am normally quite optimistic… it’s just my nature. And in the first five months of this year, my sales team has already achieved the sales increase that I had targeted for the entire calendar year, so I’m generally feeling pretty good about our prospects for another exceptionally good year. But I can’t shake the feeling that in the medium-term we are facing a difficult scenario as an industry, as the artificially delayed set of Darwinian extinctions that should have taken place in 2009, but didn’t, now occur.

So please don’t misunderstand. I am not forecasting inevitable doom and gloom. What I’m proposing is that if your store is experiencing the margin and cash flow issues to which I’m referring, then you need to take steps immediately. Those who fail to react appropriately now may pay a serious price later. 

On the Serengeti Plain, when an animal dies, its body actually provides nourishment for the surrounding carnivores. But when a jewelry store gets sick, it runs a GOB as it is dying, which damages all of the other stores in adjoining markets. And don’t forget that the internet is siphoning off ever larger parts of the jewelry revenue and cash flow stream. And if you ask any of your suppliers about the current state of their receivables, you’re likely to hear that many of your fellow retailers are having unprecedented difficulty paying their vendors. When I consider the mathematics of all of this, it has the potential look of Armageddon.

I hope I’m wrong about this, but I suspect that I am not.

Class dismissed!


George Prout is Vice President of Sales and Marketing for Gems One Corporation, and can be reached via e-mail at This e-mail address is being protected from spambots. You need JavaScript enabled to view it , or at Gems One’s New York office at 800-436-7787.

 
 
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