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
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
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
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.