Jewelers with Good Turn need to buy less inventory
I’ve been writing for years about financial numbers in a jewelry
store. Today I received an email from Roy Williams who runs the
"Wizard Academy", a marketing and advertising resource for jewelers
as well as a few other retail segments of our economy. He also writes
for InStore Magazine.
If you sign up for his Monday Morning Memos you’ll get a slab of
everything. Today’s was about turn and Roy explains it very well.
You can sign up for his weekly memos by going to this website:
1/3rd from the top, right is “Subscribe Here”. Its free. You should
add it to your arsenal. Here is what he wrote today.
Turn, Turn, Turn
The Mark of a Remarkable Business
Business midgets focus on profit margin, “I can sell these for
double my cost!” But business giants focus on turn, “How many more
would I sell if I lowered my price?”
Retailers call it “inventory turn.” Restaurateurs call it “table
turn.” Either way, it’s a measurement of how efficiently a business
uses its assets.
Inventory turn tells the retailer how many times he sold and
replaced his inventory over a period of time. Table turn tells the
restaurateur how many times he emptied and filled his restaurant
during a single mealtime.
Turn is Sales divided by Inventory.
Bob and Samantha are competitors. Bob makes a 100 percent markup on
everything he sells. Samantha adds only a 50 percent markup. Which
of them has the better business?
Your instincts tell you Bob makes more money but actually, it’s
Bob carries an average inventory of 6 million dollars and sells each
of his items an average of once a year at twice the price he paid for
it: 12 million dollars in sales with an annual gross profit of 6
million dollars. Bob “turned” his inventory once.
Samantha carries an average inventory of just 1 million dollars. She
sells and replaces each item an average of 12 times a year, adding
only a 50 percent markup each time. Samantha does 18 million dollars
in sales and her annual gross profit is 6 million dollars, exactly
the same as Bob’s.
But Samantha turned her inventory 12 times.
Both retailers made 6 million dollars but Bob is slowly going broke.
Samantha is quickly becoming rich and powerful.
Bob invests 6 million to make a gross profit of 6 million a year.
This means Bob has to make a 6 million dollar investment every time
he wants to open a new store. And Bob’s inventory is getting
out-of-date because he has to sit on it for a whole year before he
can replace it. This problem compounds itself each year.
Samantha invests just 1 million dollars to make 6 million. She can
open a new store with just a million dollars invested in inventory.
But wait, it gets better.
Bob bought only 6 million dollars worth of product last year.
Samantha bought 12 million. And Samantha is opening new stores. Lots
of them. This is what makes Samantha powerful. Soon the suppliers
will be charging Samantha lower prices than they charge Bob because
Samantha is a much better customer. And the suppliers will give her
90 days to pay but Bob must continue paying immediately.
Do you realize what just happened? Not only can Samantha open a new
store with an investment of just 1 million dollars in inventory, she
can sell that inventory for 1.5 million dollars each month for 3
months - putting a total of 4.5 million into her bank account -
before she has to pay the first million dollars for the first month’s
inventory. This leaves 3.5 million dollars sitting in Samantha’s bank
account, allowing her to inventory 3 new stores, each of which will
be able to fund 3 additional stores in just 90 days.
Samantha has opened 12 stores in just 6 months. If she keeps it up,
she’ll have 432 stores at the end of the year. And Samantha started
with just 1 million dollars in inventory while Bob started with 6
Bob likes to boast that he offers “6 times the selection,” but the
public knows Bob charges $100 for the same item Samantha sells for
Care to make a guess how this is going to turn out?
The moral of the story is this: you can’t get a high inventory turn
without offering the public what they really want. In my opinion,
the person who selects a company’s inventory is the most important
person in that company. I could be wrong.
But I don’t think so.
Roy H. Williams
Wizard Academy is a nontraditional business school. To understand
what we mean by nontraditional, just Google “inventory turn” and
compare the dozens of definitions you’ll find to the one we’ve
We’ll see you when you get here. - RHW