Sure. I'm trying to get an idea of fixed costs. Folks were telling me last week that two
big advantages in the Amazon model are no leases (carried as debt on the balance sheet),
and negative inventory carry.
William,
The typical jewelry store and mine included located in a shopping mall has rent equivalent to 6% of sales. My other store is in a shopping center and so traffic is less and rent is about 4.5% of sales.
The typical jewelry store you see in a shopping mall on a corner location spends about $175K on fixtures. That was true with us too. However, the fixtures are almost fully depreciated now. The fixtures are good for almost ever if they are modern and they occasionally need maintenance such as new glass, plastic lamination, etc. My fixtures are carried as an asset on the balance sheet at about $35K at present.
Inventory turn varies greatly from jewelry store to jewelry store. The average turn is three times per year. We only turn about 2.5 timers per year due to maintaining excess inventory. I am fortunate to be able to do that and it gives out customers a much greater selection than the competition. It is expensive since the capital could be used in the market, etc. However, jewelry is not like clothing, furniture, etc. so that the product does not depreciate do to changing styles. Sometimes a style of ring may go out of favor but one can take the stones out, recast the gold and have a new style with only the labor cost. Gold has not appreciate this year although with the labor to manufacture, typical appreciation is about 10% a year which is less than I pay on a bank line of credit. The diamonds appreciate much more quickly averaging 15% per year for the last 20 years. I make a conscious decision to over inventory for the reasons given above.
Clothing, shores, etc. have different seasons and styling so my business does not fit into the typical category. You see clearance "sales" at season end for stores in these product lines.
I want to add something further which also applies to Amazon via their purchase of many books through B & T and Ingrams. B & T and Ingrams do have distribution centers. They also maintain the inventory from the publisher. They in turn charge Amazon more per unit than the publisher would if Amazon bought the book title in bulk. I believe this explaines why Amazon is trying to inventory the better sellers and use B & T and Ingrams for the others. The jewelry business has a corresponding "model." Many jewelers including the large chain stores carry most of their inventory on memo. This means they do not own the inventory due to the fact they do not have the capital. This also means they can return the inventory that is not selling. The manufacturer is paying the cost to carry the inventory and typically the same product has a 10% higher cost if maintained on memo. Discounts are granted when the the inventory is purchased outright for cash.
We believe we sell our merchandise at an average of 3% below our competition. However, ouir competition has their merchandise on memo so our gross margins are 7% higher.
I am bearish on Amazon based on their business model although most analysts tout it as being an advantage. I really do not feel it is an error for then to advertise heavily to build awareness.
The negative inventory carry as touted is true except that it is a one time event although grows as the top line grows. There is not advantage beyond that. When Amazon does a billion dollars per year is sales and let's assume it is linear but only for the discussion, they have the use of $64 million per month of the distributors money. However, this only increases when top line sales increase. It is a one time advantage but Amazon pays 7% more per month for their inventory. This is assuming they do not stock the best sellers. The more they stock, the closer they mirror the typical brick and mortar store model. That is why I believe the current business model does not work. That dos not mean they will never find one that does. This is just my opinion about the flaws in the majority of the analyst's reports.
Your thoughts??
Glenn |
