From time to time, we get asked why our prices are so cheap. Whilst I don’t like answering that question, my standard answer usually includes statements like “our overheads are lower”, “we buy directly from the manufacturer”, “we manufacture our jewellery in-house” and so on a so forth. Anyway, today I was reading in the Australian Jeweller Magazine, an article about jewellery industry benchmarks in respect to cost of goods sold, labour and rent.
The data was apparently compiled by The Australian Taxation Office (ATO). However, my mate Ian Hadassin, CEO of the JAA, who coincidentally rang me yesterday to fill me in on the latest comedy stylings of the JAA, is correct in saying that the data is “very limited”.
|Annual turnover range|
$75,000 – $250,000
$250,000 – $750,000
$750,000 – $2 million
|Cost of goods sold / turnover||35% – 47%||39% – 51%||34% – 54%|
|Labour / turnover||0% – 14%||10% – 18%||13% – 21%|
|Rent / turnover||9% – 19%||8% – 16%||6% – 12%|
From this data two things stand out. Firstly, if you take the median (mid-points) of all the data, and add up the cost of goods sold, labour and rent for each class, you’ll see that smaller retailers have an overall cost advantage, compared to their larger counterparts. The total cost of goods sold, labour and rent as a percentage of turnover, is 62% for smaller retailers, 71% for medium sized retailers and 70% for larger retailers. Whether this translates to lower prices charged by smaller retailers is another question all together.
Secondly, the cost of goods sold figure across all categories is quite low. This means that the jewellery industry as a whole is still making quite a margin. In my opinion, this tends to reinforce consumers belief that a discount is necessary.
So, how do these figures stack up against ours? To find out, I took our June accounts and got the data for Jogia Diamonds, which is as follows:
- Cost of Goods Sold (including manufacturing labour) – 80.6%
- Labour – 3.1%
- Rent – 1.0%
Of course, this is only for one month, so the accuracy is somewhat limited, however, the total of our cost of goods sold, labour and rent is 84.7% – well above the industry benchmarks.
So, back to the question “why are our prices so cheap?”. When I look at this data, it has confirmed that our overheads are indeed lower than average, however, there are two new conclusions now that I look at this data. Firstly, our cost of goods sold figure is a lot higher – therefore our margin is a lot less, which is usually offset by the volume we do. Secondly, the niche that we occupy is a lot more competitive, therefore, margins are being tightened all the time.
In the end, I’m not a big fan of using benchmarks which compare costs in relation to turnover to measure the success of a business. A more pertinent figure would be return on equity, which measures how much the owners of the business get in return in relation to how much money they have invested.