The Economics of Online Jewellers

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
Benchmark Low
$75,000 – $250,000
Medium
$250,000 – $750,000
High
$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.

2 Responses to “The Economics of Online Jewellers”

  1. petroff Says:

    Online prices seem, not are, lower because the buyer is not able to compare and to control what was bought.
    Online sellers are better in inflating diamond grades and in sales talk online.
    there will never be an angry customer in front of their door!
    My advice: see what you marry, see what you buy, do not choose a girl from an internet photo do not choose a diamond that way either.

  2. Nikhil Says:

    You make some good points Petroff. However, most reputable online dealers only sell GIA and AGS certified diamonds. This means that there is very rarely any dispute regarding the grading. Pretty much all online dealers offer generous return and refund policies as well.
    In addition to this, the better online dealers offer detailed cut analysis of each diamond they sell as well as photos, meaning that the consumer isn’t “tricked” into thinking that a diamond is well cut, or is eye-clean by the bright lights of a retail store.

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