Go to ...

Featured In

Sell more antiques

Resale Retailing on Google+RSS Feed

June 24, 2017

Benchmarks: Your Sales vs. the Competition

Two years ago in February, I dedicated a Behind the Gavel column to a discussion of benchmarks
Benchmarks are valuable tools in many sectors, both in business and personal life. In this article Wayne Jordan offers some helpful benchmarks for antiques dealers. I’d like to revisit that topic to see how “used merchandise stores” fared in 2015 compared to 2014. I’m sure you know your “numbers” for 2015 by this time, so you should be able to compare your performance to these benchmarks to see if you did better or worse than the industry average.

For starters, a few definitions and some clarification are in order. There is no national organization that tracks the annual performance of antique stores. So, I have made the arbitrary call to lump antique dealers into the “used merchandise stores” category. Of course, this isn’t strictly correct; the category “used merchandise stores” can consist of any store that sells used goods exclusively (I have been unable to track down what specifically goes into this category).

For my February 2014 column, I compiled the 2013 statistics from used merchandise stores, art dealers, department stores, furniture and home furnishings dealers, and then attempted to read-between-the-lines when reaching my conclusions. This year I have decided to examine only the benchmarks for used merchandise stores (UMS), since UMS out-performed all other business types in virtually every category in my previous analysis.
Let’s start with profitability.

In 2013, pre-tax profitability for UMS was 7.3 percent of sales, more than double that of furniture stores and slightly higher than art dealers. Pre-tax profits for UMS in 2015 crashed but didn’t burn, down to 3.2 percent of sales. Art dealers, however, are up from 6.4 percent two years ago to 7.1 percent in 2015. Furniture stores are up from 3.9 percent to 4.4 percent.

Why was there a 56 percent drop overall in pre-tax profits for UMS in the past two years? One answer can be found by analyzing another benchmark: gross margin. Gross profit margins dropped from 59.9 percent to 53.5 percent in the past two years. Margins have dropped because retail prices are down and competition at wholesale buying venues like auctions and estate sales is strong, raising wholesale prices.

Retail prices are down because retail selling competition has increased: in 2015, there were more antique dealers, consignment shops, estate sales businesses and auctioneers. In the face of more competition, dealers are cutting prices to free up cash. Hence, lower profits overall. (For a discussion of finding the “right” balance in pricing, see Behind the Gavel from June 2011, “Do you base your antiques inventory prices on value, cost or gut feelings?” http://www.antiquetrader.com/antiques/behind_the_gavel_wayne_jordan_value_pricing). Remember that inventory is like any other capital investment: What’s important is the rate of return you’re getting.

In any discussion of profit, it’s important to remember that profit doesn’t always mean cash. If you make a $100,000 net profit and spend $90,000 on inventory, that $90,000 will still show up on your balance sheet as profit (increased asset). You will be taxed on $100,000 profit but only have $10,000 cash left to pay those taxes. Often, having to cut prices to free up cash is a result of having too much money in inventory.

It’s easy to understand how antique dealers end up in an over-inventoried position. Unlike consumer goods retailers, antique dealers can’t simply pick up the phone and order two dozen more of the current best-selling item. Dealers must take advantage of good buys when they are available, because they may not get another chance. The number of auctions and estate sales is going up with the increase in the death rate, and will continue to do so for at least another decade. Consequently, there is a lot of price competition and a lot of good deals to be had. It’s important to keep to a cash budget so that one isn’t forced to cut prices and cut into profit margins. Investing in inventory is an acceptable practice provided there is enough cash left in the bank to operate efficiently, and inventory turns are brisk (three to four turns per year). When cash gets low, dealers panic and start cutting prices.

Remember that inventory is like any other capital investment: What’s important is the rate of return you’re getting. When a lot of cash is tied up in inventory and sales levels and margins remain roughly the same, the rate of return on the inventory investment (GMROI, or Gross Margin Return on Inventory) drops. In short, GMROI answers the question “How much money do I get back for every dollar I invest in inventory?”

Decreasing inventory won’t necessarily make a dealer more profitable, though. What it will do is keep more cash on hand and decrease the pressure to drop prices just to keep the lights turned on. UMS benchmarks for 2015 support this analysis. In 2013, (on average) every dollar a UMS invested in inventory brought $5.68 (gross). In 2014, that figure went up to $7.08. But in 2015, a dollar invested in inventory only brought $4.07. That $4.07 had to pay all the bills. Since there wasn’t as much money in the “kitty” to start with before paying expenses, there wasn’t as much pre-tax net profit left over: 3.2 percent instead of 7.3 percent. Less than half.
(For a more detailed discussion of the effects of being over-inventoried, see Behind the Gavel from November 2010, “Inventory, Investment, and Perception” http://www.antiquetrader.com/antiques/antiques-americana/auctions/behind_the_gavel_inventory_investment_perception)
(For a detailed discussion of GMROI, see Behind the Gavel from March 2014 “Creating More Cash Without Raising Sales, Prices” http://www.antiquetrader.com/antiques/antiques-americana/behind-gavel-creating-cash-without-raising-sales-prices.)

Everything in your business is related to everything else. Whenever anything changes – sales, inventory, expenses, payroll – everything else is subject to change as well. I refer to these inter-relationships as “business ecology.”
You know what ecology is: It’s the “branch of biology dealing with the relations and interactions between organisms and their environment.” In a well-balanced ecosystem, everything seeks equilibrium. Your business runs best when everything is in balance. Unlike a natural ecosystem, though, business doesn’t take care of itself. You have to make decisions that will keep everything in balance.

So, how did you fare in 2015? Were your numbers up or down? If they were up, congratulations; keep doing what you’re doing. If they were down, do you know why? It’s important that you identify why your numbers are down so you can plug any leaks. Otherwise, you will keep doing what you have been doing and your results will be worse in 2016 than they were in 2015.

If you don’t know where to start in analyzing your results, let me suggest that you take a look at the Retail Owner’s Institute http://www.retailowner.com. There, you will find all the tools you need to understand your business, including the benchmarks I mentioned above.
I wish you good selling in 2016!

– See more at: http://www.antiquetrader.com/columns/benchmarks-seeing-how-your-2015-measures-up#sthash.mhzQXRVy.dpuf

Originally posted 2016-04-10 08:25:09.

More Stories From Antique Trader

About Wayne Jordan

Wayne Jordan is a Virginia-licensed Auctioneer (#3481), as well as an AIA and CAGA Certified Personal Property Appraiser.

Copy Protected by Chetan's WP-Copyprotect.
%d bloggers like this: