Behind the Gavel: Dealing in used goods more profitable than new

My friend Brian is an exercise fanatic. He has special outfits for each type of exercise, and electronic meters to gauge each workout. I’m not into exercise at all. You’ve heard the expression “No pain, no gain”; my motto is “No pain, no pain.” As Phyllis Diller once said, “My idea of a workout is a good brisk sit.”

But I admire Brian’s persistence. What I admire even more is his meticulous record keeping. Brian strives to improve his performance with each workout, and he understands that the only way to improve performance is to first measure it.

Business owners are constantly measuring and analyzing their performance. They

compare this month’s sales figures to the same month last year, compare store A to store B and so on. Some industries have national associations that provide “benchmarks,” or performance standards for their particular industry. Each year, industry business associations send out anonymous questionnaires for member business owners to fill out and return. The information collected from owners is organized into categories, which become the operating benchmarks for a particular industry and goods. Typical benchmarks for retailers include sales per square foot of floor space, profitability, gross margins, inventory turnover, certain balance sheet ratios and return on investment. Many retail businesses – but not antique dealers – have national associations that track benchmarks.

Having benchmarks enables a retailer to answer the question, “How’s everybody else doing?” With such information, a retailer can determine if he’s doing better or worse than the rest of the pack. Plus, benchmarks offer a clue as to what could be done better in one’s own business.

Although antique dealers don’t have published benchmarks, I’ve found something very close that dealers can use to gauge their performance. Plus, my discovery confirms the gut feeling I’ve had for a few years now: The antiques business is the best kind of retail business to be in at present.

I made my discovery quite by accident. In browsing through my email, I found a solicitation from a risk management company. I must have been on someone’s bulk mail list because this particular risk management company was soliciting banks and other lenders. I didn’t qualify for their offering. But in their website resource section I found a list of benchmarks for various types of companies. Bankers use such benchmarks to underwrite loans. Though there were no benchmarks for “antiques businesses,” there were benchmarks for “used merchandise dealers” which was close enough for me. Used merchandise dealers would include resellers of any category of untitled consumer goods (no autos, boats or RVs).

I gleaned the data for used merchandise sellers, as well as for the four closest matches: Art dealers, department stores, furniture and home furnishings (new merchandise). Not perfect matches for sure, but combined they could give one a sense of what’s happening in the greater world of retail, and such information is useful.

The information I gathered was for profitability, gross margins and inventory turnover.

I hope you’re as amazed by the numbers as I was: When it comes to profitability, used merchandise dealers are beating the pants off other types of retailers. Used merchandise retailers have out-performed most other retailers in three major categories every year for the past five years. Not surprising, today’s consumer goods retailers compete primarily on price and convenience. The only difference between a Sony flat-screen TV of a particular model at stores A, B and C is the price of the item and the convenience for the customer. No matter what product consumers are looking for, they can find it in multiple brick-and-mortar stores right in their home town. If not, they can order it online and have the item delivered to their door.

The inventory of antique and vintage dealers, however, isn’t the “same-old-same-old” that is found in consumer goods stores. It varies by rarity, condition and other factors. Also, antiques dealers aren’t locked in to paying a particular wholesale price for an item or ordering it in a particular quantity. In our business, dealers choose how much they pay for an item and how much they sell it for. The inventory of antique and vintage dealers offers variety and uniqueness.

Let’s take a look at what the numbers in the chart mean for antique dealers, and how they can be used to strengthen your business.

First, a few definitions. “Pre-tax profit” equals the percentage of gross sale dollars that remain after everything else is paid. Gross margin is the difference between the selling price and the wholesale price. This is not to be confused with “markup.” Markup is calculated UP from the wholesale price and gross margin is calculated DOWN from the selling price. It you buy an item for $100 and sell it for $200, you have a 100 percent markup and a 50 percent gross margin. Turnover is the number of times you sell through your inventory during an accounting period; in this case, a year. For example, if you mark up your inventory 100 percent, have $300,000 of inventory at wholesale, sell $600,000 worth of merchandise in a year (at retail) re-supply as you go and end up with $300,000 of inventory on your floor at the end of the year, you have turned your inventory one time.

Why are these numbers important? Because they are all inter-related. Changes to one

number affect the others. Raise your gross margin, and (at the same level of sales) profitability will go up. Lower it and profitability will go down. Turning inventory faster – even at the same level of sales – will create more profits. Lower your gross margin and it’s likely that your inventory will turn faster (your prices will be cheaper) but profitability will suffer.

So, these numbers can be used for problem solving. If, as an antiques dealer, your inventory is turning 1.6 times per year, you probably have too much inventory for your sales level (used merchandise dealers typically turn their inventory three times or more). How do you reduce inventory? Put it “on sale.” To do this, reduce gross margins (as long as you’re left with enough cash to pay your bills). Of course, this will move inventory but profitability will suffer in the short-term. It’s important to find the right balance for your business, and this may take some time. But, without industry benchmarks for comparison purposes, you may not know where to look to solve your problem. (By the way, these three numbers aren’t the only ones you might need to adjust, but due to space limitations a discussion of those numbers will have to wait for another column.)

Lest you get discouraged, note that used goods dealers have had the highest profitability of comparable retailers every year save one in the past five years. They also had the highest gross margins and the highest inventory turnover across the board. A glance at the chart also shows that business has, indeed, been improving steadily over the last five years for most retailers.

A well-managed antique and vintage business has the opportunity to make more profits than any other type of retailer.

The key to doing so is to keep good records and know how to interpret and respond to the data you collect. Like my friend, the exercise fanatic, you can’t improve performance unless you first measure it.