Recently I’ve been thinking a lot about the impact of the Internet on brick-and-mortar jewelry stores. As I think back to the dawn of the Internet era, there was a sense at that time that this new, very nasty source of competition was going to annihilate regular retail stores. Fortunately for all of us, it didn’t happen, did it? But just as a frog in a pot of water will allow itself to be boiled if the temperature of the water rises at an extremely slow pace, similarly, I suspect that the insidious acquisition of jewelry market share by Internet retailers has occurred at a sufficiently slow pace such that we don’t realize that the water is about to boil. Indeed, I suspect that we will look back on the current retailing era and realize, with the advantage of 20/20 hindsight, that most retailers (as well as their suppliers) have pretty much been in a state of denial, thinking that jewelry retailing was just going to stay nice, stable, and unchanging.
In my view, it’s time to recognize that things are now evolving at a breathtaking pace, to the extent that the change is actually already upon us. From a logistical point of view, “what” to do is fairly obvious, and I’ve launched two initiatives this fall (one addressing the Amazon model, and the other addressing the eBay/outlet store model) that will help about 400 hundred independent jewelers start generating some serious sales revenue online, as they evolve into “Hybrid” brick-and-mortar/Internet retailers. What’s not as clear is where they - and you - should set your “strategic sights”. So in this month’s column, I’m going to set what I believe are the benchmarks for the Six Levels of Hybrid Jewelry Retailing.
The vast majority of independent jewelers are currently at what I define as Level 1. As a Level 1 Hybrid retailer, you view your website as essentially an advertising vehicle - a way for prospective purchasers to see some of the products you sell, as well as to get a sense of who you are as a company. You’re currently doing little or no business online, and you may or may not have an enabled shopping cart.
At Level 2, you’re actually starting to try to make online sales, to the extent that profit from your online sales is paying all of the costs associated with maintaining your website.
At Level 3, your online sales revenue stream is generating sufficient profit from internet sales to pay not just for your website costs, but also for the digital advertising that you’re going to need to be doing in order to maintain market share in the Digital Era (which in my view, is a minimum of 3 percent of brick-and-mortar sales). At this level, you’re actually using your website to fund a maintenance level of advertising in channels like Google and Facebook to ensure that your traffic and top-of-the-mind awareness in your local market keeps your traditional sales volume intact.
At Level 4, your online sales are paying for not just your website costs and your digital marketing initiatives, your website is also paying for your regular advertising costs in traditional channels (which should probably be running about 6 percent of sales). Now you’re really cooking with gas, because profit from your online sales is guaranteeing the continued success of your brick-and-mortar store.
At Level 5, your online sales are paying for your website costs, your digital marketing initiatives, your brick-and-mortar advertising costs, as well as your rent. At this stage, your website’s profitability represents about 15 percent of your total brick-and-mortar sales, virtually assuring your continued success as a retail jewelry store, because a significant portion of your fixed costs are now self-funding.
And at Level 6, your ecommerce sales aren’t just paying for your website, digital marketing initiatives, regular advertising, and rent: they’re also paying for a competent general manager to run your store in your absence. And why, you may be asking, did I establish this benchmark for Level 6? I have done so in recognition of two important new realities.
Reality #1: Money no longer makes money. If you’re thinking about retiring at some point in the next 20 years, then you’d better recognize that something really sinister has occurred that dramatically increases the savings level you’ll need to retire. There once was a time when you could reliably expect to generate 7-8 percent on properly invested savings, such that a nest egg of 1.5 million dollars would generate at least 100,000 dollars per year for the rest of your life. Today, that number is no more than 4 percent, meaning that you’ll need at least 2.5 million in the bank to retire with an income stream at a six figure level. Even worse, as western democracies spent money they didn’t have to fund social programs they couldn’t afford, we are now witnessing interest rates at - and even below - zero, so even the 4 percent figure may be too optimistic. But perhaps even more chilling:
Reality #2: Confiscatory taxes on passive income are almost certainly in your future! For decades, I thought that at some point, either: a) American voters would wake up and realize that deficit spending had to stop; or b) we would inflate our way out of the deficit by substantially reducing the value of the dollar, and pay back our incredibly high debt with drastically reduced-value dollars. But now it looks like neither outcome is likely. Instead, American voters (who have consistently acted in the most irresponsible way possible for two generations), will almost surely come to support the notion that income on savings (from which only the “wealthy” benefit) needs to be taxed at a 70 percent rate. And if that rate sounds crazy to you, recognize that in 1970, the top marginal income tax rate was 71.75 percent. That was the rate that “rich” Americans paid (meaning those with incomes over 200,000 dollars). It was only through the extraordinary efforts of Ronald Reagan that the top marginal tax rates declined to their current levels. And how do you think the average American voter defines “rich” today?
This is our new future reality, which I suspect is right around the corner (remember, a Socialist, with massive support from Millennials, darned near won the Democratic party nomination this year!). So let’s assume that between a lifetime of savings, and a monster GOB sale, you can close your store and wind up with 2 million dollars in the bank. Let’s further assume that you’re able to generate sufficient income from that 2 million so that, inclusive of a long-term draw-down of your assets, you can generate 80,000 dollars per year (that’s the 4 percent figure that represents the very best you can possibly accomplish, according to many financial experts). Let’s furthermore assume a 70 percent tax rate on passive income, which will yield a whopping 24,000 dollars per year for you from your 80,000 per year in after tax income!!! Just imagine… Your 2 million bucks in the bank will generate, under this scenario, two thousand dollars per month in discretionary retirement income. And there’s nothing you can do about it.
Except, of course, to figure out how to stay in business, so that rather than being a retired jewelry store owner paying 70 percent income tax on passive income, you’re an absentee business owner paying normal income tax on normal earned income. And that’s where being a Level 6 brick-and-mortar/Internet Hybrid retailer makes excellent sense, because you can maintain your company’s current level of profitability while adding someone to run your business in your absence.
In closing, regardless of how and when you wish to retire, the Six Levels of Hybrid Retailing Success represent a road map for you to use to benchmark your success. Remember that your store’s brand cachet gives you a potential advantage in your local market over every other online retailer; you just need to figure out how to capitalize on that advantage. The Internet is waiting for you, like a hot fudge sundae sitting on the dining table, just inviting you to insert your spoon. And if you don’t know what to do to start making the sales you deserve online, search out someone who can help you take advantage of the tremendous opportunity that awaits you there.