By Ralph Amato

When the planets align there are certain industries that are ripe for a roll up strategy.  Right now that industry is in the jewelry business.

The jewelry industry is steeped in tradition and hasn’t changed since the coming of Christ.  That is the problem.  The retail side of the industry is consolidating and the mom and pop jewelry stores are slowly disappearing at a rate of 3% a year, excluding those that are acquired by larger chains.

The jewelry manufacturers who supply the retail jewelers are comprised of over 4,000 small companies.  As the retail side of the equation has consolidated the manufacturing side has stubbornly resisted and tried to keep their independence.  I predict this attitude of staying “independent” will end up being a death sentence for jewelry manufacturers.  Let me explain why.

The jewelry manufacturers are constantly running on negative cash flow.  They have to borrow money from the banks to manufacture their jewelry products and then sell their goods to the retailers, who get 90 to 120 day payment terms.  When times are slow those terms become 150 to 180 days.  On top of this if the merchandise doesn’t sell the retailer usually may exchange the goods for something else.

Now what happens when the manufacturer goes to his retailer that he has been selling for the last 20 years and the retailer informs him that he has just sold out to a major retail chain?  Lets’ go a step further.  Assume, for a moment, that the major retail chain loves your products and wants to give you a large purchase order for their 50 plus store chain.  Now on the surface this all sounds great but the devil is in the details.

Major retailers buy jewelry on “memo” which is not exactly a jewelry “purchase” it’s a “consignment”.  If the jewelry does not sell through to the customer the manufacturer has to take it back.  Also, the major retailers want a better price and terms.  Secondly, how does the small manufacturer finance the production for this 50 store chain?  He will have to go to great expense and risk because he may have to take back the merchandise if it doesn’t sell.  Lastly, large retailers will gravitate towards larger manufacturers who can provide better pricing, terms and guarantee delivery of their goods on a timely basis.

When you digest all of this information it leads you to the conclusion that both the retail and manufacturing side of this industry is ripe for consolidation or in other words, a roll up.

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