Could Covid-19 Reshape the Memo Market?

RAPAPORT... The Covid-19 shutdown and its consequences have caused many diamond wholesalers and jewelry retailers to reevaluate even the most basic business practices. Is there a new normal for memos as well? Memos, both short- and long-term, have been integral to the industry. "Much of the business is based on a consignment program," says David Rakower, president of New York-based manufacturer Joseph Asher Collection. "In fact, if memos were taken out of the picture, it would drastically change the way we do business."Some retailers prefer to purchase their diamonds outright from the supplier, as this offers better profit margins, and just use one-off calls (short-term memos) for specific stones. "When we take an item on consignment, we give up something," notes Harvey Rovinsky, president and co-owner of retailer Bernie Robbins Jewelers, which has five stores in New Jersey and Pennsylvania. "For example, if I'm selling a 3-carat diamond on call, I'm generally paying a premium for it. However, if I own the merchandise, I can use those premium points to maintain my margin."Fashion jewelry and watches "tell a very different story" than diamonds, according to Rovinsky. "The likelihood is that unless they are on memo, I probably would not bring them into my store because I'm not prepared to invest the money. However, for the wholesalers, this is their opportunity to introduce their products in my stores." For these products, he notes, the memo terms can vary from a year for fashion jewelry to three years or more for watches. The pros and consThe pandemic shutdown shed light on some of the upsides and downsides of the memo practice. "Memos involve trade-offs," acknowledges Gaurav Khandelwal (aka "GK"), sales director at fine-make diamond specialist Union Gems in Houston, Texas. One downside he cites is that during this time, his goods were just sitting idle in someone else's safe. "Customers couldn't even get back into their stores to return merchandise," he says, though he adds that the government-mandated shutdown, while frustrating, was "out of our hands." Fortunately, Khandelwal continues, "this downside was mitigated by less price volatility than had been initially expected during Covid. Had there been significant price declines, coupled with 90 days of not having your merchandise, you could have theoretically lost 20% of the selling price." Turning to the upside, he observes that memos help mitigate the supplier's accounts-receivable risk. "Some customers informed me that they didn't have the cash flow, nor did they anticipate having the money, and they returned the product to me. At least with this memo arrangement, I own the product and I'm not at the mercy of a third party as to when I'll receive payment or the returned product."One thing that is "drastically" different during Covid-19, according to Rakower, is that salesmen who would usually call on the store in person are now "using memo to sell the line." Given travel restrictions and health risks, they are taking the items from the manufacturer and then shipping them on memo to retail clients, who pick out the items they want and send the rest back. Rakower views this "salesman in a box" method as a "big negative" for manufacturer and retailer alike. "You don't have that same [face-to-face] conversation: 'This is a good seller. Your store could use something like this.'" The retailer has to be vigilant in taking memo goods that are "right for the store," he continues. The goal for both retailer and wholesaler is "a wonderful win-win rather than a terrible lose-lose."'Still a trust business'Financial risk is always an issue, and economic crises exacerbate it. Still, wholesalers advise taking long-term client relationships into account when considering whether giving memos or extending terms is worth the risk. "Granted, the situation may have changed, but you have to support the people who support you," Rakower asserts. "Was I concerned about the merchandise that was in people's safes? Yes, a little bit. But these relationships have been built over the course of history. If I trusted you six months ago, I still trust you now."While there's no need to reject new memo clients out of hand, the coronavirus has raised some valid questions about retailers' financial viability. "We always have to be concerned about whether the business is well capitalized. But what if there is a second shutdown? What if it is a one-person shop and the principal comes down with Covid?" Khandelwal asks. He invokes the financial-management concept of SWAN: that the goal is to "sleep well at night," without worrying whether you'll get paid for your merchandise. Still, he recognizes that wholesalers are caught between "a rock and a hard place. At the end of the day, it is still a trust business."And the business is a partnership. "At least in the short run, a lot of retailers have lost money or have no cash flow, which means that the money they would have invested in new diamonds is now going to pay overhead, salaries and keeping the store open," says Khandelwal. "As a wholesaler, we will have to support our retailers. We will extend memo and/or terms to fill the void and help our retailers finance the diamond inventory they need in their store."He also sees a greater divide between the buying and memo prices, which ebb and flow depending on the strength of the market. "The diamond industry is typically low-margin and high-volume. In a lower-volume environment, wholesalers will need to find ways to raise margins or increase volumes."Keeping goods movingRovinsky foresees a large number of companies going out of business, particularly on the wholesale level. "However, people who are still around and have product will want to get as much as possible into the hands of people who sell it. I can imagine getting a call from a wholesaler, telling me that I should hold their goods for 30 days. Sitting in their vault doesn't do any good. All in all, smart people will figure out what to do and make it better." Rakower, though, does not want to see manufacturers decide to "put more goods into a guy's safe" with the hope it will be sold, just because the retailer is their customer. "That doesn't benefit anyone. If the goods aren't moving, then the whole chain stops. It is critical that the manufacturer and/or wholesaler recognize this and assist the retailer, because we're on the same team."He adds that "most of our partners have gone to appointment-only. Their retail customers who are making an appointment are actually going to buy something. There won't be a lot of tire kicking. The closing ratios are going through the roof." While longer-term memos may have to be extended, Khandelwal does not envision shorter (within-a-week) memos changing. In fact, he anticipates their being very strong. Nonetheless, he remarks, "we don't know what the supply or demand will be. We're going month to month. I have a strategy for this month, but by the end of the month, it could be very different." This article was first published in the July issue of Rapaport Magazine.Image: A jeweler holding a diamond ring. (Shutterstock)