Is memo such a good idea?
New reporting platform stirs up mixed opinions

May 08, 2008

The JBT developed the Memo Reporting Platform, shown above, at the request of the DMIA after a number of diamond dealers lost millions in merchandise given out on memo.

By Michelle Graff

New York—Mention the word "memo" to anyone in the jewelry industry and it's sure to evoke a strong reaction, but you never quite know what it will be.

Some retail jewelers view the memo system as a legitimate way to do business, and the only way they can stock their display cases without going broke. As Jerry Gause of Florida-based Gause and Son Jewelers puts it, "It takes a lot of money to stock a jewelry store. It's not the fastest-moving inventory in the world either."

Conversely, suppliers that send out goods on memo often hold their breath, hoping that they'll be paid, or have the unsold goods returned to them.

But the exchange of goods on memorandum is the way the jewelry industry works, and suppliers who refuse to offer memo might find themselves with fewer customers.

Though a vital component of the industry, memo is not without its problems, especially when large chain retailers go bankrupt, making it difficult to recoup either the money or the merchandise.

In an effort to tackle at least some of the problems with the memo system, the Jewelers Board of Trade (JBT) will launch a Memo Reporting Platform for the diamond industry in the second half of 2008. JBT President Dione Kenyon says the platform will allow suppliers to see how much diamond jewelry and loose diamonds a company has out on memo and from how many suppliers.

The Diamond Manufacturers and Importers Association of America requested the system after a series of "bust-outs" in the industry—schemes in which diamond companies got taken for millions.

One example was the 2006 case of A. Taub Diamond Co. After establishing trust among key industry players in New York, its owners gathered small amounts of diamonds on memo from a number of suppliers then vanished with $3.3 million in stones. If suppliers had known A. Taub was collecting stones from so many different sources, a red flag might have been raised.

Kenyon says the reach of the Memo Reporting Platform—which could eventually be expanded to colored-gemstone and precious-metal jewelry—will depend on industry interest. For it to work, companies that extend memo will have to report it regularly.

Industry analyst Ben Janowski says while a memo platform is worthwhile, getting typically reticent industry members to share financial information could be tough.

He also points out that many memo programs do run successfully. The abuse in memo, he says, lies in the fact that retailers and suppliers don't always do it right.

Retailers, at times, do not properly track goods on memo, and suppliers are often too accepting of what a retailer tells them without understanding that retailer's background.

"I think memo is a sales tool," Janowski says. "In the right hands, it has great effect. In the wrong hands, it's disaster."

Benefits for small retailers From the perspective of the small independent retailer, memo is simply the way business runs.

Mike Miller of M.J. Miller and Co. in Barrington, Ill., calls the proposed Memo Reporting Platform "preposterous," and points out that memo agreements vary widely. He loans out merchandise that he makes in-house to other jewelers on memo terms that range from one day to months, and he also receives merchandise from suppliers on memo.

When he's shopping for a large stone for a client, Miller might call six different dealers and take $100,000 worth of stones from each to offer a selection.

"If that's going to throw someone [off], then it's going to affect my business and theirs," he says.

Miller says 95 percent of jewelers who do business on memo do so honestly.

Gause, who operates two stores in Ocala, Fla., and one in Gainesville, Fla., agrees. And though Gause understands the impetus behind the platform, he says its implementation would not ensure participation or honesty.

"It doesn't mean everyone will report as agreed," he says. "With the honest people, it will [make a difference]. With the ones who aren't, no."

Miller says it's large-chain bankruptcies—like that of Friedman's or Fortunoff—that create problems in the memo system and make it harder on smaller retailers.

"It's the big guys that hurt everybody," he says. "These big corporations need to be held accountable."

Both Miller and Gause say that suppliers need to do more background work before extending credit.

"Sometimes, greed overtakes good brain work," Gause says. "The jewelry business is not immune to that, that's for sure."

Suppliers want change Kenyon agrees that bankruptcy situations raise questions about the memo system, particularly now, when Chapter 11 bankruptcy protection filings by jewelers have mounted to include Boston-based Alpha Omega Jewelers, Fortunoff and Friedman's. She says the fallout from the weak holiday season and first quarter is not over.

In cases like these, many suppliers are left out in the cold after the bank and secured creditors get paid.

"It's kind of like musical chairs," Kenyon says of unsecured creditors. "Somehow, there's always a chair missing when the music stops."

She says there is currently a groundswell of support among suppliers to change the memo system.

Though many smaller independent retailers use memo in good faith, Kenyon says these large-scale bankruptcy cases involving memo can hurt independent retail jewelers in the long run because it could mean fewer suppliers and less-flexible terms.

From the JBT's perspective, suppliers could curtail the problems with memo if they were more disciplined about giving goods out that way.

One possible solution, Kenyon says, is for suppliers to offer a better deal to retailers who pay cash outright, instead of taking the goods on memo.

Gause, however, doesn't think this will happen.

Instead of changing the way they do business on memo, he says, suppliers need to start helping retailers market and sell diamonds. If the goods are moving out of the display cases, they won't have to worry about having stones out on memo, Gause says.

—E-mail: michelle.graff@nationaljeweler.com

Editor's note: This story first appeared in the May 1 2008 edition of National Jeweler.