Solid gold solution

RFID technology has enabled one company to spread its new finance model to jewellery stores in Dubai. Daniel Stanton talks to them.

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By  Daniel Stanton Published  October 5, 2006

|~|gold200.jpg|~|Gold jewellery: Now it can also be collateral against a loan.|~|Many people might think that their IT solutions are worth their weight in gold, but one group of Dubai companies has more reason than most to think so.

The Jewellery Store (TJS) was founded in 2002 by Standard Bank, gold bullion wholesaler Yusuf Nonoo, and gold jewellery retailers Damas and Deepu. It has managed to come up with an entirely new model of financing for the gold jewellery industry, thanks to innovative thinking and an IT solution to match.

Retailers and wholesalers in the industry take out loans from the bank to fund their purchases of stock, but the loans tend to be in the form of gold bullion rather than cash - as are their bank accounts. If the price of gold rises during the period of the loan, the debtor has to pay more money back, which can have expensive consequences.

"Back in 1999 there was a huge jump in the gold price and what this does to retailers and wholesalers is it can put them out of business," says Gabriel Nasser, IT director of TJS. "The bank has given you a gold bar that was worth US$5,000 last year, and today it's worth $7,500.

"So for every gold bar you have to dish out $2,500 for the coverage of your loan. In February 2005, gold was at $417 an ounce. Four months ago that gold jumped to $730. That put a lot of people out of business and put a lot of strain on their cash liquidity. It's bad for the industry."

Conversely, if the price falls, there may be other effects. Either way, there is a degree of unwanted uncertainty involved. "Gold loans are very bad," says Nasser. "If I'm a jewellery retailer all I want to do is sell my gold. I don't want to have to worry about this financial exposure."
In addition, this kind of loan means that retailers have to keep collateral locked up and cannot use it to invest in their businesses.

However, if retailers were able to convert the gold into jewellery and put it on sale, they would be able to utilise their assets and make a return on them. This was the idea TJS came up with, but the group needed a technology in place to minimise the security risk of putting the gold on display before this could happen.

While there is no perfect security solution, TJS found what it believes is the best available. It issues its member stores with RFID tags from Sokymat, which are then fixed to the jewellery. If a tag is broken or leaves the store, it stops transmitting and a message is sent to a monitoring system. The tags resist chemical cleaning and the heat generated by halogen bulbs, and are not affected by their proximity to metal.

"We have a model where we can monitor the gold on a daily basis with assuredness that it's there because the tag still is there," he says. "So if we can have this assurance, we go to the bank and say: 'Instead of you giving a straight-out loan to the retailer, take the gold jewellery, we'll tag it, you take ownership of it and it remains your gold, not as raw format, but as gold jewellery.'||**|||~|gabriel200.jpg|~|Nasser: RFID makes a new model of financing gold possible. |~|"Effectively what you have is the availability of the inventory for the retailer to sell without inventory exposure. If tomorrow the price of gold jumps to $1,000, the bank doesn't call up and say: 'Pay me the difference,' because it's the bank's gold. If the bank is not happy with anything, it can just get the gold back.

"This is not a system to prevent theft. It's a system to reduce and eliminate exposure due to the financial risk of managing inventory."

The model cuts out the capital expenditure retailers would have to make, and means that they just have to make maintenance payments on their loan. It also means that they do not have to have supporting assets locked up.

"People love the idea because it creates a new form of control, a new financial structure that wasn't there before," says Nasser. "Now, it may have been that someone may have thought about it or dreamed of such a thing but it wasn't possible - it's not possible without RFID. We reduce risk to the lowest possible extent to date. There are savings and efficiency improvements across the board. Insurance people can reduce their premiums because now they have lower risk."

In addition, the retailers do not need to make a large initial outlay on the technology involved. TJS leases the RFID tags, readers and an inventory system to be used on an in-store PC and updates them as the technology moves on. It also provides a monitoring service itself.

The system enables companies to perform an instant stock take whenever they want, without closing the store or bringing in extra manpower. "Most people do it every three to six months and a lot of people do it once a year," says Nasser.

"Imagine what gets lost, imagine the shrinkage. If you do inventory once every six months and you notice a discrepancy, what the heck are you going to do? There's nothing you can do."

While the main aim of the scheme was to enable a new way of financing, there have also been added bonuses. Each tag has a unique identity which can be linked via a database to information like the product type, its date of purchase and location in the store.

"You can compute true product velocity," says Nasser. "Imagine I have the same kind of item sitting in cabinet one and cabinet two. For some reason, cabinet one is selling more than cabinet two, but it's the same product.

"We found out in one shop one of the potential reasons was that one of the bulbs wasn't strong enough, it wasn't giving that gold glitter. So an old stale product is sitting there.

"The system wouldn't have told me there was a bad light but it allowed me to ask questions about my data. It's a great management information tool. You want to know what's selling fast, what's not selling as well, so you don't reorder any more or you reorder during a different season."

Nasser is confident that this original Middle Eastern business model could be adopted in other countries. "This is born in Dubai and it's being propagated everywhere," he says. TJS recently signed a partnership deal with a Turkish company and has seen interest from other markets.

By the end of the year, TJS will be opening the world's largest jewellery showroom vault in Dubai. "Eventually it's going to have millions of items in there, all RFID tagged," says Nasser. "We're going to be supplying to the market, to wholesalers, and somebody else is going to pay the cost of the inventory. And when the RFID is scanned through then we'll just transfer [the money] between bank accounts - this pool for this client, that pool for that client."||**||

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