Deceptive Pricing and Inflated Valuations

We have all seen the advertisements, "70% Discount or “Half price sale. The sign in the jewellery store window says "60% OFF!" - can such a bargain be true? What is a piece of jewellery worth?

The unfortunate truth is that many jewellery retailers artificially inflate prices so they can lure customers with spectacular discounts. This is especially true around the holidays, when consumers are very much in a spending mode.

In one highly publicized legal case, the state of North Carolina, USA charged J.C. Penny Co. with deceptive advertising for grossly marking up prices prior to advertising sales. The state law requires that a bona fide original price be offered to the public "for a reasonably substantial period of time." The attorney general's office presented evidence that, for one jewellery item in question, only 3% of sales were at the so-called regular price, the remaining 97% being made at the discounted price.

The three-week trial in North Carolina Superior Court examined not only J.C. Penny's practices, but also practices of other multi-unit jewellery chains.

In a surprising - and quite disheartening - decision, the court ruled that J.C. Penny was not guilty because the deceptive practice was so widespread. The judge said the defendant was only trying to be competitive "in an industry where very few businesses make any effort to comply with the letter or the spirit of the law". He added that to single out one merchant for prosecution "in an industry that appears dominated by many violators" could be viewed as unfair.

Representatives of the jewellery industry say that the laws governing advertising are extremely vague. In the absence of specific legal definitions, it is a matter of interpretation what constitutes an honest price compared with an inflated price, or for what period of time a sale price may be in effect.

Meanwhile, as the judge in the above case asked, where are the consumer complaints? The case against J.C. Penny was brought by its competitors. The customers, who bought their jewellery at "60% off regular price," presumably walked away quite pleased with their bargain and never looked back. So who's the victim?

It might be you, the insurer. A retailer selling jewellery at an artificially inflated price may offer to write an insurance appraisal with a valuation based on the "regular selling price." To the consumer, this seems only fair. This practice significantly increases moral hazard and, if an insurance settlement is based on such an inflated price, the insurer is paying out too much.

Any appraisal or certificate supplied by the seller is suspect. If the document carries a valuation, ask the policyholder for the sales slip.

An appraisal or certificate that carries a valuation significantly higher than the selling price can only be serving the interests of the seller.

If the valuation on a certificate is much higher than the purchase price, the valuation is probably inflated.

Certification labs used by large retailers supply documents with titles such as “summation of appraisal or “appraisal report or “identification report. The valuations are typically exaggerated to impress the customer. They look similar to reputable diamond certificates, but they carry valuations. Do not trust these valuations.

Not all diamond certificates are reliable.

A reliable diamond grading report is a detailed description of the stone prepared by a respected independent laboratory. A certificate from an independent lab does not carry valuation, since this isn’t the domain of the lab.

The purpose of offering a certificate that places valuation at double the selling price is to lure consumers into making the purchase.

"The lack of quality appraisals in the jewellery business is amazing. Even more amazing is that people will sign their names to these 'appraisals.'
... Where are our ethics? Where are our values?"

The above quote is from a jeweller, in a letter sent to a jewellery trade magazine. He is accusing his own.

One industry journal reported that ethics was a "hot topic" at an annual jewellers’ event, but went on to say that jewellers do not have a clear idea of what ethics are. The head of the Ethics Subcommittee for a national jewellers’ organization said, "We can't dictate to our members what ethical practices they should follow. We need to first make them understand ethics... Then we can proceed to put ethical practices (to) work."

Here are some ways lack of jeweller ethics affects the insurer:

The valuation on the insurance appraisal is overstated. The retailer assures the customer that the current price is a huge discount and that the real value of the jewellery is far higher.

Crucial information is deliberately left off the appraisal. Absence of descriptive details prevents the customer from comparison shopping. Lack of these details also prevents the adjuster from accurately pricing a replacement.

Flaws in gems are not disclosed, because this would lower the stated value. One appraiser admitted on camera, in a televised expose, that he would not tell his customers their gems had flaws because then the customers would not come back.

Appraisals are written by untrained personnel. A recent survey by JCRS, examining appraisals submitted to 21 insurance companies, showed that only 21% of the appraisals were prepared by graduate gemmologists and just 3% of them had additional training in appraising.

Retailers write appraisals without properly examining the stones. Often retailers do not have the gem lab necessary to perform the required measurements and evaluations. They must guess, use the information given by the gemstone supplier, or simply leave off details crucial to determining the jewellery’s value.

Just above the appraiser's signature is a statement declaring that the appraiser cannot be held responsible for the contents of the appraisal.

Jewellery is, in fact, fairly priced. The valuations, however, are totally unrealistic.

The buyer is impressed that the valuation far exceeds his purchase price, and he feels like a savvy shopper. Neither buyer nor insurer may realize these documents are prepared by the seller, or by a lab on behalf of the seller, rather than by a disinterested appraiser.

www.dcla.com.au

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