The Tourist Trap Debate

(via Gem Market News, Jan/Feb 2007, Vol 26, Issue 1) Richard B Drucker, GG writes:

Every year, tourists purchase jewelry from port town shops, major city tourist areas, and even from cruise ships, either on board or at a recommended local store. The vacation is a great memory until they return home, only to be told by a local jeweler or appraiser that they have been ripped off. Are they really a victim of a devious tourist trap, or has the local jeweler or appraiser low-balled the value in an attempt to make a sale themselves or discredit the tourist industry?

The truth is that when tourists leave their home country, they are definitely at a disadvantage when shopping for any item, not just jewelry. Tourist stores know that they are dealing with clients with discretionary income and impulsive spending behavior when away from home. If they have a change of heart for any reason when they get home, exchanges or refunds are unlikely due to the difficulty related to the distance. There might be guarantees but once home, the guarantees may be hard to invoke. Since cruise lines often get commissions from jewelry stores they recommend, they may be helpful in assisting the passenger in a dispute. Credit card companies historically helped out and are good advice for tourists to use, however, they too, are becoming reluctant to help out because there are so many claims and few are warranted.

When there is a dispute, the consumer will probably be directed to get an independent appraisal and that is one reason that Gemworld sees so many of these purchases. In fairness to the tourist stores and cruise ships, we do see many cases where the purchase price is legitimate, so this is not just about the tourist trap.

Most of the time, when a client comes to us for the independent appraisal thinking they are overpaid, we substantiate the price paid. The problem starts when the jeweler says they overpaid and their store could sell it for less. Although they could sell it for less, this may also be an unfair statement. There are different markets to buy jewelry in and different markets have different pricing. Some markets get higher markups due to overhead, location, advertising, and yes, even the fact that they may be giving commissions to cruise operators. Someone can always sell something for less, but that is not what is at issue. The only thing that is important is whether the tourist received what they expected at a fair price for the location in which they made the purchase.

Appraising in the Appropriate Market
Appraising in the appropriate market means research and due diligence by the appraiser. It means finding out what similar items sell for in similar stores. In the Sept/Oct 2006 issue of GMN, an article on markets appeared by Joseph Tenhagen. In it he identifies 14 separate and stratified markets in which jewelry can be purchased. It is our opinion that the appraiser should identify the market and research prices accordingly. We always ask where an item was purchased and value accordingly.

Occasionally, there may be reason to appraise an item in a different market than the one in which it was purchased. In the tourist examples, one may use the argument that if the item were lost, it would not be replaced in the same market. Appraisers may ask the question, “Where would you most likely replace this item if it were lost?” Since the tourist is unlikely to hop aboard the plane and return to the place of purchase, nor would the insurance company go to that store either, could it be appraised for a lower value in a different market? The answer is maybe.

First, if it is trademarked or branded from that store or location, it may likely have to be replaced only by that store. Then, you could not transfer the appraisal to a generic local replacement center. The opportunity to use a different market for replacement comes from the fact that most replacement type insurance policies state that they have the right to replace at their cost or to settle for the price that they could actually buy the item for, then one would argue that a low value is always appropriate. However, this will be the case with most purchases from all retail markets, and I am not sure that is where appraising should go. No jeweler would ever make a fair profit if this started to happen.

Sometimes a discussion may ensue regarding replacement and the client may request a lower value for insurance. Without going into a full discussion here about the appraisal methodology and valuation science, I will simply say that if a lower value is used for any reason, that reason should be clearly stated on the appraisal report. Something such as this could be added: Client purchased item at XYZ Jewelers, St.Thomas, for $4000.00. Although a fair price for that location, replacement value here in local markets has been determined to be $3200.00 and that value is being used at the request of the client.

Now, I know that appraisers love to debate methodology and appraising. There are many that would disagree with the above statement and procedure. One subscriber/appraiser recently emailed us regarding problems with a Caribbean purchase. While the heart of the issue was in some false claims, we also discussed valuation methods. He wrote the following. “My position is that it really doesn’t matter what the seller or buyer think the appraisal value of any item should be. It is what the market says it is. The client and/or seller can have absolutely no influence on an ethical appraisal. And, as an appraiser, I can’t really have an opinion on whether the price paid was too high or too low. There is no mention in the purpose and function statements of the appraisal being intended as a purchase price justification. As such, there is really no reason to identify the purchase price or to justify either the seller’s or the buyer’s position in a transaction. As appraisers, we are not in the business of taking sides (not should we be).”

While there is truth to much of this, other issues are at hand here. His position is that nothing influences what he ultimately appraises an item for. He states that the market dictates price, but what market? Market activity dictates value. Market location is an important factor in examining this activity. Disparaging terms such as rip off, etc., should be avoided. Appraisers are no more immune from civil recourse stemming from interfering in the commerce of others than anyone else. A purchase price is a valid indicator of value. If a comparable can be purchased in a different market for less, this might be noted. However, do not allow this to suggest that the original price was an unfair price for the market the consumer chose to shop within.

Appraisals of jewelry purchased in tourist markets present a challenge in that the appraiser must reconcile the role of market influence on value. Often these assignments blend two distinct tasks. One is assigning an insurance replacement value to aid the client in obtaining insurance. In this case, the purchase price may not be a significant consideration because the issue becomes not what was paid, but what would be paid to make the client whole again in case of a loss. However, this should not be done in a way that dismisses the legitimacy of an established tourist market.

Another example clearly illustrates this with real estate. Suppose a real estate appraiser were appraising a house. The appraiser finds that the builder of the home has built this exact home in a different city in another part of the country and it sold there for a lower price. The appraiser uses this price stating that this is all it would cost to replace the home with this builder. While the materials may be the same, the market value varies with location. The house does not cost the same in all locations, yet the appraiser would never say to the client that they were ripped off by paying the higher price in the place in which they chose to buy.

When the Gloves Come off
While we have defended many cases as the independent arbitrator, these cases have strictly involved the question of price. A bigger problem in our opinion is the misinformation and use of reports that inflate the grading of gems being sold. The value may be OK for what is sold or it may be high. In both cases, we will not defend the sale.