When the ghost of Jacob Marley visited Ebenezer Scrooge on that Victorian Christmas eve, Marley was dragging chains representative of the mistakes he had made in his life. Small business owners – especially retailers – do the same thing. We drag our mistakes around year after year until we become accustomed to them. We feel that their weight is a normal part of doing business, and we don’t recognize how much they drag us down until we are shed of them.
We drag chains made of excess inventory, debt, employees and unproductive locations.
All of these chains are difficult to get rid of. The solution to the problems they create can be compared to quitting cigarettes: It’s better to not start at all. But, a generation ago, teens would start smoking because it was cool and available. As small business owners, early successes boost our egos and we crave more success. We say: “If I can make ‘$xx’ profits from one store, I can make twice as much from two stores.”
It’s an easy trap to fall into; I fell into it myself. I bought my first store while in my mid-30s, and quickly tripled sales and profits. I thought I was a genius. So, I bought a second store, and then a third. The profits didn’t double with my second store, or on the third. But my workload and troubles easily tripled. Nevertheless, I carried those troubles year after year, just like Marley’s chains, until I figured out a way to shed them.
Once away from them, I could look back and clearly see where I made my mistakes. There’s no teacher like experience: It gives the test first, and the lesson afterward.
It’s a rare occurrence when a second store is as profitable as the first. In all probability, a first store is profitable simply because the owner is there all the time and can see what needs attention. Also, many consumers prefer to buy from the owner. They feel that an owner is the most knowledgeable person to deal with and can offer them the best price.
Open a second store, and an owner’s attention is divided. Managing multiple stores requires a different skill set than managing a single store. Hire a manager for a second store, and a manager is never as attentive to detail as an owner; he has no vested interest. Most small business owners that open second and third locations close them within a few years.
Chip Averwater, a third-generation retailer and author of the book “Retail Truths: The
Unconventional Wisdom of Retailing” tells of an informal study done by his retail owners group that charted the correlation between efficiency and the number of locations. Averwater says, “The correlation was virtually perfect; the more locations, the lower were profits as a percentage of sales, return on assets, sales to payroll, sales per square foot, sales per employee, gross margin per employee and profit per store.”
Does that mean that opening a second store is always more trouble than it’s worth? No, it doesn’t – but a move into a second store (or mall location) should be thoughtfully considered. If you have a simple and profitable concept, a second store may indeed be just what you need to grow your business.
Before you take the “second store plunge,” ask yourself these questions:
1. What’s my deadline for getting this done? Business issues are often time-sensitive. Don’t ask, “Should I open a second store?” Rather, ask, “Should I open a second store this year?” Data you collect this year will be irrelevant next year, so limit your timeframe for making a decision; when the time comes make your decision.
If you have failed to collect enough information to make a decision by your deadline, then your decision should be “no.” Why would you think you have enough time to run a second store when you don’t have enough time to adequately plan?
2. What do I hope to accomplish? If your goal is to increase overall profits, first make sure that you’re maximizing profits at your current location. If you’re not doing so, then there’s no reason to believe that you will do so at a second location, either. What’s the point in having two under-performing locations? Or, if your goal is to create more display space for your excess inventory, a second location probably isn’t the answer. More space won’t fix an inventory problem; it will only create a bigger one.
3. What alternatives will also achieve my goal? Perhaps something other than signing a lease for new space will work as well, such as an online store, listing your inventory on Etsy or similar sites or displaying at antique shows or antique malls.
4. What will be the financial impact on my business? This is best done by working through various “what if” scenarios on spreadsheets. If you don’t have the skills to execute the scenarios on paper, hire an accountant or “spread sheet jockey” to help you. (Search Google for “what if software” to get started.)
5. What does a SWOT analysis tell me? In a SWOT analysis, you analyze the strengths, weaknesses, opportunities and threats involved in making a move. Such an analysis will force you to look at market possibilities and competition as well as your personal/business strengths and weaknesses. This analysis is where you will consider timetables, cash flow, responsibilities and deadlines.
6. What will be the impact on my personal life? Additional stores will stretch all of your resources, including personal ones. How important is it to you to play with your kids, attend their events or have a date night with your spouse? How about hobbies or socializing with friends? No matter how badly you want to grow your business, you must leave yourself time for recreation; otherwise, you’ll burn out.
Retailing can be fun, challenging and profitable. But it’s important to make decisions based on sound planning and not myths. Bigger is not always better, and two stores doesn’t mean twice the profits.
Retail square footage in the U.S. has grown to more than 23 square feet per capita; up 20 percent in just 10 years. Retail is over-built in the U.S. Lease prices are dropping in many areas, and it may be tempting to open a second store. If you’ve been thinking about a second store, consider the move carefully. You don’t want to end up like Jacob Marley, having forged chains that are difficult to break.
About our columnist: Wayne Jordan is a Virginia licensed auctioneer, certified personal property appraiser, and accredited business broker. He specializes in the valuation and liquidation of estate and business assets. His column Behind the Gavel appears in every issue of Antique Trader. Learn more at Wayne's new site Resale Retailing with Wayne Jordan, call 276-730-5197 or email firstname.lastname@example.org.