We hear news every day about the death of retail or the retail apocalypse with the mega brands dominating the space- but what does it really take to win in the retail game? This guide is meant to guide you along the journey and the thought process of whether going into the retail business is right for you.
Starting with You
Before reading this guide, it is worth reflecting on why starting a retail business matters to you. Is it financial stability? Or perhaps the passion for a particular product? Or maybe it is about serving the larger community.
We can’t judge your reasons but before wasting the next 20 minutes reading this guide, spend some time thinking about…
- Why are you starting a retail business?
- Is there a business you admire?
- Is there something you wish to replicate or do better?
- Can YOU do that?
- Are you doing this to sell something YOU want? Or your customers want?
- Are you willing to commit the financial resources? (short checklist below)
I’m sure you have fantastic answers to all the above, and now you feel a bit more committed to reading on!
101: What you already know
You have probably chanced upon a retail store and thought “Hey, I can do better than that.” You are already thinking about the basics of customer service, product placement, payment collection and promotional campaigns.
Never lose that empathy.
The best retailers are always thinking like their customers.
101.1: What you might not have thought about
What does it mean to buy wholesale? – Resale of large quantities of good to a retailer
How does pricing work? – Based on the monetary value attributed to a particular product or service
These are some of the basics that we will cover in more detail later in the guide, but before moving forward, we should talk about the less talked about topics- merchandising, inventory and software to enable operations.
Merchandising is about presenting the right product to the customer to facilitate a transaction. I’m simplifying it here, but this is a complex process. Product selection involves understanding the trends in the market and understanding what your customers want. Product presentation (or sometimes referred to as visual merchandising) refers to making it easy for your shoppers to pick up the products that they were looking for.
Inventory is the complete list of products and their respective quantities that you as a retailer carry for your operations. The objective here is to reduce carrying too much inventory usually due to limited warehousing space but to avoid carrying too little else, you won’t be able to satisfy the demand. This equation becomes more complex when you know that some goods have an expiration date or perhaps going out of fashion soon.
Software to enable operations can include your point-of-sale system, accounting system, analytics stack and a customer relationship management system. These are utility tools that help you better manage your business. Many fret over the selection over such systems because when they are just starting up, you don’t know how these tools work and thus have no idea how to select a vendor. We will discuss a short framework for this in more detail later.
No business comes without risk- starting up a retail business is no different. Here are five common causes of death-
Indigestion: business fallouts between partners, common for all businesses
Starvation: serving a market that is too small and thus unsustainable
Miscalculation: underestimating the amount of startup capital required to build a business
Sloth: not doing enough research before getting started or failing to keep up with basic analytics as they grow
Greed: without a proper understanding of the unit economics of the business, many try to expand their footprint too quickly
Think through these issues…
- Easily avoidable if parties have had previous working relationships, else it would be best to work with really close friends that you trust. Lots of articles have been written about selecting a co-founder so I won’t elaborate here.
- For some reference, on the topic: http://startupgeist.com/find-a-cofounder/
- Before setting up an online store, run some keyword analysis (https://www.semrush.com/) to see if people are looking for this particular product
- If it is a brick and mortar distribution model, survey the site. Does the demographic and behavioural pattern suit your product selection? If you plan on selling cat food in a fashion district, you are making it more difficult for yourself to get customers in the door.
- Depending on your ideal distribution strategy (online or offline) and your merchandise offered, you might have a different cost structure, but this is a basic checklist
- Rent or Domain Hosting cost
- Human Capital
- Cost of goods
- Software (POS/ CRM/ Analytics/ Inventory Management)
- Utilities- Electricity/ Wifi
- Administrative & Legal requirements
- Office supplies & furniture
- Have enough working capital to last for slight between 12-24 months before over-investing in infrastructure
- This creeps up in two stages. Before you start, have you done the work stated above? Most of your competitors starting out have so you don’t really have a competitive edge there. Where you can gain a competitive edge is in the second stage which after you have the basic operations going.
- Invest in understanding your business. Whether this is in the form of part-time consultants, spending a few hours a day speaking to employees and shopper or purchasing analytics software. You have to consistently maintain this effort to gain an edge. Lots of retailers stall out because they didn’t invest early enough. Even after a few years of operations, they still don’t know why they can’t grow, and they won’t admit to themselves that it is because they haven’t fully understood their business.
- Growth at all cost comes back to bite. I won’t elaborate on this topic here because this guide is meant to be for those who are just starting out. Just remember that growing means establishing HR practices in place, managing a central warehouse, decentralising decision-making and maybe re-negotiating supplier terms. If done poorly, any one of these could really damage your finances.
Defining your own success
This goes back to the reason you decided to leap into the retail world. Are you in it for a side project or is this something you have been dreaming about since you were a kid?
Defining what success means you to you is important because depending on what you are aiming for, you will be structuring your store operations based on what you feel is important.
- Banking on this as your primary income source?
- Fulfilling a childhood dream?
- Searching for new ways to diversify your investments?
- Looking for a passive income source?
- Driven by the excitement of serving customers?
- Thinking of this as a side project?
- Aiming to build enough capital to start another venture?
- Building the next Walmart?
3 Things to Get Right
The first thing that might be difficult for first-time entrepreneurs to accept is that you are not going to be able to sell to everyone. You need to put the right product in front of the right customer at the right time and place.
Getting the right product means getting the product selection right. What do your shoppers want when they walk into your store? Can you cater to their other desires? Products that are perhaps adjacent to your current selection.
Right Time and Place
Offering the product at the right time and place is about selecting the optimum delivery mechanism that appeals to you shoppers (not what works for you). We won’t go into the details about the e-commerce versus brick and mortar debate because that is dependant on your strategic focus and how you think you can most effectively reach your target.
You are not going to be able to sell all your products to every single person. Even if someone walks into your store or visits your landing page, that is idle interest. You have to figure out who is actually doing the buying and figure out what he or she wants. We will revisit the importance of this in the marketing section when we talk about segmentation.
Online or Offline?
If you are online, work on search engine optimisation, ad campaigns and conversion numbers. If you are offline, work on location, location, location.
Lots of articles have been written for the e-commerce group, and we recommend checking out this site https://neilpatel.com/ if you are just getting started.
If you are looking to establish a physical footprint, you have to consider the customer psychographics in the area, competitive pressures, travel convenience and store types. Should it be a store in a shopping mall, a store within a store or maybe a kiosk stores? What are the terms of your rent? (Fixed, percentage or both?)
Even after setting your own definitions of success, there are some metrics that you just have to watch. You can’t stay in business if you can’t turn a profit.
You can’t improve what you can’t or don’t measure and the earlier you get started, the better off you will be.
Here is a break down of what you have to get right within the first three months of operations-
- Your financial metrics include the average gross margins, the cost of goods sold and the average return rate.
- Your inventory metrics include the gross margin return on investment, units sold per outlet and sell-through rate.
- Your sales performance metrics include sales per square foot, basket analysis and the average basket value.
We won’t run through definitions in this guide but here are three examples of why they matter.
- If you know the average basket value per transaction, you can work backwards to understand the overall number of transactions you need to make to hit your revenue numbers.
- With the return rate, you will have a rough idea of the actual sales done within the store. This means you can calculate the average sales per square foot which will give you an idea of how expensive the rent really is to you.
- A basket analysis might prompt you to realise that some shoppers are buying particular products together and moving these products closer together could potentially help out the rest of the shoppers.
Are you dizzy with possibilities yet? I hope not because once you hit the growth phase, there are even more metrics to watch, but we are going to ignore them for now.
Getting Set Up (Brief)
Just like any business, there are quite a few administrative tasks to get through- bank accounts, corporate structure, insurance and employee contracts.
Depending on where you are based, selecting a bank can be quite a chore. We are not the best people to advise you on this matter, but there are several common threads that you should take note of for your retail business. The first would be payment collection. How do you plan on collecting payments from your customers? Does your bank of choice support the necessary infrastructure? Is there hardware cost that needs to be factored in? The second would be taxation. When it comes time to file income taxes (assuming you have employees onboard), you will be expected to maintain accurate records and provide them with the governing bodies.
Another issue that you have to decide on is the business legal structure. Do you plan to go into it alone as a sole proprietorship? Here you have the greatest amount of freedom in decisions but you are directly liable for anything the business does. What about a partnership structure or a corporation? If you are not sure about your local options, do seek out an attorney for a short consult.
Inventory management could be your greatest competitive advantage if managed well, but if managed poorly, you could be losing quite a bit every month. It doesn’t cost much to plug-in software that can be used to calculate demand and manage seasonality. If you don’t want to use pre-existing solutions, you can do your own research and do your own calculations. This topic has been widely researched, and there are many formulas out there that can be used for your business.
Losing cash every month because of poor inventory management is a self-imposed tax system. Don’t do that to yourself, just do the math.
Your inventory turnover is basically how many times you will sell out your inventory in one year. If you have a turnover rate of 5x, it means you will sell out your entire stock exactly five times in the next 365 days.
The next question you have to answer is then- is this a good thing? The raw number itself doesn’t really mean anything until combined with the value of your inventory. If you hold about $10,000 in inventory, that probably isn’t very good. You will probably have to turnover about 5x a month to make a decent profit.
Now that you know the average inventory turnover, time to zoom in. Start exploring the possibility of eliminating products that have a low-profit-margin and a low turnover rate. These are products that customers don’t want, and they yield dangerous low margins for you.
*Warning- do not start eliminating products that have only a low-profit-margin or a low turnover rate*
If you have a product that has a 5% profit margin but is always sold out within a week, you should consider keeping it. If you have a product that has 70% gross margins and you sell out twice a year, you might consider keeping it.
How do you decide? You have to add a few more variables into the equation, the actual selling price of the product, the minimum order quantity imposed by the supplier, the delivery time/ cost and the holding cost.
Here are some scenarios to help you think through
- Soft drinks and luxury bags both have high margins, for the sake of this example- 50%. The turnover for soft drinks might be 1000x more than luxury bags. The quantity you order should thus reflect that.
- You start to realise the soft drinks are doing incredibly well but you want to only order 100 cartons for the month of April. You have to take into account that some suppliers impose a minimum quantity. Say your soft drink supplier states that you are only allowed to order in quantities above 150 cartons. Depending on bargaining power, it might mean you will have to make another order mid-May.
- Now that May is coming around, you might want to start thinking about restocking your soft drinks. Now there is another constraint. You have 50 cartons left, and your supplier requires a 4 week lead time before any orders. With 50 cartons, you will sell out mid-May and will have no more soft drinks left for the last two weeks. Oops.
We said at the start of this section that inventory management is a competitive advantage, but given all these complications you might be feeling slightly discouraged.
There is no denying that inventory management is complicated, but there is a silver lining- your competitors are facing the same issues. Getting the right product in for the right customer at the right time requires lots of manual analysis but done right- you could have 10-30% more cash on hand every month. That’s a lot of free cash that you can deploy into other avenues.
How do you reach your customers with a message that will resonate with them? This section will be broken down into four sequential chunks that highlight mechanisms to get right- the objective, the target, the message and the outreach.
Many have forgotten about the importance of thinking this through in sequential order.
If we define marketing in this context as reach out to potential/ existing customers, the logical first question to answer is “Why are we doing this?”
- Is it to drive more traffic to the site/ store?
- Is it to increase conversion numbers?
- Is it to get rid of older products?
- Is it to build customer loyalty to the store?
- Is it to build hype around a new product launch?
Depending on which objective you choose to pursue, your message, target and outreach strategy can look completely different. Think about the difference between hyping up the launch of your new e-commerce store versus informing your existing shopper base that the vegetable section is on a week-long promotion.
Think about the objective, and this should flow through. If possible, try to get as specific as possible. Who are you hoping to reach?
- Meat lovers versus vegans (Product)
- Existing versus customer base
- Working adults versus teenagers
- Loyal fans versus potential detractors
- Weekend versus weekday
- Men versus women
Scoping this down as narrow as possible gives you two majors advantages- it lowers the cost of marketing, and it increases the overall effectiveness of the messages.
Messaging isn’t about a catchy phrase like “Got Milk” or “Just Do It”, it is about conveying the intended message in a memorable manner. This can be done in the form of pictures or videos to ensure that the core message is etched into memory.
Now that you have the groundwork set up, you can start thinking about the outreach method. How is the final audience going to receive the message? Should it be an online channel like Google, Snap, Facebook, Twitter or Instagram? Should it an offline channel like flyers, in-store posters or perhaps through the loudhailer.
Employment law can be complex, and it might be best to speak to attorneys who can assist you in drafting the standard template for your business. Once you have legality out of the way, you can start focusing on the things that make you successful.
The team you build is the company you build.
We understand the financial crunch that tends to comes with starting up, but you can’t afford to skimp on quality candidates. If you are a small business with a close-knit team, a lot more is expected from these candidates, and their pay structure should reflect that. You might not have the resources to send them for corporate training and coaching them along the job, so you will be expecting them to learn on the fly. Quality candidates like that don’t stay long if they are getting minimum wage.
When you hire your first employee, think about what you knew about your own business 3 months ago. You probably learnt a lot during that time. Don’t expect employees to be completely effective from day 1. They need time to ramp up, and some form of structure training can accelerate that, but there is a maximum cadence. Check in once every two weeks for the first 90 days to see how he/ she is doing.
Software for small and medium retailers
If you have gotten to this point, you might be overwhelmed by all the things that retailers have to take care off. Don’t worry, that’s the reason why software exists.
Before you go on a software shopping spree, think through this basic framework.
- I need this problem to be solved or job to be completed
- I have these skills within my core team
- This is the tool that I want to use
Again, people think of this in reverse.
”A friend told me that “ABC” is great for a payment gateway, I should get it too.”
But what your friend didn’t tell you is that he is a software engineer by night and he can read the documentation and do the implementation by himself. If you can’t, this might not be the right choice for you.
Going through the framework for the following examples-
|Job to be done||Software||Additional Notes|
|Accounting||Accounting||(pretty basic software will suffice)|
|A better understanding of business||Analytics||There are many analytics solutions to choose from so you have to decide on what aspect of the business you want to dive deeper into|
|Track and understand shoppers||Customer Relationship Management||Crucial to get set up before scaling because it will better enable your analytics stack|
|Track stock levels and log product data||Inventory Management||Tracking amount and location of all merchandise is table stakes. It should include functionality that helps you track the age and sales history of specific products|
|Facilitate transaction and logs relevant data||Point of Sale Software||Using a trusted cloud-based vendor gives you the advantage of knowing that the system will likely be able to properly integrate into various other platforms in the future|
A small word of caution here, out of this list, the most important software that you will get at the early stages is the point of sales (POS) system. Do spend time speaking to a few vendors and figure out what works best for your business.
There are many retailers now trapped using legacy POS systems. If the system doesn’t work the way you want it to with your other tools, you might either have to pay for expensive integrations or switch to another vendor.
A reasonably good software should cost somewhere between USD$50-150 per month. We recommend staying away from long-term contracts with vendors that aren’t referenceable.
Setting Yourself up for Success
Technology is ubiquitous today, and whether you are running a three-month-old store or a twenty-year-old franchise, you should be thinking about how to leverage it to scale because your competition is definitely going to.
Get the fundamental infrastructure like cloud POS systems and a suitable analytics tool that can help your team perform at their best.
Notes about Growth
Growth is generally good- unless you have no idea how to replicate it. Is there a hot new product that everyone in your industry is benefiting from? Are profits steadily increasing but expenses seem out of control? Was there some sort of national celebration? Sales, expenses and inventory are meant to grow month on month as more customers recognise your brand.
Resist the urge to celebrate until you understand how to replicate that success.
Don’t forget to solve the little issues early. Just when you think you are ready to scale, problems will start to surface- return policies pissed off one customer, a new tax law came into place, an employee was caught stealing from the company…the list goes on. Issues like these are bound to surface and you are going to magnify them if you scale too early.
When you get caught up in solving these issues, don’t be impatient with your assumptions. We all want to get the little stuff out of the way so that we can do more interesting stuff like getting more profits through the door. Carefully analyze the situations to understand the root cause of the problem. Take these examples-
- No customers are coming through the door
- Inaccuracy in tracking incoming inventory
- Mistakes in cash collection
- Products that are far past their expiry date being sold
- Theft by shoppers/ employees
- Mistakes in buying/ receiving
These are not problems- they are symptoms.
Be proactive about identifying and addressing the little issues early on so that, if need be, you can adjust your business plans to build a proper business.
After going through this long guide, if you are still certain you want to start and grow your own retail business, we would be happy to help. Save and share this post with those who you think need to read it and subscribe to our content.
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