Many articles list the top reasons why retail companies fail. Most reports are consistent, and some highlight different reasons. I looked at the ten most searched articles, summarized their top ideas, and identified the consistent themes for why retail fails. In conclusion, every single list includes some money-related issues as one of the top reasons why retail companies fail. Whether it is pricing, or lack of financial know-how, or running out of cash, they all include some finance element as one of the reasons for failure.
Treat cash reserves as the lease security deposit. In other words, the landlord would typically request 1 or 2 months of rent as a security deposit. You should add up all of the expenses and multiply by six and put that money aside and consider it as another “security” deposit.
The business model needs to be profitable in a short period. After all, you only have six months in your cash reserve “security” deposit. It is a good idea to “test” your business model before signing the lease. A typical lease is five years, and most likely, it will become your most significant expense. You should consider a pilot (if possible) to test pricing, target market, advertising effectiveness. At a minimum, you should address these aspects of your business model:
Product and merchandising
Having the right product mix/inventory and merchandising is the number one reason why new customers will walk into your store. A new customer may not know about your pricing; they probably don’t know what to expect as far as customer experience. But if you have the product that they are looking for, they may consider going in. I owned a custom wedding invitation store, and as such, customers came into the store because they were looking for something different and unique. The products were hand-crafted, and materials were sourced from all over the world to make each piece different. After customers came into the store and glanced at a particular invitation, they evaluated the price relative to the value. In the case of my stationery store, prices were 4x higher than regular invitations; however, in most cases, the customer quickly perceived the value of a custom invitation.
The value proposition in relation to price
The business model must address how you are going to provide sufficient value to your customers to attract them to your store over and over. This may sound obvious, but many entrepreneurs often miss it. For example, a clothing boutique may consider having the latest fashion as their value add or differentiator from the competition. The reality is that this may not be enough of a differentiator for people to go shopping at this store. Customers in the target market may be price-sensitive, or they may be location sensitive, or they may want other perks such as free tailoring, or others.
One of the most important things you can do to overcome this challenge is to measure and act upon your key performance indicators (KPI). In the case of retail, the top five KPI’s are:
How many potential customers come through the door helps you measure the effectiveness of your advertising campaign. It doesn’t matter how many people click on your Facebook ad or see your billboard, and it boils down to how many people came to your store because of the ad.
The average size of the transaction depends very much on the type of retail concept, if you are selling candy, the average is going to be much less than if you are selling shoes.
How many potential customers bought something. At least 10%-15% should be the target. That means that at least 1 out of 10 people that came through the door bought something
In simple terms is the price less the cost of the product. A gross margin above 50% in retail is considered good.
How much stock do you have, and how well are you turning the inventory over. The last thing you want is to have is a lot of product that is slow-moving; this will tie up capital and restrict your ability to grow profitably.
In summary, having cash reserves equivalent to at least six months of operating expenses is a must-have before you sign the lease. A profitable business model is designed with three main characteristics; superb product, value-based pricing, and excellent customer experience. Last but not least, you need to measure the business. What you don’t measure you don’t manage.
