How to know it’s time to close up shop
March 18, 2016
Do you remember the emotions you experienced when you decided to open a store and the planning that happened afterwards? Remember the adrenaline rush just days before the grand opening? And the first week of store operations? Euphoria.
Thud! The honeymoon is over.
Store counts are low and continuing to decline. Your best employee just left for greener pastures (who happened to be one of your best friends). You are late on one rent payment. Your last holiday season was so-so, but 12% lower than the previous year. Is it time to close?
All is not well in paradise. You thought you had a sure thing. When a few family members said, “You’d be a great store owner. You just need to do it,” you believed them. But, as it turns out, you’ve learned there’s a lot to running a business. Marketing, merchandising, finances, people, administration. This was supposed to be easy. Instead, you’re ready to write 10 Reasons to Never Open a Resale Shop.
Is it time to close or continue the madness? That is the question. Perhaps there is a better question. Can I turn this ship around? And if so, how?
Start With a Marketing Focus
I’ve been an outsourced CFO since 2001. I was once a controller for a large regional retail operation. I serve multiple e-commerce clients. So I understand the business of retail, and I can understand the frustrations a store owner goes through in such a competitive environment. While my focus is biased toward operations and finance, the first thing I study when working with a struggling retailer is their marketing plan and how they are executing it. Solid marketing equals sales amplified.
Build it and they will come? Sure, that works in the beginning. Now, you have to start earning the customer visits if you not only want your store to survive, but thrive.
Let’s start with a simple income statement for a struggling resale shop. (All numbers are fabricated)
The income statement is for a recent 12-month time period, and note that the total store transactions (or customer purchases) are 3,848. That’s roughly 75 customer transactions per week or about 12 per day.
So my first question is, is it time to close or can we do better? We need to answer that by noting the simple equation for calculating total sales for a given time period (let’s stick to 12 months)
As the store owner and entrepreneur, are there more potential customers you are not attracting? If so, who are they? Where are they? And what’s the strategy to pull them in?
There is no holy grail to a perfect marketing system, but you have to start with a plan. It has to be simple, clear, easy to execute, and measurable. Rinse and repeat often. That’s the only way you’ll build up your customer base over time.
Average Purchases (Transactions)
Obviously, if you are selling furniture, the average number of customer purchases per year will be a small number (for example, about one customer purchase per year). If you sell clothing, you’re probably looking at 6-7 customer purchases per year. Accordingly, our store merchandising strategy plays a major impact on your repeat customer counts. If you don’t want to overhaul your inventory mix, you can enhance customer purchases through more special promotions throughout the year. You’ll just need to get creative.
Like total transactions, the average ticket is driven by your merchandising plan. Take note of specific items where there’s not as much price sensitivity to some of your best sellers. For a store that generates 5,000 customer purchases per year, every dollar added to the average ticket falls directly to the bottom line and into your pocket. This is where the math gets really interesting. While this may seem like major surgery, perhaps your merchandising plan needs an overhaul. That could dramatically impact your average ticket. Maybe you need a new product category or two. Your customers will be your best advisory board if you are thinking about this.
End With an Earnings Focus
We could spend hours talking about the cost side of your financial business model which includes your average cost for your resale merchandise, labor costs, occupancy expenses, and so on. However, the cost structure is not a contributing factor that’s causing large retail chains to shut their doors. They are biting the bullet because customers have quit buying from those stores. When many store costs are fixed, a declining store count only spells disaster. Still, you need to keep an eye on the costs you can easily manage (like store labor) and you need to get good at the way you spend your smart money (e.g., advertising and promotions).
In short, you need to be able to clearly state what every cost is in your store operations. You need to know why those cost exists and what drives them. I’ve worked with many executives over the years who cannot answer those fundamental questions.
The Verdict, Is it Time to Close?
I think the answer is simple. It’s time to close when you have exhausted every possible method to increase one or more parts of the top line sales equation. Generally, that means you’ve done everything to figure out how to get more customers in the store and how to get them buying more often. If you cannot figure that out, then the answer is simple. Yes, it’s time to close.
But don’t throw in the towel without thinking about your sales issues thoughtfully and carefully. By the way, I’m pulling for you. I want your decision to be based on logic more so than emotion.
Mark Gandy is a long-time outsourced CFO who enjoys the art and science of better retail performance. When he has time, he enjoys writing on his own blog over at G3CFO. Mark will be releasing a course later this summer called The Ultimate Resale CFO Playbook™.
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