Should you open a retail outlet for your company?
6 min read
18 November 2014
Opening a retail outlet is a significant undertaking and the first question that a business owner should ask is, what am I hoping to get out of it? This is fundamental because there may actually be other, and better, ways to achieve goals.
Over the years, many a manufacturer of consumer goods has been frustrated a reliance on UK retailers to stock and sell products. Primary concerns include retailers failing to promote and sell products adequately and starting to raise demands with regard to marketing, pricing and retrospective discounts.
The most attractive alternative to this is often launching a retail store, transferring the control over the sale of products and breaking the reliance on large retailers, which only seem interested in personal profit margins. But what are the potential pitfalls for the wary manufacturer and are there alternative solutions to retail stores that will increase sales and profit margins?
Opening a retail outlet, maybe a flagship store, can be a great way to build your brand and grow revenues – but it is essential that this is part of a robust business plan. This plan must identify and address the real issues that are limiting your business and develop a strategy for growth. Successful businesses have a clear vision of what each wants to achieve and how this will be conducted.
Substantial investment is required in launching a retail outlet that includes the obvious lease deposit, stamp duty land tax, legal fees, payroll, and fit out costs, as well as other hidden costs that must not be underestimated. Marketing and management are key factors to success and both require substantial costs and expertise. Indeed, ensuring that the person responsible for managing the store has the right experience and aligned values is imperative.
Sadly, not all great ideas are a roaring success and it is essential anyone considering establishing a retail outlet considers what happens if this venture is unsuccessful. What is your exposure if this fails? What are the implications on the rest of the business both financial and reputational? Paying redundancy and returning excess stock is one thing, but being in a position of having a retail unit with five or ten years left on the lease when the business is losing money will not be many business owners idea of success.
There may be less costly alternatives to actually opening your own store that gives your product the exposure to allow you to increase revenue. Alternatives could include an online solution or, assuming online sales are already taking place, improving the businesses digital platform and exploring improvements to your customer’s convenience or experience of buying from your business. Click and collect through another retailer’s store is a popular option and improving the efficiency of your systems to create a competitive advantage is another.
Another alternative to opening your own retail store is to use store concessions within larger department stores. There are a number of smaller retailers who encourage concessions especially from niche brands, that can help differentiate their own retail offering from the large multiples. The great advantage is that concessions can often be taken for a shorter period of time than a conventional retail unit lease, thereby limiting your exposure should the venture prove unsuccessful.
In addition, the financial commitments can be structured, so that they vary according to the actual sales achieved by each concession. Of course, there are downsides, not least that you are dependent upon the footfall achieved within the host store.
By thinking creatively, understanding what your customers want and how to position yourself against the competition will, for many enterprises, yield greater growth, customer loyalty and ultimately shareholder value. That is why, should you still decide that your route to build your own brand is through opening a retail unit, a robust business plan is vital, setting out clearly what you hope to achieve and how you are going to deliver.
Your business plan does not have to be a hundred page tome that becomes an office doorstop but should record, in plain English, what you are intending to do, how you are going to achieve it, what the key risks are for the business and how you are going to mitigate them. Also include a SWOT analysis, accompanied by strategies for dealing with the weaknesses and threats identified in the analysis.
Do consider the financing of the project being realistic about the required cash investment over an agreed period to ensure its success. Once you have produced your forecasts, stress test them – what happens to your cash flow if your sales do not turn out as well as you hoped? What is your breakeven point each week/month and how long can you keep the project going should the business fail to achieve targeted sales? Is external funding from your bank or other provider required and if so, what are the implications on the rest of the business?
Finally, having produced your plan and understood the financial implications of your decision to open a retail unit, consider again whether the costs outweigh the benefits, and whether or not there may be alternative ways of working with your existing retailers to deliver the growth in sales you seek.
Jeremy Cooper is head of retail and consumer brands at Crowe Clark Whitehill.