If you are a small retailer and have been trading successfully for quite some time, it might be a good time to expand your retail or ecommerce business.
Growing a retail or ecommerce business is quite straightforward, but there are a lot of considerations that have to be taken care of and actioned properly, in order for your retail business to expand successfully.
In this complete guide we are going to lay down a roadmap with different options for successful retail expansion strategies that are used by big retailers.
Why Expand Your Retail Business?
You might be asking yourself : “Why would I want to expand my retail business?“. After all, you might be doing just fine with your single store location and don’t want to deal with the hassle of retail expansion, which requires a lot of cash and commitments.
This could be a valid point, but let me bring one point to your attention, and then it’s up to you to decide whether you want to expand or stay in place.
Your business today is breaking even and even generating good profits (let’s say around 5-7% of revenue). This profitability will start to come under pressure sooner or later and might make you consider expansion for the following reasons:
To Fight Competition
Any business that performs well, has healthy margins, and is easy to start will attract competition. This competition will enter the market and try to win market share using the easiest way: lower the price.
Once the competition starts offering your products at lower prices, no matter how loyal your customers are, you will start losing at least part of them to the competition.
With retail & ecommerce businesses having single digit net profit margins, any reduction in top line (revenue) will soon put great pressure on the entire profitability of the business, and might even drift into a loss state.
To Keep Up With Inflation
With rising inflation, you will find that your P&L is coming under pressure, year after year.
- Your rents are increasing
- Your staff salaries are increasing to keep up with inflation
- Your products are becoming more expensive to source
- Your marketing & advertising is becoming more expensive to execute
If all this keeps happening, while your sales are not catching up to cover all those increases, you will soon find that your 7% net profit margin is dropping to 4%, then 2% and suddenly you might find yourself in loss.
Due to all the above factors, you might find it is actually necessary to expand and grow your retail business.
In fact, you will see in this guide, that growing a retail or ecommerce business doesn’t have to include operating multiple units. There are many different strategies and you can choose the best option for your business, as well as your lifestyle and capabilities.
Retail Expansion Strategies
Retail expansion strategies will usually fall into 4 categories:
- Market Penetration: Growing into the existing market using the existing products
- Market Development: Growing by expanding into new market territories
- Product Development: Growing in the existing market using new product development
- Diversification: Growing the business by diversifying its offering with new products & services
Using the above framework, let’s see how we can apply this to our retail or ecommerce business.
1. Expanding The Footprint of Your Retail Business
The most straightforward way to grow a retail business is by opening new store locations.
All the big names in retail have once started as a small operation, usually run by a small entrepreneur just like you, and now have become household names by expanding their footprint and opening new stores.
Your retail store expansion strategy could come in two forms:
Existing Market Expansion
In this case you will open stores in your existing market, where you are currently operating. This will allow you to get closer to your customers and win more market share from competition.
The key for the success of this strategy is to ensure that every new store is actually adding new value to your retail business on both, top line and bottom line.
After you have opened more stores in the same area, you might find that some stores are cannibalizing each other and that your same store sales are declining. That’s why it is very important to understand the effect of cannibalization in retail from the beginning and how to deal with it.
Read more: Cannibalization: A Side Effect of Retail Growth
New Market Expansion
In this case you will be exploring new territories, where you currently don’t operate.
This will allow you to win a totally new market and will probably have bigger opportunity, since your products are not being sold here.
Few Considerations Are Important for International Expansion
1. Competitive Landscape
The key for this strategy is to study the competition in this new market very well. It might be that your competitors have established themselves very well in the area and your entrance will be faced with fierce resistance. Be prepared for it.
2. Local Traditions
Another thing to consider is local traditions. You will need to study this new territory and its customer behavior.
For example I was surprised when I visited Germany and found out that stores close at 8 PM and I had nowhere to go. This is because I come from a place where stores are open 7 days a week and extend until 12 am on weekends.
It is important here to find answers for some questions:
- How do they shop?
- Are your products a good fit for them?
- Do you have to accommodate their habits in a new way?
- Are you ready for such accommodation?
3. Currency Fluctuations
Expanding and trading in international markets will mean doing business in different currencies. In fact this is one of the biggest considerations that big businesses study when it comes to international expansion.
A few things come into play here:
- Exchange rate (Fixed or Fluctuating)
- Local policy measures that might affect currency (interest rates)
- Local inflation
- Capital control
Due Diligence is Key When You Expand a Retail Business
Some very big retail names have entered and exited international markets because they didn’t do their due diligence and study the market in advance.
Learn how to assess new markets for international retail expansion in this Retail Growth & Expansion Course
2. Expanding Your Product Usage
Another way to expand in the existing market, using the existing product line is to increase the usage of your product. This can be done by finding new ways for your products to be used and educating your customers about them
I was shopping at Kiehl’s and talked to their sales associate about how amazing their products are, and that I actually use them for more purposes. Their skin whitening product line that is typically used and promoted to be used for face I have tried to use it to lighten underarm and it worked perfectly. This has resulted in me consuming double or triple the quantity from the same product. I told them that they might actually want to highlight this in their marketing message.
The sales person replied by telling me that actually they had another customer who came to buy more from a face tightening product (again promoted for face) and they noticed that she is buying it in big quantities. When they asked her, it turned out that she was using it for tightening her loose skin around her armpit, and it worked perfectly.
This is a perfect example for growing your retail or ecommerce business without opening new locations, simply by expanding the usage of your products.
3. Expanding Your Product Line
In this strategy you will actually be developing or sourcing new products for your store.
Since you already have an existing customer base, you will find that expanding your product line with new related products will result in increasing your AOV (ATV) and of course your revenue.
When you give customers more variety, you are giving them a reason to shop more.
The key here is to make sure you are doing this strategically and avoid the trap of trying to be everything for everyone. You want to stick to your brand positioning and only add products that reinforce this positioning and appeal to your customers.
I have heard about a brand that has been in the market for very long, but now they are starting to close locations because the business is struggling. This business was once a very successful business.
I went to see their stores and try to figure out myself what the problem was.
I walked the store as a normal customers and immediately knew what the problem was.
This brand has no positioning !
When I entered the store I was faced with makeup booths that made me feel that I am walking into Sephora.
Then I kept walking..
Suddenly I found home accessories product line that gave me the feeling that I am in a home store, except that the product line was not full. Only few products from here and there.. No story, no coherence.
I kept walking..
Then some fake women’s bags were on display
I kept walking..
At the end, closer to the cash counter I found school supplies & notebooks! Also some cushions..
You see the problem? Don’t do this.
The problem is: As a customer, I don’t know what this brand stands for. (also it is not a department store)
4. Adding New Channels
One of the ways to grow your retail or ecommerce business is by expanding your sales channels.
This could be by moving an existing brick & mortar store online and also by having an online ecommerce business presented in brick & mortar stores or pop-up shops.
Partnerships & Collaborations
If you don’t want to fully invest in a new channel or would rather test the waters first, you can always partner or collaborate with other businesses.
Read our article on How to Drive Free Traffic to Your Retail Store for ideas.
5. Adding New Business Models
You might want to consider expanding your retail or ecommerce business by exploring and testing new business models.
For example you can test creating a subscription model for your products, if you are trading supplies that are purchased frequently (e.g beauty products, stationary items, pet supplies..etc).
You can also try offering services that are related to your products and would appeal to your customers.
For example if you are having a pet supplies store, you can add pet grooming service, or dog walking,..etc.
Here you will also need to assess the feasibility of introducing such new models:
- How much it will add to our operating expenses?
- Will it result in additional sales and profits?
- Are we going to need a license to add such services? It is easy to obtain?
Learn about business model innovation for retail businesses, with real-life examples, in the Retail Growth Course
What You Will Need to Expand Your Retail Business?
Now that you are ready to expand your retail business, let’s dive deep into what you will need to do this.
Growing your retail or ecommerce business requires investment. Whether you are going to build new stores or source more products you will need more cash.
Read more on Improving Cash Flow for Retail & Ecommerce
This cash can come from the retained earnings that you have accumulated over the years, waiting for the right investment opportunity. If you haven’t been cashing out your profits and your business was profitable, you might have enough cash that is needed for your growth investment.
If you have been taking out your profits in the form of dividends or salary, then you might not have enough cash for expansion.
In this case you will need to explore your financing options.
Financing could be in the form of bank loans or in the form of equity financing, by bringing in new investors into the business where they will provide the needed cash in return for equity in the business.
2. Due Diligence & Feasibility Study for Retail Business Expansion
Since this is an investment, and also since financing is needed, you will need to perform a professional due diligence process and a feasibility study. This process should cover the following
- Amount of CAPEX Needed
- Expected Returns
- Expected Pay Back Period
- Competitive Analysis
- Cannibalization Effect
- Financial Projections
Basically you want to prove to yourself and the bank or potential investors that this opportunity is real and is going to pay off in the future.
Never skip the due diligence phase !
3. Understanding Multi-unit Management
Now that your are expanding your retail business into multiple units, you will need to learn about multi-unit retail management.
In the past you were managing a single location, which meant simple operation and everything under your eyes and under control. Now your business will be stretched over a bigger geographic area and the operation will look much different in many ways.
What You Need to Expand into a Multi-unit Retail Business
1. SOPs & Brand Guidelines
A thorough documentation for standard operating procedures (SOPs) for different aspects of your retail business will be needed now, so that the new locations will have a reference on how to do things.
This should cover the following, among others:
- Store Operations (Opening & Closing procedures)
- Banking & Cash Handling
- Retail Audit Guidelines
- Stock Movement
You will also need to establish your visual brand guidelines that will be applied at all stores to ensure consistent visual & customer experience.
Expanding your retail operation also means expanding your team and having new roles set in the business.
Learn how to operate retail stores in this Retail Operations Management Course
Area Managers manage multiple locations in a defined area and their direct reports are the store managers of these locations.
Area Managers will have full P&L responsibility over the locations they manage, and their KPIs will include delivering on the below areas
- Targeted revenue
- Targeted profit
- Targeted shrinkage
- Targeted audit results
- Developing store talents
- Maintaining good customer service and delivering the expected customer experience
Visual Merchandising Managers
Visual merchandising managers will be responsible for maintaining a uniform visual experience across all stores, by creating planograms, ordering store props and fixtures when needed and ordering in-store marketing materials.
They should also make sure their visual display in supporting sales, by having commerciality in mind while setting their plans.
Merchandiser or Inventory Controller
The merchandiser or inventory controller will make sure all your store locations are receiving the right products in the right quantities at the right time. They will maintain adequate replenishment mechanism and inventory management of stock holding.
Managing multiple store locations comes with its own inventory management challenges, so make sure you have a qualified merchandiser.
Since you want to maintain a coherent operating standards across all locations, training is essential for all new joiners, as well as at intervals throughout the year.
Training programs usually cover
- Selling Skills
- Product Knowledge
- Managerial Skills
Retail Expansion Resources
Join the academy and learn the different strategies available for each business at different stages in their lifecycle and learn about different ways to grow and expand a retail business even without opening more locations.
Learn how to optimize a retail business by applying a better pricing model, improving gross margins and improving inventory returns.