STARTING A RETAIL BUSINESS
The Definitive Guide
This is a complete guide to starting a retail or e-commerce business
You will learn about:
- Retail Basics
- Buying & Merchandising
- Retail KPIs
- Retail Financials
- Managing Performance
Here we will talk about the process of starting a retail business
We will be covering in details :
- choosing your product line
- Choosing brand name & logo
- Choosing site location & domain
- Finding suppliers
Before you start: This article intends to cover a huge topic of starting a retail business. Since this is a branched topic, we’ve included links to other free articles in our library that explain specific terms in more details at the end of each section. We recommend reading those articles as well.
CHOOSING A PRODUCT LINE
The most important thing when starting a small retail business is defining exactly what you want your brand or business to stand for. This applies whether you will operate as a boutique or you want to go private label.
Many times entrepreneurs start with a single product and then keep branching out and adding to the product line until they reach a point where they are almost selling everything to everyone.
If you really want to survive & compete in today’s hyper-competitive retail landscape, you want to have a solid brand positioning that will attach a certain group of customers to your brand, and make them think about your products every time the need arises for the particular features you have positioned for.
The way to survive in the current retail landscape is by building brand loyalty, and for this you need a strong positioning
Product Lines Examples
CHOOSING A BRAND NAME & LOGO
Another thing to consider while starting a retail business is to choose a brand name that will resonate with your targeted customer demographic and reflect your product line.
It goes hand in hand with the positioning concept we discussed before. When you choose the right brand name you will make it easy for your customers to connect that name to certain products and to remember it when they need those products.
You will want to make sure your brand name is easy to read and spell and also easy to be included into a logo design. If your brand name is too long it might be difficult to make a nice logo design of that name.
You also need to make your research to ensure your brand name doesn’t already exist and is not violating any trademarks (we included the link to the U.S database below). Furthermore; you don’t want to choose a brand name that might have negative connotations in other languages or cultures where your customers might belong to.
Things to Consider
CHOOSING SITE LOCATION & DOMAIN
You will find everyone in real estate saying “Location, location, location” and this is really for a reason. Your store’s location is one of the most important choices that you will make when starting a retail business. It could literally make or break your business.
The reason the location is so important is that you want to be “found” by potential customers. You can’t expect to get all your customer by referring them through your website or social media. You want a constant flow of traffic that brings you new customers everyday who haven’t heard about you before.
The biggest consideration here while choosing the location will be the rent price. The best locations will always have high rents. But the question is: Is this rent feasible?
You will find many times that some landlords get ahead of themselves and overcharge for the store because it is in a very good location. However; when you start doing your feasibility and budgeting you will find that at this rent you can never turn any profits.
On the other hand, we strongly advice against renting a location only because it has a cheap rent. You will always have fixed costs in your retail business, and if the location you get is not bringing enough revenue to cover those costs you will be losing money every month.
The other consideration when it comes to the rent is the lease terms. Make sure you consult your lawyer before you commit to a rent agreement and always have an exit clause that will allow you to end the lease after a certain lock in period, just in case your business didn’t perform as expected.
The final thing you want to consider, especially if you are starting an e-commerce business, is the domain availability of your brand name. It would be perfect if you can choose a brand name that has a .com domain available. It is not easy to find, but if your brand name is unique and creative enough (which you would want anyways) you will find it.
Read our new series on Opening a New Retail Store for all behind the scenes preparations that have to happen before opening.
When it comes to store locations, you really get what you pay for
Things to Consider
Now that you know exactly what products you want to sell, it is time to go out in the market and find suppliers and manufacturers.
Always keep in mind that your suppliers are long term business partners and will have the biggest effect on your success. When you have this in mind your approach in searching for suppliers will totally change. You will not be focusing solely on price or payment terms, but rather on the supplier’s capability to fulfill your business needs over time in a timely manner and with great consistency.
Your suppliers are your most important business partners
The task you have to perform here is careful due diligence. You will have to examine your suppliers’ business, their history in the market, their other customers and if possible even travel to see their manufacturing facility.
The last thing you want is to launch a product and then face customer dissatisfaction due to quality issues. Or launch a nice product and build a customer base for it and start spending on marketing, just to find that you are not able to get replenishment from your supplier because their business cannot handle the volume.
Finding suppliers is not a cheap process. You might need to travel to attend trade shows (which we have found to be the best way to find credible suppliers) or, as mentioned before, travel to see the factories. Don’t expect to do the entire process online unless you are expecting to be extremely lucky!
If you choose to do everything online though, then we recommend taking your time and ordering samples first. Take these samples and use them and expose them to normal wear & tear conditions and see how they hold. You will find that in many times, after you use the product yourself, you will drop that supplier from your list, because the product didn’t hold well and you don’t want to associate your brand to this quality level.
In this chapter we will cover the process of running your retail or e-commerce business
We will be explaining in details :
- Buying & Merchandising
- Generating & Reading Reports
- Understanding Retail Kpis
BUYING & MERCHANDISING
Now that you are very close to starting a retail business and probably will start selling to customers soon, you need to place your first order of merchandise from the suppliers you have found earlier.
The process of buying starts with creating a buying budget, also know as Open-to-Buy budget. The OTB is closely connected with your sales budget or sales forecast for the first year. The whole idea is to buy enough product to be able to achieve your planned sales, so that at the end of the year you will get the planned profits.
This process is very critical to master in retail, because it will directly affect your sales as well as your cash flow. You ideally want to avoid ending up in an overstock or under-stock situation, where you either have to clear merchandise at steep discount and lose margins or not having enough products to sell and lose customers over time.
After determining this budget you will start allocating those amounts to certain products and placing your orders with the suppliers. You don’t have to place all the orders at once, but rather based on their order lead time.
You will start pricing your products to ensure you are getting enough gross margin out of your operation to pay all your other bills.
While setting your initial price take into consideration that you will be running different promotions and discounts throughout the year, and this will reduce your final margins.
We linked to different tools below that will help you set your pricing strategy for maximum profitability.
The first thing to do while setting up your merchandising system is to create a merchandise hierarchy. This is simply creating a map with all the product categories and classes that you plan to have in your store, so that when you start ordering and receiving those products you will assign each SKU to a certain hierarchy. This is your way to organize all the different kinds of products and also to help you in reading & understanding the reports in the future.
Now after you start receiving those products, you will start merchandising them in your store. Whether online or offline, merchandising is how you allocate these products to your stores and display them to ensure their availability to the customers at all times.
Read Also: Inventory Allocation
You will start visually displaying those products in your shop and ensure they are replenished properly to avoid missed sales opportunities. This process can be automated on your system, so that you always be notified when some products are running low.
Read Also: Replenishment Systems in Retail
Despite the automation it is also important to generate your merchandise reports periodically and review them to ensure no products are running low on stocks and you haven’t been notified. It is also important for the person doing the merchandising and allocation to visit the stores from time to time. This is because reports don’t tell the full story.
Every store is unique in its space, layout and customer profile. It is essential to link all those attributes to the merchandising strategy for this particular store, and this can not be done optimally without visiting the store.
Another term related to merchandising is visual merchandising. It refers to the visual display of products in a way that maximizes their sales and creates a nice visual story in the store.
It usually starts with deciding about the store layout and fixtures, and then displaying the products as per the planned layout. There are different store layout models, but the most popular are:
- Forced Path Store Layout
- Grid Store Layout
- Free Flow Store Layout
GENERATING & READING REPORTS
An essential part of managing a retail business is generating and reading the different business reports.
These reports could be
- Sales Reports
- Stock Reports
- Financial Reports.
You will generate these reports periodically, i.e weekly, monthly or quarterly, based on the type of report.
Your sales reports will show you your sales performance against your budget and through your KPIs reports you will get to know why you are above or below budget. Based on these indicators you will then start tweaking your sales strategy to catch up with your budget.
The Sales KPIs for a retail business include:
- ATV: Average Transaction Value
- IPC: Items per Customer
Your stock reports will show your stock levels, the age of this stock and the sell through of the different products or collections (Sell through means how much these products sold out of the initial ordered quantity).
Stock KPIs will include:
When you read your stock reports you will then action a plan to clear certain stocks that have low sell through, order new stocks if products have sold quicker than expected or reconsidering future buying orders for products that are not selling as expected
Your stock levels are very dynamic and keep changing based on your sales patterns. It is very important to be on top of your stock situation at all times.
Your financial reports will show a bigger picture of the business. They show how the business is performing in terms of profitability, cash flow, working capital and assets & liabilities.
Dealing with numbers could be intimidating to some people, but if you want to start a retail business you need to be comfortable with dealing with numbers
In this chapter we explain how to grow your retail or e-commerce business.
We will be covering in details :
- Marketing & Branding
- Digital Presence
- Connecting Online to Offline
MARKETING & BRANDING
Marketing is an integral part of any business operation and retail is no different. In fact it is even more important in retail because retailing has a direct to customer approach.
We already discussed the importance of having a defined branding strategy before starting a retail business, so you can stand out & compete in the market. Here we want to link this strategy to other aspects of retailing.
You will want to make sure that your buying and product sourcing is reflecting your brand position and what you stand for. Typically retail brands are segregated into value brands, premium brands and luxury brands.
Value brands present a good value (in terms of price level) to the customers and generally attract people who search for bargains or the lowest price in the market.
Premium brands present a different proposition. They offer products at a higher price and also a better quality. Their customers usually don’t focus much on the price they are paying or wait for the sale to buy the product. Their customers concentrate more on newness. To satisfy these customers you have be launching new products frequently and never compromise on your quality.
Luxury brands target a different segment in the market and offer exclusivity. It goes without saying that the quality has to be good, but what is more important for the customers her is the exclusivity aspect. They don’t want to see this brand being discounted in the market and made available to everyone at lower price after they had paid a premium for.
Depending on which market segment your brand is targeting you will then create your product offering to suit this segment. By product offering we mean the features of your products as well as the price level.
This is a very important step, because, as we mentioned before, you don’t want to be everything for everyone. Also to grow your business you need to start attracting more customers from the customer segment your brand is targeting. For this you need a clear branding strategy.
Things to Consider
Gone are the days where you could succeed in retail without having a digital presence. Nowadays, if you are starting a retail business you MUST create a digital presence from the get going.
By digital presence we mean having at least a basic website that shows your store locations and social media profiles that showcase your product offerings. At later stages you might want to establish an e-commerce platform and fulfill directly form your stores. or have a click & collect option.
When you think about social media it is important to identify the platforms where you think your target customers will be present. You will not be able to maintain a presence on all the social media platforms, so doing a research on that will save you a lot of time and efforts.
Some product categories are great for instagram and others are better suited for Linkedin. Some products shine on Pinterest and others have more following on Snapchat.
Decide on few platforms and start executing.
You will need a domain registrar to register your domain, a hosting provider to host your website and an image editor to create artwork.
To connect the digital world with the physical one if you are running a brick & mortar, consider listing your shop on Google My Business. This will allow you to show up in Google Maps when people search for your business or for the products you sell. After you list it they will send you a verification code to your physical location and after that you will be able to manage that profile on Google and respond to customer reviews.
Remember that to grow your business you need new customers, so you are trying to put your business out there on the internet to get found by your target market.
It is also a good practice to optimize your website for SEO for the products you sell in the area you are operating in. You can hire a freelancer to do it for you.
Things to Consider
In this chapter we will discuss monitoring your retail business performance
We will cover in details :
- Financial Reports
- Budgeting & Forecasting
Now that you have been in business for quite some time, it is important to know how you are doing financially. After all, the ultimate goal of any business is to maximize shareholders’ value. In order to improve the financial performance of the business over time, you have to read and act on its financial reports.
These Financial Reports include:
The balance sheet statement will show the assets & liabilities and will give a better picture on the historical performance of the business.
The Cash flow statement will show the movement of cash in & out of the business.
The ultimate goal of any business is to maximize shareholders' value
BUDGETING & FORECASTING
Now that your retail business is reaching its first year, you will need to start budgeting for the next year. Budgeting for your retail store will depend on how your store has been performing this year and how much you expect it to grow next year.
The retail budgeting process is very critical because you will plan your buying and your costs based on it.
The Steps include:
- Sales Budgeting
- Cost Budgeting
- P&L Budgeting
Based on the results you are getting this year you will start forming a plan for next year. You will see where your costs have shot up for example and try to rectify this in next year’s budget. You will also assess the trend of your business and might want to increase spending in some areas, such as marketing, if you can see a good potential & opportunity.
If you plan to expand the business next year, by opening a new store location and adding some related products, this is the time you start planning for that and allocating it in your CAPEX (Capital Expenditure) budget for next year.
Premium Tools & Guides
Starting a retail business is a very holistic process that will teach you a lot about different aspects of doing business.
To learn more about retail, feel free to browse Retail Dogma, read all the articles for more in depth knowledge about the different topics and use our free online tools.