BrainTrust Query: Six Sins of a Startup Retail or Franchise Business

Discussion
Jul 06, 2011
Bob Phibbs

Through a special arrangement, presented here for discussion is a summary of a current article from the Retail Doc blog.

I had come to Charlotte to help a business owner considering expansion. We drove around and she showed me a location down a side street, on the back side of a grocery store with limited visibility. She told me she expected to be doing $3000-4000 per day.

“Why is that?” I asked. She replied, “Because the competitor across the way has a line out the door day and night.”

That’s startup business Sin#1 – Unrealistic expectations. You’re not your competitor.

Sin #2 – Undercapitalized. When the budget is created, you have to expect cost overruns and delays. You should still have at least six months of money to operate the business. Oftentimes startups run so close to the rail that if something happens, they don’t have the money or credit to get by. That means they open their doors stressed, looking at customers with do$$ar signs in their eyes. So needy for sales, they often miss on what should be the easiest — customer service.

Sin #3 – Not taking it seriously. “Build it and they will come,” only worked for Kevin Costner in Field of Dreams. You can’t assume the world will beat a path to your door. You must know who will buy your stuff before you open, not when you struggle to keep your lights on. A franchisor can cut your learning curve but it’s like buying an expensive Ferrari — it’s still up to you to drive it.

Sin #4 – Impatience. This dovetails into #2 but it is the disregard for a well-trained crew that ultimately shoots many startup businesses in the foot. Why? With no marketing in place, untrained staff or lack of consistency of product, customers might well flock to your Grand Opening but they won’t return. They’ll tweet about the bad experience, Yelp about it and Flame on Facebook. In the long run, you will have torched your own neighborhood. Remember: bad news travels fastest on grapevines that have soured.

Sin # 5 – Picking location by price. I met a Jack in the Box location scout and he told me he was always amazed when a franchisee asked where they should locate, the scout told him and the owner went somewhere else. Why? Because they would tell themselves with the 1/3 savings in rent, they could do 1/3 less business and be at the same place. My take: maybe. But there’s a reason rent is cheaper; it is not in demand. You never want to be 100 feet from success and, once you sign a lease, you’re stuck for a very long time.

Sin # 6 – Promoting on price. Yes, trial is important, but adopting promotion-based marketing from the start means you’ll rarely, if ever, be able to get full price for anything. So you become the generic off-price store instead of the new one that will surprise and delight because of your people and your merchandise.

These are by no means all the things that frequently go wrong in a startup but they have a common theme: leaping before you know how deep the water is.

Discussion Questions: Is now a good time to start a retail business? How can individuals launching a retail business avoid some of the pitfalls that derail startup ventures?

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12 Comments on "BrainTrust Query: Six Sins of a Startup Retail or Franchise Business"


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D. Black
Guest
D. Black
9 years 10 months ago

Research, research and more research. One you’ve done all that, do some more research.

Set your product pricing in tune with the economy. That means you should have your thumb on the heart beat of the economy, especially locally.

Be prepared to work hard for smaller margins. You’ll get tired of this and that’s exactly what we are counting on in this economy…many will tire quickly with the hard work and quit.

John Boccuzzi, Jr.
Guest
John Boccuzzi, Jr.
9 years 10 months ago
Mr. Phibbs’ advice is very good. I was recently in a community outside of Chicago and visited a start-up retail store. The store was open for less than 6 months and it was clear they were not going to make it. Great location, but clearly not enough inventory/assortment to keep the store traffic consistent throughout the day. The approach of limited assortment works if you become the destination for something special. Unfortunately, this retail store had nice items, but nothing that a customer would go out of their way to get. A great example of a unique destination location is a local retailer in Connecticut that created a section in his store that only includes MADE IN THE USA items. This approach creates something unique for the local community. I spoke with the owner and so far the results have been very good. Today, retail start-ups need to consider the importance of strong assortment and one or more items/themes that turn the store into a destination for consumers — something special that people can’t or… Read more »
Ralph Jacobson
Guest
9 years 10 months ago

These are good, basic words of advice. None of them are new, however they do stand the test of time. All too often we see small entrepreneurs fail due to the fact the have more “heart” into their business plan than “head.” If small retailers look at 1) Location (Thanks, Ray Kroc), 2) Viability of item category and 3) Customer service (Yes, TALK to the people who come into your store…and ask for the sale!), then the odds of success will be far greater.

Marge Laney
Guest
9 years 10 months ago

This list pretty much covers it. It’s hard to pick which one will kill you faster, but I will have to say that unrealistic expectations probably is the biggest problem. When you don’t understand how your idea fits into the local market from the git go, you will probably make all of the other mistakes in quick order. The finale being a Groupon offering that will wring out the last bit of capital as the entrepreneurs’ dream evaporates.

Kai Clarke
Guest
9 years 10 months ago

Now is a great time to start a business if you have plenty of cash. Cash is king. You will need enough cash to stock your store, pay the rent, pay yourself, pay your other expenses, AND promote your new business for an entire year. If you do not have 12 months of excess cash to cover all of these expenses (and more), then you should not be starting your business. The greatest failure of the majority of businesses is that they do not have enough money to pay for everything, including themselves for 12 months!

Steve Montgomery
Guest
9 years 10 months ago

All the points from Mr. Phibbs are great. We get calls all the time from people looking to start up a convenience retail/fuel marketing business. Some of the common errors we see are a lack of understanding of what makes a good location and no understanding of the complexities of what seems to be a simple business (don’t many businesses seem simple from the outside).

This topic reminds me of when many years ago I taught new business start up at a local college. As the end of the semester I was asked by the Dean if I thought the class was successful. I said yes because half the class had discovered they were not yet ready to do a start up and the other half now had a far better understanding of what it would take.

David Biernbaum
Guest
9 years 10 months ago

All of the pitfalls mentioned in this article are typical and very true. The same types of criteria are true for new manufacturers and new brands. Those that fail are often undercapitalized, under-researched, and inexperienced.

Kevin Graff
Guest
9 years 10 months ago

Great advice from the “Doc,” Bob Phibbs. Maybe we can add one more to the list: Opening a store just like everyone else’s. I always say the last thing the world needs or wants is another clothing store, gift store, hardware store, shoe store, etc. What we want and need is a store that is different, better, and exciting (see Lululemon, Bass Pro, American Girl). If there is no innovation in your concept, don’t bother.

Ed Rosenbaum
Guest
9 years 10 months ago

This is a very good article hitting the major reasons a start up will/can fail. I am focused on under capitalization as reason #1. If you don’t have the capital to properly stock (if this is a retail location) or train and have the staying power until the business builds a substantial cash flow; there is no way you can “keep the lights on and the doors open.” I believe you need enough capital to stock to attract the buying public. I believe you need at least six months available capital if you are a service provider if you are serious about success. That plus a lot of good luck always helps.

Bill Robinson
Guest
Bill Robinson
9 years 10 months ago

Doing everything yourself. Running a retail store can be an exhausting experience: long hours, constantly with customers, stressed about money. Before starting the venture, make sure you have a trusted employee or partner. Otherwise, you’ll be done before the store had a chance.

Gordon Arnold
Guest
9 years 10 months ago

Experience and observation will demonstrate that there is never a bad time to open or expand a business. This article is a nutshell look at obstacles that are most likely to cause failure. There are many means available to successfully overcome these obstacles which can easily be tailored to even the most unique variations of the sins mentioned. It is therefore imperative to keep account of what is or is not happening even if you must seek observation and/or help from sources that are repulsive or harsh.

Doug Fleener
Guest
9 years 10 months ago

As usual Bob has great advice in this list. I have a sin specific for the franchisees.

Last week I met and spoke with a number of retail franchise store owners. Great people who had a varying degree of success.

What stood out to me was that the most successful franchisees were passionate about the products and being a retailer, but others were almost buying a job.

So I’ll add the sin of not being passionate about the business you’re going into. As basic as it sounds, I believe this lack of passion ruins a many of franchisees.

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