This is Part 2 of a 10-part series on the Start-Up Mix, which is the selection of goods a retail store orders prior to opening its doors. Why a 10-part series instead of a quick list of tips? Because as you’ll come to see, the start-up mix is pretty crucial to a store’s success in its first few months of business. And as you may able to see from looking around your town, the first few months are a pretty crucial factor in whether an indie retail shop thrives or fails.
Missed Part 1? Find it here.
Here’s the second principle of assembling a strong start-up inventory mix:
Establish a budget for your start-up inventory.
Photo by zzzack courtesy of Flickr Creative Commons.
Ew. The B word. Learn to love it if you want to stay in business.
Why do you need a budget in independent retail, this niche-y enterprise that’s part art, part business, and part psychology experiment?
Because undoubtedly, independent retail is one of the riskiest business models out there. You have to invest up front in the hopes that someone will buy what you’ve selected. All that merchandise sitting on your local indie shop’s sales floor? It’s all risk. And in many cases, it’s debt, as so often small retail is funded by credit cards or second mortgaged homes. Most Americans who dream of opening small shops simply don’t have the discretionary jack on hand to fund them adequately. Truly, small retail is a business where you have to build it and hope they will come.
Put it this way: how much can you afford to lose if it goes bust and you sell nothing? Got that number? Good. That’s your start-up budget for inventory.
Not saying the worst will happen, but if you live without rose colored glasses you see how often it does happen in indie retail. A great little shop opens its doors — sometimes even to terrific fanfare — and within a year or two it’s closing up shop. And you betcher bottom dollar that every starry eyed new shop owner thought his shop would be the exception. Homie don’t play. {Homie being the economy, the fickle nature of consumerism, a natural disaster in your town.}
OK. Don’t blow my budget. Check. So how much do I buy?
Here’s the bottom line: a good measure of a store’s financial health is sales per square foot. Most retailers that I’ve worked with start calculating this after they’ve been open for a year. But if you can invest in start-up inventory with this measure in mind, you’ll be ahead of the curve.
Here’s a ballpark. Ideally, your store should sell at least $200 per square foot each year. This means that if your store is 1000 square feet — this includes your sales floor, your storage space, your cash wrap area, your restroom, etc. — then theoretically you need to sell at least $200,000 of product at retail each year to not just cover expenses comfortably, but to pay a small staff and yourself and have enough cash to reinvest in new product each season.
Get that? $200 per square foot x 1000 square feet = $200,000 of retail sales.
{Note: Some retailers calculate this number based on their square feet of selling space alone. But I’ve heard that you should include all of your square footage, because, well, you’re paying for rent and utilities on that square footage, too!}
Consider that wholesale prices {what you, the shop owner, pays for merchandise} are roughly half of retail prices {what your customers pay you to take said merchandise home}. So if you need to sell $200,000 at retail, you need to invest roughly $100,000 in product over the course of a retail year.
And remember how I said at least $200 of sales per square foot? Really, that’s on the low end of a store being “okay” financially. Truly successful retail stores sell $350 or more per square foot each year!
Let’s do the math again. $350 per square foot x 1000 square feet = $350,000 of retail sales. At wholesale, your merchandise will cost you roughly $175,000 over a year.
You might be thinking {laughingly}, I don’t need my store to make $350,000 a year! I’d be happy to make $40,000!
Would you be surprised to know that it takes over half a million dollars a year in retail sales for a shop owner to take home $40,000 a year {pre-tax}?
A retail shop that brings in only $40,000 a year in retail sales {I’m talking before taxes} isn’t making anybody a living. It’s a hobby.
More on this in future posts in this series.
Anybody gulping yet?
Note: you should not buy all of your inventory for the whole retail year before you open your doors. You’ll learn so much about what sells and what sits and what your customers {your right people} are looking for only after opening your doors. So before you open, spend only a quarter or maybe even one-fifth of your total year’s inventory budget. Remember that retail is a seasonal business. Customers look at your store in terms of Winter, Spring, Summer, and Fall {otherwise known as 1st, 2nd, 3rd, and 4th Quarter}. To some degree depending on your store’s niche, they expect the feel of the store and its merchandise offerings to reflect the change of seasons — i.e. holiday items during 4th Quarter, maybe some gardening-oriented merch in the Spring, Fall clothes in the Fall.
Once your store’s been open for a year, you can begin to calculate the quarterly volume of your sales. For instance, what percentage of your yearly sales are accounted for by 1st Quarter sales {January – March} versus 2nd Quarter {April – June}? After a couple years, you’ll notice a pattern. Perhaps you’ll find that your 4th Quarter sales account for 30% of your yearly sales. Perhaps not. In any case, once you have those figures, you’ll be able to make projections and decide how much inventory to purchase for each quarter. Until you know that, though, you can plan for a fairly even quarterly budget split for your first year of business: in other words, if you’re working with a budget of $100,000 for inventory, plan to spend about $25,000 for each quarter, starting with whatever time of year it is when you open your store. For example, if you’re planning to open in October, you only need to worry about $25,000 worth of merchandise to get you through those first three months {4th Quarter}. {If your shop is located in a tourist area that is virtually un-trafficked during one quarter, though, you won’t want to invest as heavily in merch for that quarter. Use common sense to guide you until you’re able to actually track patterns.}
Here’s a formula that will help you roughly apportion your spending across high, middle, and lower-end items. You can look at this breakdown quarterly or yearly. It works both ways.
A nice start-up balance might look like the following:
About 15% of your budget should be spent on high end/aspirational items.
About 50% of your budget should be spent on mid-priced items.
About 35% of your budget should be spent on lower-priced, “grabbable,” gift-y, pick-me-up items.
This ratio will vary depending on the type of merchandise you offer {only jewelry? children’s apparel? gardening supplies?} and on whether your merchandise mix skews more high end or low end, but in general, this is a good ratio to work from if you’re aiming to carry a mix of price points.
Lots of math here. And I’ll tell you — this kind of information is not readily accessible in the boutique industry. Sometimes it seems that retailers would rather talk about anything but money. In my observation — and this should come as no surprise — the most successful, longest lasting retailers I’ve observed have their eyes on the money continuously.
Newbie and aspiring retailers, is this inventory budgeting breakdown helpful to you?
Active retailers, do you use formulas similar to this to plan for your own inventory buying? What do you do differently?
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Hello, you.