I just can’t get my head around the basic process by which the average small retail business stays in the black from month to month. Can anyone help me out, or is there a basic concept I’m missing?
I’m talking about your average small retail business - a book store, guitar store, something like that.
The way I see it, their monthly costs are:
Rent: $1,000 or more
Utilities: I’d imagine a couple hundred for electricity, heating/AC, phone, etc.
Employees: If they have four or five emps, at a mere $6 an hour x 40 hours a week, they’re paying around $5,000 in salary a month - not to mention that a manager will be making more than $6/hr.
We’re already up to at least 7K a month or so that the store needs to PAY OUT before they’re even thinking about profit. I just can’t fathom that - there’s no way that your average bookstore, guitar shop, comic book store, or whatever makes that much money a month!
And then, what about all the thousands upon thousands of dollars in stock on their shelves? Where did they get the money to buy that with? What about buying new products to sell? Where does THAT money come from?
How do they stay in business, much less turn over a profit for their owners? I feel like there must be some crucial factor that I’m missing or unaware of. I understand that they buy their products for significantly cheaper than they sell them for, which is where “profit” comes from, but I see them paying out at least $7K a month before they’ve even THINKING about making a profit! How do they even break even?
Many small businesses can’t make a go of it and most startups fail. That said I don’t think you can judge a store’s income by brief observations but only by seeing what the real recievables are.
For a store that’s open 10 hours a day, 7 days a week, you would have to net about $20 an hour to break even with the estimates you’ve given. I don’t know what the markup is on books or guitars, but that doesn’t seem that unimaginable to me. Selling a few hardback books an hour should do it.
That seems a little generous to me. There’s a used guitar store near me that’s open 7 days a week, but they’re lucky to sell one guitar every two weeks - they’re always empty, and their stock is always identical. Of course, they have a repair section that brings in more dough.
There are many “hidden” avenues of income for the average retail store that the average consumer doesn’t see and isn’t aware of. I know of a Taco Bell that used to sell tacos to local elementary schools for lunches once a week or so. We’re talking 500-600 tacos, and yes, the schools were charged less than retail but still, that can be a significant income each week. I know that in the 1980s and 1990s that stores received rental fees from phone companies for the placement of pay phones (although I’m not sure how that works these days). Convenience stores that have video games in them often receive a fee simply for having the machines there, which more than offsets the cost of electricity. And I’m sure that many stores these days also have an Internet presence through which they sell their products.
My understanding is that this is exactly how many businesses stay in business. High-ticket, high-visibility goods (such as guitars) bring people in, but they don’t have a high profit margin. Accessories, add-ons and service keep people coming back, and profit margin on those items is much higher. Say you buy a guitar - they may not make much on that purchase (guitars are expensive to acquire and maintain, even if they’re just sitting in the showroom), but now you’re on the hook for strings, music, lessons, service, etc. Those cost a lot less to acquire, stock, and sell, and most guitar players buy these things regularly as long as they play the instrument.
Services such as lessons and repairs can have a very high profit margin, since the consumer typically pays for the supplies (instrument, books, parts) outright and the merchant need only mark up the cost of labor.
Most small stores don’t have nearly this kind of employee numbers.
Per your numbers above, 6 employees + 1 manager x 40hrs/week. That would be 7x40=280 employee hours/week.
280employee hrs per week / 7 days = 40 employee hrs per day.
The small stores that I know of have 1 or 2 employees working most of the time. Often it’s just the owner that is there. Cut your employee costs to half or less.
My brothers and I own a convenience store in a rural, but rapidly urbanizing, location in Northern Virginia. He no longer works there, but my oldest brother ran the place for about 2 years and it supported not only him, but 3 part time employees as well.
Here’s a few things to consider:
As has been pointed out, you have items that don’t bring much profit in and of themselves, but serve to get people in the store. Gasoline is such an item. The markup on a gallon of gas isn’t much, but given our location people often would buy a couple gallons of gas, plus a 6 pack of beer, some bread, a gallon of milk, a pack of cigarettes, etc. There’s a tremendous mark-up on all of those items.
My brother worked for little or no salary during those two years. Any profits were funneled back into the business for improvements, which could then be written off our corporate taxes and then depreciated over time.
Utilities are minimal (depending on location and type of business, naturally). Our water use was small; however, electric bills could get high because of the walk-in coolers. Our father, a retired engineer and contractor, handled all of the repairs and maintenance himself.
We owned the building outright (that was the sole reason for buying the store in the first place - it is on a corner lot, at a commercial intersection, in one of the fastest growing counties in the country). My parents purchased the store for a song from the original owner (he had opened it in 1925), and, in turn, gave it to my brothers and me as part of their estate. Even if we had to pay rent (we charge the current tenant $1800 per month), the store would have been a viable operation.
A lot of us aren’t in the black month-to-month. We make it because most retail is seasonal and during 4th quarter we generate anywhere from 45-60% of our yearly sales in only three months. That pays the bills for the rest of the year.
This is true even for major retailers. I used to work for Borders Books, and their yearlong operation is pretty much break-even. The 4th Q Christmas season accounts for almost the entire profit of the company.
My comic book store makes a killing, despite today’s market. Surprisingly, they make most of their profit on toys, cards, and video games (especially foreign ones). There are probably 3 other comic book stores in the 10 mile radius (one is one mile away), and at least 30 in the metroland area. Yet, they have suprisingly the best outlook of the bunch, including two chains retailers. They’re the nicest owners (literally ma and pop operation), and they also make a killing on ebay. They really know the market and a lot about comic books in general. They’ve managed to send three kids to private school, and employ, I believe, 6 employees. Also, they buy comics, too (well, I haven’t sold them anything in at least a year). I remember when they started, and I remember how lean they started (back in the mid 90’s). I chalk it up to hard work and determination.