Why consider...the Retail sector?

Buying a shop as a going concern can be a great way to start a retail career.

Opening a shop is one of the most common routes to business ownership, which isn’t surprising. From the corner convenience store to the specialist retailer, we all use shops of one kind or another on most days of the year. The business model – buy stock and resell at a profit – is familiar and we’re all aware of the importance of retailers within the community.

There are many reasons why individuals choose to start retail businesses. Sometimes it’s a case of seeing a gap in the market, such as a high street in a small town that lacks a delicatessen, or a village centre crying out for a hardware store. Equally, the decision to pursue a retail career may be spurred by the imminent sale of a pre-existing business.

Lifestyle aspirations can also play a part. Those who are passionate about a particular hobby or activity – anything from playing a musical instrument to cycling or fashion – may choose to turn that passion into a career by opening a specialist retail outlet. Also, taking over a village store or post office provides a means for those planning an 'escape to the country' to make a living once they’ve moved house.

Whatever the motivation, would-be retailers should approach their new career with a solid business plan.

In brief

• The pros and cons
• The statistics
• Business models
• Money matters
• Sources of funding
• Common pitfalls
• The moneysense top five: managing your money
• How I did it: Retail
• Useful contacts

As with any business venture , the positives and negatives will depend on personal as well as business matters. Here are a few points to consider if you’re thinking of launching in the retail sector.

Pros

• You can be your own boss.
• The business model is reasonably straightforward. You buy stock, sell at a profit.
• Payment is made to you by cash or card whenever goods change hands, so you won’t have to send invoices to customers and wait for money to arrive.
• Shops of all kinds play an important role in the community, whether a local community such as a town or village, or a community of interest, such as walkers or climbers.

Cons

• The hours can be long, especially if there isn’t much budget for staff. In the convenience store sector in particular you may have to work odd hours (such as Sunday evenings) when the supermarkets aren’t open. 
• Selling is just one part of owning a shop. You’ll have to stock the shelves (which may involve a lot of dealing), manage staff, keep the books in order, do your own marketing, keep your website up to date and ensure that all tax and accounting records are sent to the authorities on time.
• Competition can be intense. Corner convenience stores face competition from both similar establishments and the major supermarkets. A specialist store selling, say, books or musical instruments, is also competing with similar rivals, not forgetting well-established internet sellers, who can offer cheaper deals.

In the five years leading up to 2009, employment fell by about 72,000.

According to figures published by the British Retail Consortium (BRC), the retailing industry currently employs about 11% of the UK workforce, or 2.8 million people, across 293,509 retail outlets. In 2009, total sales amounted to £286 billion. However, employment in the retail sector has been heading downhill over the last few years.

Although around a third of consumer spending goes through Britain’s shops, these remain challenging times for retailers. The BRC-Nielsen shop price index showed prices rising 1.7% in 2009, below the rate of consumer price inflation. Shopkeepers are forced to work harder as prices fall behind the total inflation figure.

Franchising plays an important role in the retail sector. According to the NatWest/British Franchising Association survey 2009, there are 838 franchised businesses in the UK, supporting 34,600 franchisees and 467,000 employees. These figures cover the entire range of franchised businesses, not just retail.

Online retailing is of growing importance, and now accounts for 7% of total retail sales, according to the Financial Reporting Council.

There is no single route into the retail market. Some business owners start from scratch: finding, renting and kitting out premises, buying stock and building a customer base from nothing. An alternative is to buy a shop (or chain of shops) that is already up and running. A third alternative is to take advantage of an existing brand by buying a franchise. Let’s look at these three options in more detail.

Buying an existing business
The advantage of buying an existing shop is that you will own an already-running business as soon as the keys change hands. You will have the premises, the stock and the all-important customer base. Businesses come up for sale all the time, with transactions often handled by business transfer agents.

What you pay for a business will largely depend on its existing turnover (sales). If a business is thriving, you’ll pay top dollar. Knowing that you’re buying an already successful shop can be immensely reassuring but you need to examine the figures carefully to ensure the sales justify the asking price and will provide sufficient income to cover any borrowings needed to finance the deal. Success today doesn’t guarantee success tomorrow; you’ll have to work hard to keep your customers loyal.

An alternative strategy is to buy a less successful business and use your skills and marketing abilities to build the customer base. However, this is a risky strategy and you’ll need a clear idea of why the shop is underperforming. Local competition? A poor reputation? Lack of a market? Talk to the current owners and customers and do your market research.

The franchise model is attractive because it allows you to work for yourself while simultaneously benefitting from an existing well-known brand.

Buying a franchise
Franchising works like this: a retailer with a strong brand licenses third parties with the right to use that brand. Generally, the franchisee pays the parent company both an upfront sum and an annual royalty based on profits. In return the franchisee benefits from national (or sometimes regional) marketing and the right to trade under a shop sign that customers will instantly recognise. Franchises also operate as businesses in their own right. In other words, you work as a franchisee but you’re also working for yourself, not as an employee of the parent company. The efforts you make to grow the business are rewarded by a direct share of the profits.

Before buying a franchise, you should consider whether the benefits attached to the brand – i.e. the ability to pull in customers – are sufficient to justify the fee and annual royalty. If you can build an equally strong customer base under your own steam, you will have a greater share of the profits.

Starting your own business
If you see a gap in the market that isn’t being served by an existing retail outlet, starting your own business from scratch is the only real option. Obviously, this can be tough. You’ll have to find premises in a suitable location, kit those premises out and source suppliers. Once that’s done, your next task is to build a customer base. How you do that will depend on several factors. If yours is a shop serving a local area – say a hardware store – a high proportion of your business is likely to come from passing trade. However, you will still have to market the business through advertisements, features in the local press, flyers, etc.

On the other hand, if you run a specialist retailer that needs to attract customers from a wider catchment area, marketing will be essential. This could mean advertisements in local press, trade press and specialist magazines, an internet presence, flyers and word of mouth within the community of interest.

Internet selling is becoming an increasingly important component in the retail sector.

Internet sales
It isn’t necessary for a corner convenience store to have an internet presence, but if you sell specialist products to a non-local audience, an e-commerce facility is probably essential.

Types of outlet
Within those broad business models, there are huge variations in the type of shop you can buy. These range from:

• Convenience or food stores serving a local market.
• Specialist stores offering higher priced items – such as hardware or fashion – to local consumers.
• Specialist stores selling to a regional market. This could include stores seeking to attract customers from a wide catchment area, attracted by specialist advice and products that are unavailable locally.
• Shops depending on the tourist trade or other cyclical factors.

Revenue streams
As a retailer, there are several ways in which you can generate income beyond the usual sale of products in your shop. These extra revenue streams include:

• Lottery sales: This will involve installing a lottery terminal, which can be obtained from operator Camelot.
• Post Office facility: Many rural shops would struggle to survive without the extra income from providing post office services. In the current climate where sub post offices are being closed down you might struggle to add this to your portfolio. However, post offices do come up for sale and can be purchased. Details of vacant post offices can be obtained via the Royal Mail’s website. This provides details of sales and costs, enabling you to assess the market value. You will require capital to purchase the post office but the Royal Mail will provide training.
• Cash points:  Merchant fill machines can be bought or rented. The merchants fill the machines from their own cash turnover and set a surcharge. Cash machines have the additional advantage of encouraging customers to spend more.   
• Hot and cold drinks machines: Machines can be rented for as little as £10 a month or bought new or second hand. You will have to pay to stock the machines (either yourself or using a filling service provided by the rental company). 
• Café area:  If you’re operating in a village, small town or tourist area and have extra space, a café area will help cement your position in the community, attract customers and provide revenue. However, running a café – and in particular dealing with food – requires specialist skills (see our Hospitality & Catering industry guide). 
• Window advertising: This will represent just a small percentage of your total income but it requires no outlay. You take advertisements from local people on cards and charge a few pounds a week to carry them in a prominent position. It will help establish the shop as a hub in the community.  

According to the British Franchise Association, buying a franchise can cost anything from £10,000 to £50,000, plus an annual royalty.

One-off costs
If you’re buying a business as a going concern you should consider the following:

• The cost of the premises – which may be leasehold (to rent) or freehold (if you’re buying).
• The cost of the business itself – which includes stock, fittings, equipment such as point of sale (POS) machines, and ‘goodwill’ in the form of relationships with customers and suppliers.
• Administrative and legal costs – you’ll be paying solicitors, agents, surveyors and accountants, so expect to pay around £3,000.

If you’re starting a business from scratch, you’ll be looking at:

• The cost of buying or – more likely in this case – renting the premises. This will depend on location. For example, high street shop space will cost more to rent than a similar space on the edge of town. This could mean the difference between £700 a month and several thousand.
• It could cost as much as £10-15,000 to fit out a shop from scratch and a further £10,000 for stock. However, these are just indicative figures. The cost will depend on the size of the shop, the nature of the goods (stocking out a large high-tech computer store will be much more expensive than stocking a newsagent. The real cost will depend on the specific nature of your business.

There will also be stock to buy on top of up-front charges. Once again, seek professional advice.

Ongoing costs
Your ongoing costs include:

• Rent or mortgage costs. Rentals vary considerably from area to area with the starting point based on square footage and location. Expect to pay anything from a few hundred a month to a several thousand. 
• Business tax. If you’re trading as a limited company, you’ll pay corporation tax at the current level of 18% (for SMEs). You will also pay VAT and tax income tax and National Insurance (employer and employees) on your own income and that of staff.
• Business rates are based on the rateable value of your property (as defined by the money it would earn if you rented it) multiplied by a ‘universal multiplier’ applied by the local authority. According to the British Retail Consortium, this is the third biggest cost facing small businesses,  although a business rate holiday (no rates for 12 months) has been announced in the Budget for properties with a rateable value of less than £6,000 a year.
• Lighting and heating. This is likely to cost from £1,000 a year upwards, depending on the size of the establishment.
• New stock. This will depend on the business, but you should be looking at replenishing stock as it’s sold.
• Staff salaries. You’ll have to pay at least the minimum wage, which is currently £5.80 for adults over 22 years of age. Under eighteens must get at least £3.47 per hour, while the so-called ‘development rate’ for those between 18 and 21 is £4.83 per hour.
• Telecoms (phone/internet). You should look for good internet, free call packages, which can come in at around £15-£30 a month. However, check the limitations.
• Marketing. This could range from virtually zero (for local shops with passing trade) to several hundred a month if you’re printing flyers and advertising in the local press or radio.
• Finance charges (repayments on money borrowed in order to start the business). This will depend on the interest rate, the nature of the loan and the perception of the lender.

The trick is to give yourself reasonably large mark-ups in order to generate a decent profit margin.

Mark-up and margins
Consider those ongoing costs – which include repayments on your finance – as your overheads. Therefore, look closely at whether you can sell enough products – and make a sufficient mark-up on the sale – to meet your commitments.

This is where the typical retail business model begins to get tricky. As a retailer, you’ll buy products at a wholesale price and resell at a profit. Manufacturers and suppliers will generally recommend a figure – the recommended retail price – but in most cases you’ll have a certain amount of flexibility in the amount you charge customers. In this respect, recommended retail price often differs from the ‘street price’ actually charged by retailers. The difference between the wholesale price and the street price is the ‘mark-up’ and this can be as much as 100% on expensive products.

The second key figure is the margin. This is the profit you make once all your costs (the overheads) have been deducted.

Margins vary depending on the type of shop. According to Graham Sindle, a partner with chartered accountants Thomas Westcott, a convenience store should expect gross profit on sales of about 20%. A gift shop – with larger mark-ups – could expect much higher margins, perhaps around 40%. Margins for coffee shops, for example, could reach 70% if managed well.

According to Michael Taylor of business transfer agents Everett, Masson & Furby, when you buy a business from another retailer it’s the profit rather than the turnover which you should look at. “People tend to focus on turnover but it’s no use having sales of £200,000 a year if your costs are £300,000,” he says.

Taylor advises purchasers to look carefully at the net profit (what the business earns after tax), in order to establish how the owner has arrived at their figures. For example, the owner may have been claiming items such as mobile phone costs or car costs through the books to bring down the gross profit and thus pay less tax, a practice that would make the net profits appear healthier than they actually are.

If you’re just starting out in retail, you’ll be looking at sources of finance available to all new businesses. These include:

• Personal investment drawn from savings, redundancy money or remortgaging property.
• Friends and family investment. That is, money from people you know, either in the form of repayable loans or an equity investment in which the backer buys shares that can be resold back to you at a later date.
• Bank loan.
• Angel investment. For retailers, this is probably the least likely source of funding. Angel investors are wealthy individuals who back businesses with the aim of selling shares at a profit. Such investors typically seek businesses that will grow quickly to increase the value of those shares. If you’re hoping to attract an angel, you’ll have to have a pretty convincing growth plan.
• Partnership. Quite simply, going into business with someone else, allowing you to share the costs between you.
• Grants. Some grants are available for small businesses. You can find out more about these through your local Business Link: www.businesslink.gov.uk

The basic principles behind retail are simple, but making them work in practice isn’t so easy. Here are some of the pitfalls to avoid:

• Overstocking One advantage of retail is that you receive payment by cash, card or cheque as soon as you hand over the goods. This means you won’t face the situation that cripples many businesses, that of spending up-front on staff, premises, production or stock, while waiting weeks or months for payment. This is the infamous cashflow trap. However, many retailers fall victim to a similar trap, which is to overstock. Overstocking has two negative effects:
• It ties up money up-front that could be used to pay bills or staff when times are tight.
• It risks you becoming burdened with stock that sells slowly, if at all, and which may have to be sold cut-price at a loss.

It’s important to research your products. You need to know what sells quickly (and therefore keep stocks high) and what sells slowly. If you’re buying a shop, one way to do this is to seek advice from the previous owner. If you’re buying a franchise, the franchise company should be able to provide you with information on stock.

• Understocking The opposite of overstocking, when you run out of key products and your customers decide to shop elsewhere. Again, make sure you research your products.
• Lack of a unique selling point (USP) Your USP is what makes a customer decide to shop with you rather than a rival. It may be price, quality of customer service, the location of the store, the range of products or a combination of all the above. Every retailer should think about their USP both in terms of customer requirements and the strengths and weaknesses of competitors.
• Pricing Get pricing wrong and your shop will suffer. In some cases, this may mean competitive pricing to vie with cheaper internet retailers. However, if you’re selling, say, high fashion clothes to upmarket customers, price cutting could actually be detrimental. Again, it’s vital to research and understand your customers. In some cases – often with highly priced items – the mark-up can be anything from 40 to 100%. In the case of convenience stores, there is much less room to manoeuvre, as customers know what they are prepared to pay for a loaf of bread or a can of beans. By comparison, local stores can charge up to 12% more than major supermarkets, as customers understand there is a premium for factors such as late opening on a Sunday or the convenience of a retailer at the end of their road.

1. When buying a shop, find out how much the business makes after all overheads have been subtracted.

2. When you’re working out the finances for the business, don’t forget to add working capital to the one-off and ongoing costs. You’ll also need cash to pay yourself and employees as the business finds its feet.

3. Draw up a full business plan covering all your start-up costs and  outgoings set against projected revenues and mark-ups. Use this to assess your margins. If you haven’t done this before, seek help. 

4. Consider diversifying your revenue streams 

5. Seek credit from suppliers to improve cash flow

Cartridge World: 'Buying a franchise'
David Pryke and Shelley Thomas bought a franchise to operate a Cartridge World shop in Luton and set up business in November 2009. As David explains, the couple had considered buying a business from an independent owner but were eventually deterred by a lack of available information. "It can be difficult to get all the information you need to decide whether or not to buy a business," he says.  "Some owners don’t seem to know much about their own businesses."

Buying a Cartridge World franchise was much simpler. David and Shelley bought from an existing franchise holder who was happy to talk them through the business and provide information on customers and top selling lines. Much of that information was stored in the POS machine.

As franchisees, David and Shelley benefit from national marketing but are free to do their own marketing at a local level. Under the terms of the agreement, they are also free to set prices, based on the market conditions in Luton. "Cartridge World allow us to fix prices, but there have stipulated a maximum," says David. David and Shelley have also taken advantage of the openness of other franchisees. "The shops aren’t competitive with others in the network, so people have been willing to talk to us about ways to improve the business," says David.

Garden gifts: ‘How we grew by expanding our stock’
The Gluttonous Gardener is an online retailer selling food and gardening gift packages. As e-commerce director Sally Golland explains, the current range of 50 gift packages shows just how far the shop has come since its launch. "When we started we had just three products," she says. "But we have continually added to that. Each year, we introduce about four new items."

The decision-making process is based partly on the availability of new plants and food products and partly by asking customers what they’d like to see. And while there is a certain amount of guesswork in terms of what will be popular and what will be less so, Golland says they avoid understocking or overstocking by working closely with suppliers. "We tend to work with small suppliers who are usually more flexible. They will supply us with small quantities to enable us to test a product. At the same time, because we know them, they will work hard to help us if we have a rush of orders."

Shopping complex: 'Location, location, location' 
Lapstone is a complex of businesses – including a shop, hairdressers, spa and café – nestled in Chipping Campden in the North Cotswolds. As founder Simon Hudson recalls, the idea behind the venture was to give customers a complete experience. They could indulge in some retail therapy in an upmarket gift store, enjoy being pampered in the spa and finish the day with a meal.

The location dictated the shape of the venture. "We had farm buildings available and we thought we could create an experience," says Simon. The site featured an attractive building, beautiful surrounding countryside and the proximity of centres such as Birmingham and Cheltenham. By offering a unique day out, Lapstone has succeeded in attracting a regular base of customers from the local area rather than relying on periodic tourist trade.

"Because of where we are, the marketing side is hugely important," says Simon. "For this reason we’ve relied on a kind of viral marketing. Lapstone is a something that people pass onto their friends." Building the business has been a slow burn, supported by other business activities, but has now achieved its goal of building a solid base of loyal customers.

MoneySense for Business is about helping you understand and manage your business finances. If you're thinking of starting out on your own, or already have a small business, MoneySense for Business provides helpful guides and information on managing the financial side of your business, plus useful links and tips to give you the guidance you need.

Links: Retail
British Retail Consortium
Association of Convenience Stores/
British Franchise Association
Trading Standards Institute
NatWest/BFA survey 2009
Becoming a Cartridge World franchisee
The Gluttonous Gardner
Lapstone

Links: Business
Business Link 
Department for Business, Innovation & Skills
Office for National Statistics
SkillsActive

Sources
Thomas Westcott (accountants)
Everett, Masson & Furby (Business transfer agents)
The British Retail Consortium: Trade body representing retailers
Association of Convenience Stores: Trade body representing convenience stores
British Franchise Association
Business Link: Provides a wide range of advice on starting a business

Additional thanks to:
Thomas Westcott (accountants)
EM&F (Business transfer agents)