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What to consider if you want to shrink your business

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I’ve often thought that a corner store had a lot of potential. You know, for 'When I retire...'. Chatting to neighbours...  A nice lifestyle... 

When 7 Eleven stores rolled out, I watched closely. In the last few years, we’ve seen other brands of convenience stores open, offer two-for-one deals, then close. They were located on a street (strip retail) rather than being a genuine corner store - could that make a difference?

Now our largest supermarket chains have announced that the corner/convenience store is their next growth model. With increasing population density, they are looking to open 18 or 24 hours a day to capture the ‘precinct’ foot market.

This is at the same time that Woolworths has opened its largest supermarket in Australia (Oran Park) of 5,000 m2 with 28 checkouts. [Note to self: wear comfy shoes.]

Can these supermarkets, whose business model has been ‘big box’, shrink their model successfully? Let’s look at the numbers.

                                                                                      

There’s a science behind retail layout - it is designed to keep the customer in the shop for as long as possible to spend as much as possible. Think IKEA. The numbers (left column) are industry averages: Annual sales of $35m generated from 2,800 m2 in a ‘neighbourhood’ shopping centre (1).

How would the corner store work when the shopper's intention is to get in, get what he or she wants and get out as fast as possible?

I asked one of my retail property colleagues, Brendan Sheedy, what numbers would be required for a successful corner store model of the size Woolworths and Coles are looking for: 200 – 400 m2. Using a midpoint of 300m2, the numbers are shown in red. 

Brendan started with a target $2m turnover but we decided that a higher turnover would be required for the effort (that is, if Woolworths is making 7 cents in the dollar [EBIT Margin (2)] on a turnover of $35m, and it will not want to work as hard to just make $2m). So we went for $3m per annum. What can we conclude?

To be successful, the corner store model will need three key success factors. To:

  1. have about 3,000 items to sell and they will be the ones needed regularly by the local market which is not so price sensitive. Managing GPMargins will be critical.
  2. be an economic powerhouse. Sales ‘productivity' is the sector term for sales per square metre. The corner store model will not be able to have any ‘dead’ spots. Every m2 must be hard at work generating revenue... very hard at work to generate $10,000 pm2! 
  3. have exceptional service.

Why do staff matter in our online, self-service environments (especially when the concept of post boxes or lockers is mooted)?

In recent analyses of retail performance, such as Rebel which introduced a store concept 1/8th of its traditional ‘big box' size, company executives have stressed that sales managers need to be multi-skilled, with excellent customer service skills and really know their business. 


FOR YOUR PROJECT OR BUSINESS:

Two issues to consider:

Risk in a new business model

Changing the business model is a risk. ‘More of the same in a smaller place’ might not work. Listed retailers (3) often report that they underestimated how a new business model is often a different business which requires different thinking across all parameters. 

Changing scale requires new ideas

Premium brand retailers, such as Oroton, are opening larger stores where the counters become pods and the cash register – previously located prominently to encourage last-minute sales – is now hidden from customer sight. The sales process will become humanised; a concierge will greet you... not wait for you to get to the cash register.

When I see these dramatic changes in business model, I think of Michael Porter’s model of competitive advantage where he argued that, to be successful, you need take the high margin/lower turnover end OR the low margin/high turnover end of the market and do every aspect of it well; better than your competitors. The message is: Don’t get caught in the middle. Let's watch how these changing business models perform.

Two questions to ask:

1. Can you change your business or product model or concept without confusing and losing your market? If so, what's really important to know and do?

2. Looking at changes industry leaders are making, what ideas might work for my project or business?


Brendan has been in retail property for nearly 30 years. 'The real challenge now is developing commercial acumen,' he said. 'Each week, 45,000 people visit this centre. I engage retail staff about ways to encourage customers to spend just one more dollar. Do the numbers. One more dollar generates $2m more in revenue each year. Success for the business, success for the owner, you keep your job…'

I took the photo above in my local corner store but the owner was out the back on his mobile phone. I waited long enough to ask permission so just took the photo and left without buying milk. 


(1) Performance metrics for the range of retail property models is available from the Property Council of Australia.

(2) The EBIT range for 2013 was 4 - 7%. Retail performance metrics are examined in Part 2, Chapter 12 of Financial Performance Unveiled. 

(3)  Companies which are listed on the stock exchange are required to release reports to the public and executives present to analysts and media, whereas privately owned companies are not. So we use the performance and experience of listed companies as a source of benchmarking and analysis. 

This blog is for education purposes only. 

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