Two stores don’t make twice as much.
Opening more stores is just in the DNA of retailers. It’s irresistibly logical that a successful store—a proven and profitable retail concept—could be easily replicated. The same products, methods, and operating systems should yield similar results in another location, only with enhanced economies of scale.
It makes so much apparent sense that the question “How many stores do you have?” is almost equivalent to “How successful is your company?” or even “How profitable is your company?”
Ironically they often have the opposite meaning. Second and third stores are rarely as profitable as the original, and often they’re losers.
Many store owners with adequate profit breakdowns recognize the source of their reduced profitability and retreat in a few years. Unfortunately most don’t have the necessary numbers or aren’t willing to swallow their pride; they drag their mistakes behind them like a ball and chain.
Only a few come to grips with the specific differences and added challenges of operating multiple stores, expand their management abilities, and devise methods and formats that will work across multiple locations.
The most profitable store is the first; the least profitable is the second.
Second stores typically do a fraction of the volume of the original store, and profitability is nowhere close to proportionate—often it’s negative.
Apparently no academic study has established the reasons for this, so we can guess with impunity: less experience and dedication in store management, inadequate systems for multiple locations, diminished access to information, less decision and reaction power ….
We often make these challenges even more formidable by designing second stores as smaller versions of the original. The plan of stocking only the top sellers seems logical for increasing efficiency, but backfires when customers bypass the small store for larger selections.
Size is the adversary of excellence.
Most of us know how our stores should operate. The challenge of retailing isn’t recognizing what’s right, it’s getting so many details right at once. That’s full-time employment for almost all of us. If we get most of the details right, we make a profit; miss more than a few and we take a loss.
Each additional store multiplies the details we’re responsible for and divides our time to tend to them. Distance increases the challenge, not just of correcting problems but also of seeing what needs correcting, and knowing how to correct it and when it’s corrected.
Great managers are the vital but elusive ingredient.
Among the many challenges of operating multiple stores, finding appropriate management tops most retailers’ lists. Unless the business concept is exceptionally simple, the manager is the single most critical component—and unfortunately the rarest of talents.
Applicants and experience are plentiful, and a company can provide training, business philosophy, and operational guidance. But unless there is a powerful, innate drive deep within the store manager, results will be disappointing.
Smaller stores create smaller sales and much smaller profits.
Second stores are usually reduced versions of the original store.
Customers will shop for inexpensive items in a small store, but they will drive to a larger selection for bigger purchases. Even when a small store has exactly the product the customer will buy, he often won’t buy until he’s seen a broader selection. As a result, small stores typically get proportionally fewer of the large sales.
Small stores are also handicapped in that their staffs must be generalists. Salespeople in small stores see too few of each customer type to develop specialized knowledge and expertise, and they get fewer opportunities to practice and hone their sales skills and develop confidence.
As a result a few large stores are often a more profitable investment than many small stores.
Chains are retail’s high-stakes gamble.
A large, smoothly operating, profitable chain is a thing of beauty, a tribute to its management, and a golden goose to its owners and investors. But before betting the farm on a chain a retailer needs to think through the odds and obstacles.
It can be done—it’s been proven in almost every field. And advantages never seen before are available today in modern information systems, access to large pools of capital, and methods of communication.
But managing the innumerable facets of large chain retailing is a juggling act mastered by few and rarely for long.
Chains occasionally collapse, almost as quickly as they spring up. Retail is in constant evolution and multiple layers of management, inflexible systems, entrenched policies and culture, high leverage, etc., make adapting even more challenging. New competitors, unencumbered by legacy methods and equipment, and agile smaller retailers constantly raise the bar and change the game.
The rewards are outsize but so are the risks.