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The Scary Truth of Averages

“Have you ever noticed that everyone wants to be normal but no one wants to be average?” -Roy H. Williams

Did you hear the one about the statistician that drowned in a river with an average depth of three feet?

Image result for averagesIn business, everyone wants to know the averages, the average cost of rent, the average sales per square foot, the average level of inventory, etc. Averages are interesting. They can be a nice benchmark, but they can also be misleading, and sometimes downright dangerous.

Take, for example, average inventory at cost (a number you should all be tracking). If you were an average toy store doing around $500,000 a year in sales, your average inventory at cost would be around $100,000. But if you are that same toy store, your Thanksgiving to Christmas sales will likely be around $200,000, or pretty much all of your inventory if you only had the average on hand. As nice as it would be to sell to the walls, so-to-speak, you know you can’t sell it all. You also know you need some inventory in January for birthdays and post-Christmas.

Just trying to keep your store at the average will kill your holiday sales. You’ll need a lot higher inventory to start the busy season and much lower inventory the rest of the year. Rarely will you ever have the “average” amount of inventory on hand.

Another problem with that average is that $100,000 worth of toys looks a whole lot different in a 2,200 square foot store than it does in a 1,100 square foot store.

The bigger the store, the more creative you may need to be with your merchandise to keep the store looking stocked and full. The smaller the store, the more creative you may need to be with your merchandise to fit it all in. Sometimes your store space dictates your inventory levels more than just sales or industry averages.

Averages are a nice starting point, but it is worth exploring all the reasons you might deviate from the average, and be okay with those reasons.

For instance, my payroll at Toy House was a significantly higher percentage of our expenses than the average toy store. But I could afford that because my rent was significantly lower. Our sales per square foot was extremely low compared to the average, but that was because we had wide aisles to allow for shopping carts, four cash registers lines, a large gift-wrapping area, and a stage with seating/playing area—in other words, a lot of square footage not used for showing merchandise. Our average ticket, thanks to shopping carts and toy demos however, was significantly higher. Each deviation from the norm was on purpose and with a purpose.

I do many talks about the financials of independent retailers. Whenever possible I try to use an average store for that industry. But I remind everyone in attendance that these numbers are average and they should be striving to be spectacular. If all your numbers are average, you haven’t found the place to stand out and make a name for yourself.

In retail, there isn’t a prize for being normal.

-Phil Wrzesinski
www.PhilsForum.com

PS The upside to averages is that they give you a quick check of the health of your business. If you have a number way off from the averages and you don’t know why, that might be a good place to focus your time and energies on changing. The downside is that you don’t ever want to be an average store. You are destined for greater than that.

PPS Rent per square foot and sales per square foot go hand in hand. You need to be selling at least 10x more per square foot than what you pay in rent (if your profit margin is around 50%). That’s a far better benchmark than average rent or average sales per square foot for your industry. Those averages tell you nothing.

When It Is Time to Move

Maybe it is declining sales in your current location, or maybe you’ve peaked out your sales and don’t have the room to expand. Maybe the demographics of your location have shifted or maybe your store’s product mix doesn’t fit in with the surrounding stores. Maybe a new development has made you an offer too good to be true.

There are dozens of reasons you can justify for moving your store (and just as many for staying put – too costly, lost sales during the move, will the customers still find us? can we afford it? is the grass actually greener? etc.)

The decision to move your store has to be something you research and consider the issues carefully. A bad move will sink you. A great move will grow you. A lateral move will wear you out.

Here is the short version of this blog…

  • Don’t move unless you have to – if it ain’t broke, don’t fix it
  • Prioritize what you need from your new location – More Traffic? Parking? Accessibility? Visibility? Better Demographics?  Do your research
  • Plan for extra expenses – moving costs, lost sales, etc. all add up quickly
  • Buy what you can afford – yes you expect your business will grow eventually, but make sure you can afford it on day one.

NO LONGER SUITS YOUR NEEDS

The first decision is the desire to move. You move when your current location no longer suits your needs. Your business model is working but your location isn’t the ideal spot. It’s too small, too big, too quiet, too expensive, too hard to find, wrong demographics, wrong part of town. There was an auto dealer in San Diego that was constantly advertising that if you would work with their location, they would work with your price. It became their gimmick, but at a great advertising expense. That low overhead from the lousy location was instead spent on advertising and profit margin.

Moves are risky. There are no guarantees your move will grow your business. If your current location suits your needs, the risk factor for moving goes up exponentially and it is often better to stay put.

WHERE DO YOU GO?

Just making the decision to move is huge, but you have to also know where you want to go. What are you lacking at your current location? Is it traffic? You’ll likely have to pay more in rent to get better traffic. Is it space? You can find bigger spaces, but you might have to give up something else like traffic or parking.  Is it better demographics? Do you know your demographics well enough to know what “better” demographics look like? The most important question is this…

Can you afford the new location with the money you’re making currently?

We all would like to think our business will grow hugely at the new location. But that isn’t always the case. Plus there are a lot of costs involved in moving that eat up any extra sales and profits. You have the lost days of sales while you move. You have the build out of the new place. You have the changing of phone and address and lost mail and lost shipments. You have the revving up of the new location as your regulars try to find you before the newbies have discovered you. You have the advertising of the change of address including the banners at the old location, the grand opening banners at the new location, the advertisements and the big grand opening event itself.

PRIORITIZE YOUR NEEDS

We moved once in our 67 years in business. The store started in a house. We bought neighboring houses and tore them down for a parking lot and a couple expansions. But we maxed out our location at about 10,000 square feet. My grandfather wanted three things in his move. First he wanted a larger building. He drew up two plans for a 20,000 sq ft building and a 24,000 sq ft building. Second he wanted to be along the busiest road in the downtown district (suburban shopping malls were not yet a thing in 1967.) Third, he wanted his own parking lot.

He found his location – an easy right hand turn off the busiest road in the downtown with plenty of room for parking in both the front and back of the building – and opted for the 20,000 sq ft building because that was all his current level of business could afford. He also had the expenses of moving. Even as a big fish in a small town, the newspaper didn’t cover our move. He had to take out his own ad in the paper. He used this picture with the headline,

“But Grandpa, Momma Won’t Like it if We Play in the Mud”

Yes, his business grew – fast enough that he needed that extra 4000 sq ft only five years after moving. Fortunately he also had the foresight to buy a piece of property that would allow such growth, and he now had the money to pay for it.

That location served us well for many decades even as new competition came to town. But when the demographics of the whole county changed, so did the options for moving. The criteria that served us well before were no longer the criteria we needed. Our options were downsizing greatly or moving to a new community, neither of which we wanted to do.

Moving is a big deal and can be a huge benefit for your business. It can also sink you. Make sure you are moving for the right reasons.

-Phil Wrzesinski
www.PhilsForum.com

PS I didn’t discuss renting versus owning. That is a topic worthy of its own post (or three).

In Retail it is All About Location

Let’s get the elephant out of the room right away.

How can I write a blog about being a successful retailer when I closed my retail store? I can sum that up in three words…

Location. Location. Location.

Yes, we were having a tough time with cash flow. That’s the usual culprit behind any store closing. Much of that was due to our location.

Location Issue #1

The population of Jackson has been stagnant at best the last several years. The youth population, however, has shrunk considerably over the last several years as birth rates declined for all groups but teens, and school enrollment is down huge since 2007. On top of that, average household income in the city fell from around $35K per household to $27K per household (well below the national average of around $56K).

I have constantly talked about paying attention to your Market Share. To know your Market Share you first have to know your Market. Ours has shrunk over 40% since 2007. Fortunately, our share of that market only dipped a little. We still had our piece of the pie, but our pie had turned into a tart.

Location Issue #2

We own and occupy a large building on the north edge of downtown. We have been a large toy store for decades, carrying toys, hobbies, baby products, sporting goods, scouts, and more. When the market could bear it, we had a ton of inventory, but scaling back inventory to match the needs of the community meant less efficient use of space and less of the “impact” of being that large store that had everything.

We discussed converting to a smaller store, more in alignment with the population and income, but that would have led to many long-time customers lamenting that we just weren’t the store we used to be or the store they remembered. Better to close while the memories were still positive.

Location Issue #3

I am a big believer in downtowns. Call me naive but I still believe downtown shopping districts can be successful. It takes dedication from the shop keepers, the landlords, and the city leaders to make it work. It takes smart policies, united fronts, and strong relationships to make it work. We have some of that in Jackson, especially among the retail owners. We also have a city council dedicated to improving the streets and sidewalks and green spaces in our downtown. Unfortunately, that also means a ton of disruptive construction. Two years of it! (and counting.)

Our city leaders are not retailers and don’t understand how construction affects retail. They saw an opportunity to get roads fixed and attract new development (all good things), but didn’t see the consequences to the existing retailers and restaurants. When you are trying to dig out of a cash flow hole, having the busiest street in town – the one that goes right by your building – be restricted from three lanes to one with backups that stretch for blocks for an entire spring and summer is not a good recipe for success. At one point we had so much construction downtown that one detour actually led you to another street closure dead-end, and only if you had local knowledge would you know which alley would get you back to open road.

In a couple years, our downtown is going to be new and fresh and repaved and ready for business. But the last two years were pretty tough on the businesses already here, especially for us as our market declined.

Yeah, Amazon is a deal-changer for many retail categories. Yeah, our own vendors are making decisions that hurt the indie retail channel. Yeah, customers are as fickle as ever and have power like never before. None of those are insurmountable. You can still compete. Even as we closed, we were holding our own for our market. We just didn’t like the direction our market was heading.

If your market is your problem, you can do one of four things, Move, Close, Change or Wait. We chose to close.

Now you know.

-Phil Wrzesinski
www.PhilsForum.com

PS I’ll discuss the other three options and what would make them attractive in future posts. Right now I have to go let the big elephant in the room out to roam the savanna.

What I Learned in 2016

2016 was a learning experience for me. I went through two life-changing events that taught me a lot about myself and about business. I got a divorce and I closed my toy store. Although they weren’t the kind of things one typically wishes for, they were incredible experiences filled with lessons I will share in 2017.

This blog is back. You will be getting posts on a regular basis filled with thought-provoking ideas and simple things you can do to make your business better.

 

Although I cannot put all the lessons from 2016 into one blog, I can sum them up for you in one sentence.

“Life and business is all about the relationships.”

We’ll explore how to build better relationships for 2017.

-Phil Wrzesinski
www.PhilsForum.com

PS My first goal will be to rebuild my relationship with you. Sorry for not blogging in 2016. With the store closed you are my main focus for 2017. Let me know your fears and obstacles and challenges. We’ll find ways to overcome them.

The Chasm Between Early Adopters and Early Majority

Back in 1962, Everett Rogers introduced us to the Diffusion of Innovations that shows how people enter the market for any given idea, product or service. There are five groups of people who look at new ideas and products distinctively different. The percentages shown are consistent across the board in study after study. Here is a quick definition of these groups through the prism of the smart phone industry.

Innovators: They don’t find what they want on the market so they make it. They didn’t get what they wanted from the new iPhone 5S so they hacked into the programming and made their own apps and programs.

Early Adopters: They want the newest, latest, most unique. They loved the iPhone 5S, couldn’t wait to get their hands on it. Yet, there they were standing in line one year later for the iPhone 6+ because it was newer and more unique.

Early Majority: They want the new, too… but only after it has been proven to work. They prefer tried and true over new and unique. They bought the iPhone 5S, but three to six months after it launched and have proven itself. They’ll get an iPhone 6 eventually, but probably not until it is time to upgrade.

Late Majority: Unlike the Early Majority, these people are waiting until it feels like everyone has one. They will only buy the iPhone 5S because they found a great deal on it, and figured they might as well join the crowd.

Laggards: They aren’t buying a smart phone. They don’t need one. Oh, they might get one, but only after all other options are completely gone. They will buy the iPhone 5S when they have no other choice.

WHAT THIS MEANS FOR MARKETING

The chasm you see in the chart is the monumental mind-shift that takes place between the Early Adopters (EA) and the Early Majority (EM).  The EA want their product now. They want “new and unique” and don’t care how much it costs. They’ll pay full retail to get it first. To them, the words “tried and true” are the kiss of death. The EM’s, however, live for the words “tried and true”. They want the proven item, the easily available item, the commodity.

If you try to market to the EA’s, you will completely turn off the EM’s. Words like new, innovative and unique are scary to the EM’s. If you try to market to the EM’s, you will completely turn off the EA’s who don’t care about tried and true.  In other words, you have to choose which of these two groups to market, then make sure your message and your offerings are tailored to that group. If you try to reach both, you’ll reach neither.

If you try to market to the Late Majority (LM) or Laggards, you’re just a fool. The LM’s only want the commodity at a discount. The Laggards don’t want it at all and only buy it as a means of last resort at the cheapest price.

You can look at the five groups like this…

  • The Innovators push the development of the product forward. 
  • The Early Adopters buy that new product as soon as it is available. 
  • The Early Majority buys the commodity version of that product. 
  • The Late Majority buys the discounted commodity version of that product. 
  • The Laggard only buys the discounted commodity version and only when forced to buy it.

The profit margin, therefore, is in selling to the EA’s. The volume is in selling to the EM’s. Everyone else is a race to the bottom that you can’t  (don’t want to) win. The choice is yours, but it is definitely a choice you have to make. Otherwise you will be stuck in the chasm between the two with ineffective marketing to both of them.

-Phil Wrzesinski
www.PhilsForum.com

PS One other thought I have been having on this topic… My toy and baby customers turn over so fast that even the tried and true product to me can often feel new and innovative and unique to a brand new mom-to-be. In other words, if you have a fast-changing market, don’t throw out the tried-and-true products just yet. They may be new and unique to your new base.

Putting Amazon and eCommerce Into Perspective

It is about that time of year when you start hearing all the news about Amazon and Wal-Mart and low prices and discounts and the death of mom & pop shop retailers.

Yeah, Amazon is huge. In 2013, they did $75.4 billion in sales. That was 28.6% of all US eCommerce!

But it was only 2.5% of all retail. In fact, if you take gasoline and groceries out of the mix, eCommerce only accounted for 8.8% of all retail dollars last year.  (see references below)

Think about that for a moment. All the hype about Amazon and the Internet, yet over 9 out of every 10 dollars spent in retail were spent in a brick & mortar store. Brick & mortar is so far from dead, that any report you hear otherwise should be discounted immediately.

Yeah, Wal-Mart is huge, too. Almost four times bigger than Amazon. In 2013, they did $279 billion in sales in the US. That was 9.2% of all retail – more than all of eCommerce!

But once again, that shows you there is still plenty of room for you to do business. Add up Wal-Mart and all of eCommerce and you still have 82% of the retail dollars going somewhere else. That’s almost $2.5 trillion dollars going somewhere else.

That somewhere else ought to be you and me. If we quit worrying so much about Amazon and Wal-Mart and the demise of the mom & pops and start focusing on making ourselves better, it will.

-Phil Wrzesinski
www.PhilsForum.com

PS I used two sources for the numbers you see above. The first source here from emarketer.com claims that all retail was $4.5 trillion. But I felt that number was inflated by things like gasoline purchases and other non-eCommerce retail, so I also used the numbers from the US Census here to get a true product purchase number just over $3 trillion.

PPS And the number from Amazon is their total sales, not just US sales, so their percentage of the US market may be a little bit lower.

Brick and Mortar Retail is Alive and Kicking!

According to a report from EMarketer, retail sales last year were a whopping $4.53 Trillion. Yes, with a T!

E-commerce was $264 Billion of that. That’s 5.8%. Oh, and M-commerce – you know, those mobile apps that are the new hot thing you need to have that are going to eat the computer’s lunch? M-commerce was only 0.9% of the total.

E-commerce and M-commerce continue to grow. And $264 Billion is a lot of cabbage. But contrary to what you hear, brick and mortar retail is certainly not dead. Over 90% is still being spent on the ground.

What are you doing to capture your share of that market?

-Phil Wrzesinski
www.PhilsForum.com

PS I have heard from other sources that the e-commerce number is higher when you account for only goods and services that are bought in typical retail stores. I don’t know the methodology EMarketer uses to determine their numbers, whether home sales or gasoline is included in the overall sales total. Since they are a company that caters to the e-commerce crowd, however, I’m going with their number. Even so, if e-commerce is truly 10-12% of retail as some claim, that means 88% is still done on the ground.

The Two Distinctly Different Customers

This video is a great summation of many of the ideas and thoughts I have shared with you. I want you to watch it and think about the Transactional vs Relational Customer. I want you to watch it and think about the importance of knowing and showing your Values. I want you to watch it and think about your products and services and policies and to which planet they are aimed.

There are powerful lessons contained in these eleven minutes. Block out some time when you can watch this without distractions.

-Phil Wrzesinski
www.PhilsForum.com

PS What does Planet Neo look like for indie retailers? Much of what we already do, but need to do more. Think words like Innovative, Cutting Edge, Unique, and Authentic. Think not just in terms of your products, but of your services, too. What do innovative services look like? What services are cutting edge? How can your services be unique?

Are You Planning or Learning?

Five years ago, how many of you predicted that Amazon would be the retail power that it is today? How many of you accurately predicted the housing market collapse? How about the Great Recession? Did you nail that one, too?

None of us did.

Any Five-Year Plans that were made in the beginning of 2008 would not be producing fruit in today’s market. The market changed in ways no one was expecting.

Do you think the plans you’ve made this year have any chance of accurately predicting what will be happening in 2018?

“We cannot plan our way into the future. We must learn our way into the future.” -Jeff De Cagna

The one thing you can plan on with certainty is unforeseen events, seismic market shifts, new threats, new challenges, and a marketplace no one in today’s world would recognize.

The one thing you can do to prepare for that is to learn more. Read more blogs that challenge your views of the world. Take more classes that stimulate your mind. Attend more events that change your perspective.

The more you learn, the more likely you will be on the leading edge of those changes. The more you learn, the more likely you’ll be able to implement the strategies that will succeed in the new market. The more you learn, the more likely your current plans will be able to adjust to the new challenges.

I’m not saying that planning is bad. But strict five-year plans that do not take into account the fast-moving changes in today’s business climate have little chance of succeeding. Learning organizations will always have the leg up on planning organizations, because they will be nimble and smart enough to make the necessary changes to succeed.

-Phil Wrzesinski
www.PhilsForum.com

PS Plans change. Values do not. Know the difference. Regardless of the products and services, we’ll always be here to make you smile.

When it Rains…

Yesterday afternoon I watched my son run a cross country race in the rain.  Some of the hundreds of spectators had umbrellas, some had raincoats, some had no protection at all.  I read the weather reports.  I had an umbrella and a raincoat.

After the race that same son had to rush to the football stadium to march with the band.  The band wore full length rain jackets with hoods.  It rained so much the woodwinds didn’t even play.  I added rain pants, a warmer shirt and a hat to my umbrella and rain coat.  Some people in the stands had nothing more than a jacket without a hood.

This morning my other son had a soccer game.  He was the only kid on the soccer field wearing a rain coat.

Sometimes it rains.  Life still goes on.  The cross country team runs. The football players play.  The band marches.  The soccer game happens.

Some people are prepared for the rain.  They read the weather report and dress appropriately.

Some people don’t.  They hope the game or meet is canceled.  They pray the weather will change.  They make do the best they can and pretend it doesn’t bother them.

Are you reading the weather report for your business?  Are you prepared for the storms?  Or are you just praying and pretending?

-Phil Wrzesinski
www.PhilsForum.com

PS Storms can be economic crises in your hometown, vendor issues, competition coming to town, over-buying, or even under-buying, cash-flow problems, profit problems.  Every business has storms.  The best businesses have umbrellas and rain coats ready to handle those storms.  One way to stay prepared is to make a list of storms you might have to face and find the appropriate “umbrella” for each one.