Let's open a shop

Exploring the economics of independent retailing

It is quite common these days to lament the creeping death of the High Street. Consumers mourn the lack of cheery independent retailers that they remember from their youth, retail professionals look on horrified as the cancer of empty shops spreads around their stores, making them less and less economic and politicians pontificate about their latest scheme to fix everything, usually involving Mary Portas in some way.

But if we are really going to lean-in to the problem and create a resurgence in vibrant independent retailing, it is probably worth getting into the detail a bit. And to do that, you and I are going to open a hypothetical shop together, and explore the economics as we go.

The good news is I’ve found a vacant site. It is a real one, in the South-East market town where I live, and so the numbers we are going to explore are realistic ones for this part of the UK and at this point in the economic cycle.

We are going to open a lifestyle-y, gift-y kind of shop. Regular readers will recall that we looked with some admiration at Oliver Bonas a few months ago and we are aiming for that kind of middle-class market-town offering (not least because it means we can use their accounts to get some of the other key data points!).

What's the point of Oliver Bonas?

The shop I’ve found has a nice position on a key street with good footfall and it is about 1000sqft, which feels right for our offering.

So the first question we need to ask ourselves is what it is going to cost to open our shop, and then we’ll need to check our piggy-banks to see if we have that kind of cash lying around.

Here, then, are some key costs we’ll need to consider:

• The rent is £40,000 per year

• Business rates will set us back £4,600 this year as long as we remember to apply for the 75% small retailer rate relief scheme. In a normal year, business rates will be a hefty £18,500

• The shop is currently a shell, so we can bank on fit-out costs being at least another £40,000 and possibly more if we want the posh wooden floors and spot lighting that you’ve set your heart on

• The process of renting a shop is frustratingly old-fashioned and complicated, so we can bank on legal fees of another £2k or so

• And of course we’ll need to buy some stock to fill our shop, which working backwards from the OB business will probably set us back about £50,000 at wholesale prices

Now we might get some kind of rent-free period or other support from the landlord if we negotiate hard and no-one else wants the shop, but we are also likely to be competing against other tenants that the landlord will regard as ‘safer’ (charity shops, national chains etc) so that will count against us.

Either way, in round numbers we are looking at a year-one commitment of between £100k and £150k before we’ve sold a thing.

Then, of course, we have to consider the ongoing economics of the shop. We’ll sell our products for a gross margin of something like 50% if we use Oliver Bonas as our example, and so for every £100 of goods (ex-VAT) we sell we’ll end up with £50 to pay all the running costs and generate our profit.

In addition to the rent, rates and other costs we’ve already considered, then, we’ll also need to factor in:

• Staff costs:

  • After the next rise in the minimum wage this year, the ‘full time equivalent’ salary cost of each new staff member is pretty much £25k, and for a store of this size I think we’ll probably need 1 person to start with alongside ourselves.

  • We shouldn’t forget to factor in another 14% for employers National Insurance

  • And of course, as soon as we employ anyone other than ourselves we are now obliged to provide a workplace pension with at least a 3% employer contribution

• Utilities - heaven knows what this will be, but let’s allow £2k to be sure

• IT/EPOS/Security costs - all the electrical stuff can be leased or rented rather than bought, but is likely to cost us another £2-3k per year

• Marketing costs - it is ever-so-tempting in these social media days to assume that marketing is free, but it never quite works out like that - even if most of our marketing is on Instagram, the time it takes to manage that is an additional staff cost. All in, we are going to allow 3% of our turnover as a marketing ‘pot’

• Shrinkage - as sad an indictment of society as it is, we need to allow for the cost of stolen or damaged items. We are going to be optimistic about our leafy maarket town, though, and allow 1% of turnover as the shrinkage cost for this business (about half the national average)

With all of that taken together, we have enough to work out the potential economics of our shop.

As a comparison point, I’ve taken the sales per store that our rival Oliver Bonas achieved and scaled it down because our store is smaller than theirs are. That creates a benchmark which is quite a high bar, because if we achieve that kind of sales figure then we are achieving, in our local shop, the same sales-density as a well-known national brand with years of experience and loyal customers.

I’ve taken the liberty of throwing all the numbers into a spreadsheet and worked out the following:

• Our ‘break-even’ turnover is about £180k per year - at that level, we are covering our external costs but not earning enough to pay ourselves anything.

  • And this break-even figure is about 40% of the Oliver Bonas comparison point

• To pay ourselves the minimum wage, on the other hand, we’d need to be getting closer to £280k per year

  • which is 60% of the OB benchmark

• And if we achieve 100% of the Oliver Bonas benchmark sales figure we’ll turn over £470k per year and be able to pay ourselves about £60k each.

Now of course there are all sorts of things wrong with this analysis - there will be over- and under-estimates, I will have missed some costs entirely and there will be wildly different benchmarks we could create from other retail comparisons.

But I think some important points still stand:

• To open a shop requires a lot of up-front capital, which is either cash you already have or loans you have to take out

• Once you’ve raised the funds, there are a lot of things to do before you open - this is a complex process involving a lot of suppliers, some pretty arcane business practices and a lot of paperwork. I haven’t even touched here on the need for an accountant, the pain of running a payroll process or of submitting a corporation tax return or VAT returns.

• And after all that, the economics are quite marginal and entirely depend (obviously) on your ability to sell lots of stuff. If you succeed in that, there is a reasonable living to be made but your income is far from certain and is the first thing that will disappear when sales drop.

Now if you are anything like me, reading that will have given you an even greater admiration for the small retailers up and down the country who are still fighting to keep our High Streets alive.

But I hope this analysis also gives you a sense of how the rest of us, and the political establishment in particular can help them succeed. Opening a new store is hugely risky, for example, because of how much of the cost has to be paid out whether you are successful or not. A fourfold increase in Business Rates back to their ‘normal’ level next year will make all of these numbers, and that risk-level in opening a new store, worse again.

So what leaps out from this as a ‘shopping list’ to help the independent retailer:

• We should review the byzantine world of commercial property lets to see how shorter commitments and greater cooperation between landlord and tenant can make opening a store less complex and costly.

• We should review planning laws, partly with the objective of reducing rents by increasing availability but also to give councils more control of what ‘kind’ of retail goes where and to end the dominance of charity shops and betting shops on too many of our streets.

• Politicians should be careful about adding to the costs, or the complexity, of running any business. The forthcoming rise in the minimum wage is admirable in its intent, for example, but will be a big cost for small businesses to absorb so why not look to make some other costs go down at the same time?

• Local communities can do plenty of ‘place making’ to ensure that shops get as much passing footfall as possible - simple changes like better signposting, cleaner streets and more community policing can make a huge difference

• Retail communities can come together to support each other - amplifying each others’ social media, creating events together like late-night opening etc.

• And of course, all of us as interested consumers can support our local retailers with our wallets.

I’d love to hear your views too. If our High Streets die, that will be a shame. If they die without us doing everything we can to save them, that will be a tragedy.