You’ve been told it’s important to grow. Your alternatives? To shrink or stay exactly the same as you are now. Before you make a decision on this, explore your alternatives.
Shrinking your business may look enticing. You may even imagine the sigh of relief you’ll feel. Reducing the number of distribution points and the employees supporting them generally reduces the number of problems and day-to-day issues you’ll face.
Closing a store or dropping a route might give you the chance to reduce numbers of employees and overall hassles. There’s nothing wrong with closing unprofitable locations or eliminating other underperforming areas. The difficulty is to ensure that doing so really results in improved profitability.
Shrinking your costs in proportion to the lost volume is one of the most difficult tasks facing operators. You must recognize the real costs that will be affected and avoid dealing in generalized allocations and estimates.
For instance, closing a store that only does 100 pieces per day may not really result in lower plant processing costs. Your shuttle expenses won’t drop, either. Analyze your shrinkage strategy carefully before making changes.
The alternatives could be just as difficult. Opening a new store carries risks, and if a new store performs poorly, the move can have long-term financial consequences. What happens if it fails to produce the volume you’ve forecast?
What are the chances your new store won’t meet expectations? You may be paying $25 per square foot or more, and may have CAM charges that put you over $30 per square foot.
You may be in a part of the country where you don’t have to pay that kind of rent; nevertheless, rent should be 10% to 12% of mature sales. If you don’t achieve “mature” sales goals, it won’t be a pretty picture when you have a three-, five- or 10-year lease.
Buying an existing store may seem like a less risky move. Sales and rents may be known quantities, and yet, there still can be surprises. The previous owner may have provided discounts to friends of which you weren’t aware. Sales can drop dramatically when a new person takes ownership and customers leave in droves.
Starting a route has lots of appeal today. It also seems less risky — just hire a driver and lease a truck. If it doesn’t work out, you think, you’re not tied to a huge, long-term lease and can cut your losses. And you’re absolutely right — the downside risks involved with a route can be managed.
But that’s not why you launched a route, is it? You started a route to grow sales, and that’s harder than it looks. It’s hard to find the right person to service the route, and it’s even harder to find someone who will help you grow it. What’s more, it’s a harder business to break into today. You’re competing with others in the market that are trying to do the same thing.
Growth can also result in other, unanticipated cost increases. If you’re lucky enough to experience growth, there are often still cost increases you will be forced to absorb. If you grow from two or three stores to six or seven, for example, you might need a customer service manager — someone whose primary responsibility is to visit the stores, maintain your standards, provide support, and hire, fire and train staffers.
This person may or may not be affordable at the moment — particularly if all those new stores haven’t reached sales maturity. But without hiring this person, your service will suffer, and the stores will never mature. It’s a growth Catch-22.
Similarly, the right person may come along and apply for a position with your company, and you may not be able to hire them immediately. On the other hand, you may not be able to afford not to hire them. Lots of owners who take growth seriously have taken a personal pay cut to bring the right person on. When it’s the right decision, they are rewarded with an even larger income than they had before, but it’s another risk.
Cutting costs may be the answer. Some people think that the solution to their profit problems is not increased sales, but improved plant efficiency. Taking advantage of new equipment and new technologies is tempting; it’s easy to spend money. Banks and leasing companies will lend money more readily for new equipment than they will for a new dry store or a new route. And you can prove the labor and cost savings to them on paper.
Achieving the promised results is sometimes more difficult. Building a new plant almost always takes more cash than expected or planned. Disruptions from turnover, poor delivery times, unplanned overtime and inadequate training can result in a cash shortage at the exact time you need to make an important debt payment.
Individual pieces of new equipment seem to promise labor savings on paper, but somehow, labor costs don’t fall in proportion to your increases in payments. There never seems to be a simple answer. What’s the right strategy?
If there was a magic bullet, everyone would use it. Shrinking is a real option, and so is growth. But doing nothing while others around you are doing something often results in your operation shrinking or growing — whether you like it or not.
The most important thing to remember is caveat emptor, or “let the buyer beware.” If it sounds too good to be true, it probably is. Any decision you make could pan out, with time, effort, commitment and perhaps a little luck.
Consult your advisors, ask the right questions, listen to their answers, do your homework, and understand the differences between your operation and the others that are used as examples. Then, make a plan and move forward.
Have a question or comment? E-mail our editor Dave Davis at [email protected].