How NOT to Start a Retail Business

“Fools rush in where angels fear to tread.” – Alexander Pope

I don’t normally recommend getting into retail. (To learn why, reread ETR #152.) But if your dream is to run a brick and mortar business, you can learn a lot about what not to do from one entrepreneur’s mistakes.

Yesterday, in the middle of writing a chapter of my new book, Ready, Fire, Aim, I got an unexpected visit from Matthew, my nephew. He wanted to talk to me about a business he was thinking of getting into. It happens that the chapter I was writing was about starting a new business – specifically, about how important it is to focus on sales. “What a coincidence,” I thought. I stopped what I was doing and listened to his story.

Matthew told me he had always admired handmade jewelry and had dreamed of having his own retail store. Out of the blue, an old friend called him last week to say that he was starting a business selling South African jewelry in the U.S. and he wanted Matthew to be his partner.

“He’s a really good guy. I’ve known him for years,” Matthew told me. “He has lots of contacts in South Africa. And he will put up most of the money. He has another business, so he needs someone to be his partner in this one. He said because I know so much about handmade jewelry, I could do the job.”

I have to admit, I have a soft spot for Matthew. He is family, after all, and his happiness is important to me. I knew he was hoping I’d approve of his opportunity and I didn’t want to disappoint him. “It sounds like a great idea,” I told him. “And I am sure you would be very good at it. How do you plan to sell this stuff?”

Matthew looked at me like I was speaking Afrikaans. “What do you mean?”

“I mean, have you done any thinking or taken any actions that would help you figure out how you can sell this type of jewelry – who might want to buy it, how much they are willing to pay, what sort of pieces they would like?”

“Well,” he said. “We have a few things.”

He opened up a briefcase and started laying out all sort of papers on my table. I noticed an artist’s illustration of a company logo and designs for letterhead, price tags, and packaging. Also in the pile was information about import regulations, a letter from a real estate agent about office space, and a DVD that he urged me to watch.

I put it in my laptop, held my breath, and pushed “Play.”

As I feared, it was an amateurish commercial for the imagined business. It had arresting graphics, a catchy soundtrack, and lots of photos of bracelets, necklaces, and earrings.

“Nice,” I said as convincingly as I could. “What were you thinking of doing with that?”

“That’s what we wanted to ask you,” Matthew said. “You are the one with all the experience.”

“Right,” I said.

Here I was, writing this chapter on the importance of focusing on sales at the very beginning of a business. How ironic that I should be interrupted by Matthew with a bag full of business baubles but not a single thought devoted to sales.

“How much money are you looking to spend to start this business?” I asked.

“I don’t know, but I think I will have to invest my life savings,” he said.

“Would you be interested in a less-costly way of getting into it?” I asked him.

“Sure,” he said. “But what’s the catch?”

“The catch is that you will have to work a little harder. To start anything new, you have to be prepared to put in both money and time. If you put in less money you need to put in more time.”

“How much more time?” he wisely asked.

“Probably all you’ve got,” I told him.

Matthew frowned, but then smiled again. “Sure,” he said. “This is my dream!”

“Okay,” I said. “Here’s my idea…”

What I told Matthew would apply to almost anyone interested in opening up a retail business. That includes any sort of store selling merchandise as well as restaurants, hair salons, day spas, etc. If you’re thinking of getting into one of those businesses, you might consider following this plan:

• Don’t rush to sign a lease. Rental contracts are like marriage licenses. They feel good when you are heady in love but after reality sets in they may be expensive and restricting.
• Figure out how to test your basic selling proposition – to find out if there is an active market for what you want to sell at the price you want to sell it. In Matthew’s case, there are several ways he can do that:

1. He can rent booths at local flea markets and art fairs on a daily or weekly basis and peddle his merchandise there. In most parts of the country (and certainly in Florida, where Matthew lives), there are all sorts of places to choose from – upscale, downscale, open-air, etc. Matthew should begin with one where he thinks his wares will sell the best, but he should try them all because his hunch may be wrong.
2. He should advertise on eBay, CraigsList, and other Internet-based vendor sites.
3. He should try to wholesale his merchandise to existing retails shops and make distribution deals with them. This may require him to discount his merchandise so severely that there will be little profit in it. That doesn’t matter. What he wants to do is find out if his jewelry will sell.
4. He should sponsor office- and home-based “jewelry parties,” where small groups of women gather to look at the merchandise and buy what they want in a friendly, low-pressure atmosphere.
5. He could make deals with local restaurants that would allow models to show off his jewelry to customers in return for a commission. (This is done very effectively in a few of the better restaurants in my hometown.)

• In trying out all these possibilities, Matthew will enjoy three benefits. First, he will discover which of his products sell well in what kind of selling situation and at what price. Second, he will learn how to sell his merchandise – the specific type of sales effort that works best for the type of money he wants to earn. Third, he will generate cash that he will desperately need to run his business.
• Only after Matthew has a good year of experience selling in this sort of way will he be able to make other, less critical business decisions – such as those involving advertising venues and point-of-purchase materials.
• If everything goes well for a year or so, he will have everything he needs to confidently sign a lease agreement. He will even have a good idea about where his store should be. And he will know exactly which products to stock it with and how to price and package them.

In giving Matthew this advice, I mentioned that my brother-in-law and his partners started a jewelry business this way about 20 years ago. They began by selling gold “by the inch” at flea markets. They graduated to discount malls and then finally upgraded to fancy malls and shopping centers. Today, they have stores in more than two dozen locations and generate more than $10 million in annual sales.

In my view, it’s almost always best to get into a new industry slowly and cheaply by figuring out how to test the waters without committing yourself completely to an unproven idea. That’s where my Ready, Fire, Aim principle comes into play. For Matthew’s retail jewelry business, it means:

• GETTING READY by (a) identifying a way or several ways (in Matthew’s case, five ways) to test his basic selling idea and (b) stocking up on the merchandise he will need to make the test relevant.
• FIRING by (a) selling his jewelry at flea markets and art fairs, (b) doing some person-to-person wholesale selling to find out more about how the industry really works and, hopefully, to establish one or two steady retail customers, and (c) sponsoring some party events to get immediate feedback from customers he can trust and talk to.
• AIMING by making adjustments about product selection, packaging, pricing, and merchandising during the first year when such adjustments are easy and inexpensive to make.

You can’t test the basic selling dynamic so easily in every business. If you want to sell cars, for example, you have to manufacture them first. If you want to sell pharmaceuticals, you have to get FDA approval for your drugs. But even with such capital-intensive businesses, there is a lot you can do in the early stages to test the basic proposition: Can this business really work? Which ultimately means: Can I really sell these products/services at a profit?

[Ed. Note: Mark Morgan Ford was the creator of Early To Rise. In 2011, Mark retired from ETR and now writes the Palm Beach Letter. His advice, in our opinion, continues to get better and better with every essay, particularly in the controversial ones we have shared today. We encourage you to read everything you can that has been written by Mark.]