Over the Counter

OTC February, 2004

So, you've gone out and scrounged up the numbers you needed from last month's column, right? Well, do it now, then, and when you get them, this is how to use them. Again, remember this disclaimer, stated in anything but fine print: The numbers I am going to use in these examples are made up - they are not right. I will in fact be lazy and pick numbers that lend themselves easily to division, etc. As they say in textbooks, obtaining the actual numbers will be left as an exercise for the student.

In the first example, let's assume you have a trade area of 120,000 people. After doing some census research, you know there are exactly 3 people per household, which means you have 40,000 households (120,000/3). You have found in the trade mags where 10% of the households in the country at any given time have aquariums, so there are 4,000 aquarist households (40,000 * .10)in your area. You have found in your research where each household spends an average of $200 per year on the hobby, so 4,000 times $200 means there is about $800,000 spent on the hobby each year in your trade area. Furthermore, you have identified four existing stores that are in the business of tropical fish - therefore, each store must do an average of $200,000 per year in sales (800,000/4). If you were to open a store, you would be the fifth. If you get an equal share of this pie, you could figure on sales of about $160,000 per year (800,000/5).

To belabor the point, lets try that again with other numbers. You live in a city of 3,000,000 people where you have identified 100 establishments dealing in tropical fish, and you plan on being number 101. What will your sales be? 3,000,000 divided by 3 people per household times ten per cent for those owning aquariums times $200 spent per year per household divided by 101 stores equals $198,019.80 per year per store.

How accurate is this method? Well, for statistical guesstimates, I have found it to be very close over the years. The first year I was open, back in 1980, I came in very close to what I figured my equal share of the pie in my trade area should have been. Every year after that, when I would play with the figures to see if I was keeping my share, I kept getting increasingly larger shares of what was theoretically available, which brings us to a discussion of some abstract factors to consider when digesting this information.

These formulas give you an average. That means in the last example, for instance, for each store in that trade area that is booming and doing $500,000 per year in fish, there must be others plodding along at next to nothing. Your effort, commitment, work, location, luck, etc. will factor in to determine which outlet you will be. There also seem to be areas in the country which are "fishier" than others. If you live in such an area, then there may be more than the average revenue to compete for, and therefore more stores are needed before a saturation is reached. Other areas haven't been developed yet, and are perhaps "under stored", which means that they will be lucrative opportunities for someone who can spend the time and resources to develop them.

This was the case when I opened my store in a town of 100,000 people. I was the fourth store selling aquariums and fish (the other three were full line pet shops). Thirteen years later, when I sold it, it was one of eight, counting the Mega-Mart where you could by an aquarium, some fish, and tires for your car all in one stop. The population in that time only went up by 10%, but the number of stores doubled, and each time someone else opened, my fish sales climbed, which opens another whole area of retailing theory which I won't go into now.

Now that you have developed a guesstimate of your potential revenue, you need to figure your cost of doing business in your chosen location. This means back to the newspapers, etc. to dig up more numbers. How much will it cost you for rent, utilities, insurance, employees, advertising, taxes, fish food, graft, etc. each month? Most of these costs you can determine exactly by calling realtors, agents, etc. Some advice when doing this - always assume things will cost more than the estimate and that you are overlooking some expenses, because they will, and you are. In fact, I would suggest allowing some safety margin by rounding revenue expectations down while rounding costs up. If you are going to be surprised, it's always better to have it be positive rather than negative when dealing with cash flow.

I have talked to store owners in the pet and aquarium trade who claim gross margins for their stores ranging anywhere from forty to sixty percent (if you don't know what a gross margin is, stop here, go take some business and accounting classes, and then start reading this series all over from the beginning). Given that I have seen a filter that wholesales for $20 marked for retail sale at anywhere between $24.95 and $60.00 in different parts of the country, I don't doubt the range. How you set your prices will be a factor of many things - competition, need, greed, and whim, but for a general idea of what margins in your area are, a combination of price shopping some competitors and a little advice from your distributors will give you an idea of what you can expect.

Take the guesstimated gross income figure from earlier, and multiply it by your estimated gross margin percentage. From this, subtract your cost of doing business, and what you have left is possibly what you'll end up making in your store. For example (again with bogus numbers), if you came up with an estimated annual sales figure of $200,000 earlier, and you've determined you will have about a 45% gross margin, that gives you 200,000 x .45, or $90,000 gross profit.

Subtract from this the amount you figured for your cost of doing business for the period, and compare this figure to how much you need to make to live. If you are opening where you live now, you already know this amount. If you'll be moving, you'd better be checking the papers to find out housing costs, etc. in your new neighborhood. Somewhere in here you also need to come up with an honest answer to this: Are you willing to live on little or nothing for awhile to get started? In a new business, often costs are the greatest at the beginning, when revenue is the lowest.

Once you've shuffled all the papers and worked through all these numbers and they seem to indicate a guaranteed gold mine in your back yard, go back and make sure all of your decimal points are in the right places, because not a lot of us fish store owners are really able to keep up the payments on the Rolls. Even after you've checked and double checked your calculations, the hard part is still to come, because no matter how many times you look at the pool as you climb the ladder to this high dive, you still really don't know how much water is in it until after you've actually jumped. Good luck.

Posted by Ben at February 1, 2004 04:53 PM