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Expansion Zone:
How to Determine if Your
Business Is Primed for Growth
by Ed Arvidson

As a consultant to the specialty coffee industry, I interact daily with people who are starting or already own retail coffee businesses. These entrepreneurs, particularly those not yet in the business, often express a desire to own multiple locations. Owning multiple stores is a good thing, right? Multiple locations mean more income, so why wouldn't you want to expand your business? I think all retailers would like to believe that they might grow from humble one-store beginnings into prestigious, profitable regional or national business empires. It could happen, couldn't it? Well, before you ask your commercial real estate broker to start looking for additional properties, and before you start signing leases for future locations, you need to take time to seriously consider some important issues.

   To begin with, you should ask yourself why you are contemplating business expansion. The probable answer is that you would like to earn additional income. But do you need additional income because your first location has reached its income potential or because it hasn't lived up to your financial expectations? This is a critical question. You should never open a second location if you are struggling with your first. If you have not maximized your sales and controlled your expenses to achieve a reasonable rate of return in your first store, why would you think you might achieve better results with a second location? You would be wise to develop and perfect your business ownership/management skills and maximize your sales and profitability in your first store before you ever consider opening additional locations.

The primary reasons you should consider opening additional stores are:
1. Your first location has reached its maximum potential for sales and profitability.
2. Your business is running efficiently from an operational standpoint without your constant supervision.
3. There are many additional opportunities available for viable locations in your market.
4. Opening additional locations fits into your long-term professional and personal objectives.

   How do you determine if your first location has reached its maximum potential? First, understand that there is a difference between sales that have reached their maximum potential and sales that are insufficient or stagnant. Just because not enough customers are patronizing your business on a daily basis to achieve or maximize profitability, this does not mean that your sales are maxed out. When I refer to reaching your maximum sales potential, I mean that you are so busy that you physically cannot handle additional customers, or that you have aggressively marketed and merchandised your business in every imaginable way, yet you cannot seem to increase your level of sales.

   Maximizing your sales means you have engaged in marketing efforts, such as distributing to-go menus with coupons to surrounding businesses and households, advertising in local newspapers, writing press releases, sponsoring a Little League team, joining your chamber of commerce and speaking about your business, promoting an event in return for name exposure, and offering free coffee tastings and classes. Most importantly, you have done these things on a consistent basis, or at least multiple times.

   Now let's look at some "rule of thumb" financial parameters that might help you determine whether you are sales-deficient or expense-excessive. Keep in mind that the following numbers are merely "typicals" for the average coffee business. To make these determinations, I usually look at some basic expense categories as a percentage of sales.

   Starting with your monthly rent, I usually see businesses approach a break-even volume when the rent expense equals approximately 10 percent of total sales. Monthly labor expenses should be between 30 and 35 percent of total sales. And total cost of goods should not exceed 35 percent of total sales. So what does this all mean? Well, if you are not profitable and your cost of goods is at the recommended 35 percent but your rent is running 20 percent (and you're not paying an unusually excessive rate) and labor is running 50 percent (and there is no way to cut your labor budget without doing everything yourself), you probably need more sales. Play with your sales numbers to determine the volume you need to make these percentages fall into line.

   Perhaps your daily sales are healthy, but your net returns are less than desirable. If you have not controlled or fine-tuned your cost of goods and/or other operating expenses, this is another area that will demand attention before you consider business expansion. If you have not learned how to budget and control the cash outflow from your business, how will dividing your attention and efforts between two or more operations produce better results? In other words, you would be wise to learn how to drive a car before you attempt driving a semi truck!

   Another major factor to consider when contemplating business expansion is the supervision and control of your operations. If your existing operation runs efficiently-but only because you spend 40-, 50- or 60-plus hours a week running it-how will you possibly invest the same amount of time in a second location? It is essential for you to maintain the usual, expected quality of operation at your original location while you are opening a second store. If you fail to do this-if you let your quality, service and cleanliness slip-you will certainly begin to lose customers, sales and profits. To preserve the quality of your first store and ensure that your second location lives up to the same standards, you will need to find a manager you can trust to run your first location.

   While it is possible to find a qualified manager "off the streets," it is usually much more advantageous to promote a capable employee from within your business. There are several reasons for hiring from within. First, you already have a working relationship with an existing employee. Second, you already know about an existing employee's work ethics and the level of respect he or she commands from the rest of your staff. Third, an existing employee is already familiar with your operation. And finally, a promoted employee may not demand as high a starting wage or salary as an experienced manager off the street.

If you decide to hire an experienced manager from outside of your company, be cautious. Always thoroughly check a candidate's references. When talking with past employers, confirm that a candidate not only has managerial experience, but that he or she also possesses a successful track record. For instance, you'll want to find out if the candidate was able to increase sales and profitability for his or her previous employer. If the answer is no, keep looking.

   The manager you choose, whether hired from within your business or from outside, should possess an owner-like attitude and work ethic. He or she should be proficient in every company position and should command (not demand) the respect of your employees. Ultimately, this person must be able to maintain the quality of your operation while sustaining sales and profitability.

   You'll want to start training a manager long before you are ready to open your new location. You should teach this person everything you know about management, administrative duties and responsibilities associated with the job. The more a new manager understands about how you manage and where your priorities lie, the better. Establishing good operational controls and systems will also help your new manager understand what he or she is responsible for. Job descriptions, policy manuals, and daily and weekly checklists for employees and management will all greatly reduce confusion and reinforce priorities. They will also help close the gap between your manager's lack of knowledge.

   In addition to examining the sales and profitability of your first location and determining how you will operate a second location as effectively, you must determine the opportunities your market has to offer. Is there room for additional locations in your area? If you live in a mid-sized or large city, this probably won't be a problem (unless, of course, you live in the Pacific Northwest). But if you live in a small town (with a population of 20,000 or less) or in a rural area, you'll need to carefully consider additional locations. Will your market support a second store? If you do open a second location, will part of your customer base come from your first store? The last thing you want to do is cannibalize sales from your first location by opening a second.

Your final consideration should be whether or not you really want and need additional locations. Yes, multiple locations usually represent additional income, but with that income come greater time commitments, more worries, additional problems, and increased risk. Ultimately, you must weigh the advantages with the drawbacks and honestly assess whether or not expansion fits in with your personal and professional goals.

I've worked with numerous retailers who have found success and fulfillment in operating additional locations, but certainly, expansion is not for everyone. I recently talked with a previous client about the possibility of business expansion. He says a number of people have approached him about partnering to open additional stores, but he's not so sure it's worth it. "I think about it, but then I say to myself, 'Hey, I'm making great money now and my store is almost running itself-do I really want additional locations?'" he says. "After all, how much do I need? Maybe it's time to temper the ambitions I had when I was younger. Maybe it's time to just start enjoying life!" He's right-happiness is central to running a successful business. Whether that comes from one store or five, choose the route that will bring you the most enjoyment.

Ed Arvidson is a specialty coffee industry business consultant. He can
be reached through Bellissimo Coffee InfoGroup at 800/655-3955 or 541/683-5373.

This Issue: $5 U.S.

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