I imagine there will be some folks with small businesses who won’t like me telling you what I am about to tell you. But it is high time consumers got a better understanding of just how difficult it is to run a small business in today’s market, and why sometimes their prices are higher than the National chains. This article does not begin to touch on all the variables and details, but will hopefully give you an appreciation of just how perilous it can be to own a business today. Maybe it will encourage you to shop at the smaller stores like the one I manage more often.
If you don’t shop at independent stores, eventually they will be gone – right along with your choices. Major Retailers (National chains, “Big Box” stores) do not care about you or what you want. They are faceless, nameless money making machines, though they will pay lip service to how they value your business, when really they just value your money. When they carry a product that doesn’t sell, they stop carrying it. They don’t care that you like one brand of product better than another; it is all about the bottom line. They are looking for products with the highest profit margins for the lowest investment and are often not concerned with quality. That’s how lead-paint laden toys got into your kid’s mouths; they didn’t care enough to check the quality of the product, they just liked the numbers and the package so they ordered it. Small, independently owned stores know that selling you a defective product – or a dangerous one – can literally ruin them. So they seek out the best quality products to offer, and sometimes those things cost more than what the National retailers offer. There are other legitimate reasons for higher prices at local retailers, so read on if you care to know just a few of them.
There is so much I could tell you that many of you likely don’t know, but let me just cover what I like to call my Top 10 Things Consumers Should Know about Small Businesses (that no one wants to tell you).
10. The Most Expensive Thing in a Small Business is the Staff. People are the backbone of any organization, but much more so in a small retail business. It is not easy to find the right people who can work at a small store and deliver great customer service every day while juggling myriad tasks. They have to be smart and trustworthy enough to be at the store alone for periods of time and handle any and all situations that arise. My employees have to fix the computer if it crashes, or use a handwritten sales receipt and a calculator if they can’t – and answer the phone, and wrap gifts, and clean, and help with ordering. A cashier at Target only scans price tags, takes cash, and hands you change that they don’t even have to count. They call a manager if they have a problem. The caliber of person needed for a small business simply costs more, and the really good ones are worth more than you can afford to pay them, so sometimes you can’t get them to work for you. Let’s conservatively say that for the average retail store that’s open 10 hours a day, six days a week, you spend $5,000 a month in payroll with one full-time and two or three part-time employees with your employer tax contributions and Unemployment Insurance (neither of which are optional).
9. The Second Most Expensive Thing in a Small Business is the Place. The mortgage or rent for commercial spaces is very expensive. In my town right now, a rented space in one of the ultra-premium shopping centers where you like to shop (the new, shiny, clean ones with the piped in music, ample parking, and great atmosphere) average about $25 per square foot per year plus Common Area Maintenance (CAM) charges of around $8 per square foot (that’s the money that pays for the parking lot and the music). This is down from $35 and $12, respectively, about 3 years ago (but if you signed a lease 3 years ago, you are still paying those higher rates). So if you have a modest size space (about 2,500 square feet), that’s $6,875 per month just to rent the space. (Just to emphasize how expensive this is, that’s $3,400 per month for 1,250 square feet – the size of a small home that in our town costs an average of $1,000 a month.) Add utilities, insurance, and maintenance (most commercial spaces make it the tenants responsibility to maintain the heating & air system, repair broken plate glass, and clean the windows), and you can easily spend over $8,000 per month for this house-sized space. Even in an average, aged shopping center, you are looking at about $4,000 per month, and in a low-end center maybe $3,000. Poor location is one of the top three reasons small businesses fail in the first 5 years, so it’s pretty important to be in a good place – but it will cost you. Oh, and when a National retailer wants to put a store in a local shopping center, they generally get offered a much lower rate than small businesses because they have the star power – their name alone will bring traffic to the property, so it’s a quid pro quo that is supposed to help the little stores (even though there is no guarantee that if you are going to Target you will shop the other stores while in the plaza). In this sick twist of economic karma, the big places with the high sales volume – who can afford to pay more – pay less rent than the little places with the small sales volume who can barely make their payroll. (If you are doing the math as we go, we have already crossed the $10,000 mark on monthly expenses and we haven’t bought anything or paid the utilities yet.)
8. Many Small Business Owners have Bet their Houses on the Success of their Business. Commercial Landlords generally require a personal guarantee for the lease of a business space unless you are a National chain. Yes, that’s right. Even if you have formed an LLC or S-Corporation, you probably have to sign a personal guarantee to rent the space. This means that the owner of your favorite restaurant, hair salon, or boutique clothing store is quite literally betting his or her house on the business. The guarantee allows the landlord to pursue a judgment against you in court if your business fails and you default on the terms of the lease. Also, tenants usually have to pay to upfit a commercial space for their use (plumbing, electrical, walls, floors, paint, lighting, etc.) and many tenants take a second mortgage on their homes to accomplish this, unless dear Uncle Albert passed away and left them $100,000. The average upfit of a new shopping center space of 2,500 square feet is about $100,000; modifying an existing space averages $50,000 here in my town. Retail is not for the faint of heart – I’m just sayin’.
7. Maker’s Mark Taste, Old Crow Money. If you are a small retailer or restaurateur, you want to offer the best products possible. Today’s consumers want the best quality for the least investment possible. The electronics age has fueled this mind set; big machines are producing our little machines by the millions and over time they have gotten really cheap because the volume of sales makes up for the lower profit per item, and the machine is cheaper than human labor. Cellular phones are a prime example. The best quality housewares, clothing, and food cannot be made by machines – they have to be handmade, hand fed, and organically grown. The care involved in those processes costs a lot of money (refer back to number 10 above). The dilemmas faced here are many, but let’s use this example: A restaurant may have to decide between organic, local chicken at $10 per pound or mass-produced chicken from Tyson’s Noel, Missouri plant for $4 per pound. How much are you willing to pay for your chicken parmesan dinner? If they opt for the organic, they will have to charge you $22 or more to break even on their cost (once side dishes, gas for the stove, and labor are added) or sell it for $18 and not make their payroll (and we didn’t even add in rent and utilities). So they opt for the mass-produced chicken to offer you a reasonably priced dinner and still be able to make their payroll and order more chicken. Or they can pound out a few carefully butchered ounces of the organic chicken, portion out more pasta, and hope that you won’t complain that the portions are too small (you bourbon drinkers know exactly what I’m talking about – the choice between ample Old Crow on the rocks, or a little bit of watered down Maker’s Mark). (Here, I could launch into how the National chain restaurants don’t make much of their food on-site and thus can sell it for less, but I am trying to stay focused.) The only way a local restaurant can consistently offer higher quality ingredients and a talented staff to cook them properly is if you are willing to pay more for them and come back often.
6. The Crystal Ball is Broken. Retail is extremely volatile. There are certain well-established norms in the retail and restaurant industries, but even the norms sometimes don’t hold true. For instance, Saturday is typically the busiest day in retail each week, and the busiest evening in restaurants. This does not mean that every Saturday you will sell a certain amount of product, or that you will turn all your tables twice. Some Saturdays hardly anyone steps into our store. Why? Who knows; weather, special events elsewhere in town, certain times of the year – like January – are notorious for being slow. But on a given Saturday in May, no one knows why it’s dead. If you do come in, I don’t know if I will have what you are hoping to buy; if I have it, I don’t know if you’ll like the color or brand or price. In short, retailers and restaurateurs take educated guesses about what you might want and when you might want it. We can’t have everything that will please everyone on every day. We don’t have that kind of money or storage space. Plus we are small and have a certain identity; if the name of our restaurant is Little Italy, are cheeseburgers a realistic expectation of us?
5. Special Orders Don’t Upset Us, But Impatience Does. When is the last time you tried to get Williams-Sonoma to order you a fruit carving tool that isn’t in their inventory? Did they look at you like you were an alien? Did they have any clue what you were talking about? If you came into our store, we would sift through some catalogs from our vendors looking for what you want. We might have to call you back the next day, but we will research it. When it turns out that the tool sells for $8 and we just spent an hour looking for it, we still order it for you even though we spent more than double the price of the item in labor to locate it. But do bear in mind that our vendors have minimum order requirements so it may take us a few weeks to get it for you since we have to order $300 worth of product from them to get your $8 widgit and we operate on a tight budget and just don’t need more widgits today. This, my friends, is called personal service. You don’t get this at the National chains. But it will cost you some patience.
4. We Don’t Tell You What We Pay for Products Because You Don’t Get It. Wholesale pricing information is held pretty close to the vest of those of us in the trade. This isn’t because we are setting out to rip you off and pad our checkbooks; this is because we know you don’t understand the complexities of the pricing structures and we don’t have time to explain it to each and every customer – and we are trying to keep the doors open. I am explaining it now, through this blog post. Are you listening? Your $8 widgit cost us an hour direct labor plus the wholesale cost of the widget itself. There will be additional labor to prepare the purchase order, pay the freight, verify the shipment when it arrives, unpack it, take the cardboard to the dumpster, receive the product into our inventory, print and apply the price tags, and figure out where to merchandise the other widgits on the sales floor. Then we have to call you to tell you it has arrived and pay the fees for processing your credit card transaction. Your $8 widgit cost us a lot more than what you paid for it. But we are happy to do it for you to earn your loyalty; we are investing in you as our customer in the hope that you will come back and buy some other things from us and that eventually our investment will pay off. I will tell you this much: the percentage of profit is about the same for most of the products we sell in our store (package beer and wine has very little profit in it, so that’s the exception for us; by-the-glass beer and wine can be profitable for restaurants and they rely upon their bar to pay some bills, so have a drink with dinner). You can rightly conclude, then, that if all we are selling are $5 and $10 items, we are not making enough profit to pay the bills unless we are selling a bazillion of them. When you buy a set of cookware? That might pay half the electric bill for one month. Buy more cookware. Please.
3. Small Business Owners Don’t Get a Paycheck Every Week. In fact, many small business owners don’t get a paycheck at all. They take just enough money out of the business to pay their mortgage and expenses at home, and many don’t have health insurance for their families. They have to live like this because it’s a never-ending cycle: you have to have product to sell in order to make money; it takes money to buy the product; and round and round you go. Why not cut expenses by closing in slow times, you say? If my store is not open when you, the consumer, want something from us, you will go elsewhere and probably not come back because we are not open regular, reliable hours. We do have seasonal hours based on those norms we mentioned earlier in number 6, but if there is no foot traffic on a given Thursday, I can’t just close and go home. What about that one customer who comes by at 5pm? The risk is too high. So even when business is very slow and revenue is at rock bottom, I have to be open, pay my staff (because I can’t work 24/7), and order product for when you do come in to shop. Sometimes there isn’t any money for the owner to pay themselves. Imagine this situation continuing for a couple months (while you are on vacation and not shopping in our store). Small business owners may have had some money when they started the business, but chances are they don’t have any money now that isn’t tied up in the business. Why do they do it? To be their own boss, to make their mark on the world, to forge a trail for others to follow, to follow their passions, to live out their dreams. It is their chosen employment, but the pay and benefits suck.
2. When you Demand a Discount or Play the “Use and Return” Game with Products, You are Taking Food out of the Business Owner’s Mouth. Literally. Review numbers 3 through 10 above. Restaurants probably suffer a bit more with this than other retailers, but we all deal with it. Many National retailers have a policy that they will take any return you bring them, no questions asked. They can afford to be liberal with their return policy because they have a volume of sales that renders the effect of their relatively small percentage of returns negligible to their bottom line. What did she just say? Big box stores are unaffected by you wearing a dress to a wedding and returning it for full credit, stains and all. They can take it. But when you do that to a small retailer, and get belligerent when they point out the stains on the dress you swear you didn’t wear, you box them into a corner – and don’t you know it! You count on it. The underlying threat is, “I won’t shop here anymore if you don’t give me my money back, and I’ll tell all my friends how rude you were to me, too.” At a restaurant, this strategy is often employed thusly: “Waiter, my <half-eaten> steak is over-cooked. Please take it back. Oh, and I want it taken off my bill.” In that moment, retailers/restaurateurs must make a judgment call. Me, I usually opt for the less-traveled road: “Oh, I’m sorry that pan didn’t make your omelet the way you wanted. But since you’ve used it and it has the marks to prove it, I cannot take it back and re-sell it. Therefore, I cannot offer you a refund. I will happily give you a gift certificate for $20 for your inconvenience.” Go ahead, tell your friends. I will not be held hostage by someone who clearly wants something for nothing. I want you to be happy, but I will not be extorted – I simply can’t afford it. Now if your pan had a manufacturing flaw, I will happily take it back. But once you’ve used a perfectly good pan, you are out of luck. If you eat half the steak and then complain, you should pay for it. Period. If you can’t afford to pay the bill, eat at home.
1. We Need You to Realize Our Dreams. You browse my store and say how lovely it is and how you love my products. Then you go to Bed, Bath & Beyond to purchase your cooking tools. Was it something we did? Was an employee rude to you? Did we not have what you were looking for? Was it the price? Why didn’t you buy from us? If you had taken a minute to tell me, I might have been able to apologize/re-train my employee/order you what you want/give you a discount. Refer back to number 5 – the crystal ball is broken. But we want to earn your loyalty and offer you what you need and want. We cannot stay in business if you don’t buy from us. If I can’t get you what you need, I might be able to recommend someplace that can. Hell, I’ve even been known to give free samples of things to people to meet their needs when I am out of stock of a product and have a sample on hand. I was out of butcher’s twine once and gave the guy a couple yards from my ball in the cooking school kitchen. I will do almost anything I can to take care of a customer and help the owner of our store stay in business. But if you don’t shop with us and don’t tell me what you want, I can’t do either. Buy local, so that we can continue to offer you a choice. The big guys will not ask you what you want, they will only follow the money. We want to know you and offer you the best quality possible for your money.
Thanks for stopping in. Please come back!