DREAM II: THE BRANCH
Deciding If, When and How For That Second Location
Like most entrepreneurs, you probably went into business to fulfill a dream of owning your own place and being your own boss. If your operation is successful, then chances are you’ve thought of opening a second location – a sequel to the dream.
Almost one of four retailers eventually opens a branch store. Unfortunately it’s as risky as when you first started in business, and in some cases even more so. There are numerous dangers, many completely different than your original start-up.
Chances are that half those expansions will fail in five years, according to experts. But for those that don’t, the advantages can be tremendous.
Reasons for Branching
There are several reasons for branching out and adding a second – or third – location. One big plus is that you will enjoy economy of scale and centralizing of functions. With two or more shops sharing the budget, you can spread many expenses – advertising, warehousing, delivery, etc. – and even justify adding a full-time bookkeeper. Some small businesses estimate their budget savings at 10% just from operating a second unit.
Perhaps the biggest advantage of all is being able to buy better because you will be buying bigger. Also on the plus side is a potential saving in insurance because business interruption protection will not be as vital per unit when you have two or more. If a disaster wipes out one location, you’re still in business and can use the surviving store to keep going.
Another advantage is the opportunity to sharpen your management. You can compare expenses and operations to sniff out problems and spot strengths in one location that can benefit the other. And because you’re not like to repeat mistakes, your branch also will benefit from the missteps taken at your first location.
A second shop – especially one located near key customers or a fast-growing area – provides defense against competition. When a good site opens up just outside your present trade area, you might want to snap it up rather than see a competitor locate on your border.
Here’s the Flip Side
But despite all those pluses in branching out, the fact is that almost 90% of the 1,800,000 retailing firms in the U.S. are single-unit operations. The number is fairly similar for wholesale and commercial sales and service businesses. That’s because the negatives and the risk involved with opening a second location are great.
Half of all branch locations fail, according to National Federation of Independent Business, a strong indication that the most dangerous time in business is the first expansion phase.
If you’re not careful with site selection, for instance, the branch might siphon off customers from your original location and hurt its profits. While multiple shops help lower buying costs and extend your revenue opportunities, you are adding another set of fixed and discretionary overhead costs.
Besides building and land (if purchasing) and associated taxes and utilities, capital equipment, vehicles, tools, office and store furniture, computers and software, etc. all must be bought or leased. There’s staff to hire and train, promoting that must be done, selling and customer contact that has to happen, and a whole assortment of seemingly minor things – office supplies, uniforms, outdoor and indoor signage – that quickly add up.
If you consider everything up front and are prudent, you and your budget won’t get overwhelmed before business stabilizes and profits roll.
Different Skills Required
Running a multi-unit business absolutely requires different skills from those needed to start a business. The entrepreneurial spirit that helped you get started might be too risk-taking for a branch. Originally, your mind set was "go-for-it." When expanding, it should be: Let’s think it over and go slow. Be more objective, even at the expense of enthusiasm.
The branch will partly destroy the feeling of control you have over all you survey. That out-of-control feeling is another key reason half of all branches fail. As an owner and manager, if you can’t handle the added stress of a second location, neither can your business.
Time and Staff to Spare?
Ask yourself two important questions. Is your present business in shape to handle the strain of expansion? Can you spare the time and the staff?
Recognize that while you may be a great merchant, by expanding into a second unit you must become a better people manager. You must be able to recruit, motivate and train – fast and well.
When that second location comes, just knowing the product and your customers is no longer enough. Now you must know people management. And have greater faith in others.
If It’s Go, Here’s How
After considering all the potential negatives and you’re still in a branching-out frame of mind, here are the next steps.
First, decide what you want your new branch to be. Above all, don’t simply clone your original operation. Instead, tailor your second location to its own market area – or area of expertise if, for instance, you’re opening a commercial center to compliment a retail store.
Unless you are in commodity business like McDonald’s, whose Golden Arches fit anywhere, you must study consumer or customer peculiarities for your proposed new location.
How close should you locate your branch to your headquarters store? Too close, and your two operations (if they are both retail, for instance) will be fighting for the same customers and actually become competitors – at your expense. Too distant from each other and you lose the economies of joint advertising, joint warehousing, joint deliveries, etc.
On the retail side, how much could your branch take away from your headquarters? Figure on a maximum of 25% customer migration, depending on how close together the stores are.
Obviously, if your second location will take on a different set of customers – a wholesale operation, as an example – locating close to your original business isn’t an issue. But, you must still consider the best location from which to sell and serve a new potential customer base.
Early on, you should plan how you will staff the branch. Most of the dealers we talk with say that staff is the first consideration, whether its for retail, wholesale or commercial.
You’ll need a topflight manager for the branch. If that’s you, then you will have to find a topflight manager for your headquarters location.
Don’t try to split yourself between the two units. It usually won’t work. You must find a solid, trusted manager to be your extension at the expansion.
Spend Plenty on Promotion
Months before your branch opens, you should be finalizing a promotion plan. How much should you budget for advertising and promoting the new branch? Some recommend that for a new retail location you should plan on spending 4% of your total startup budget for advertising. Others say plan on spending in one month what you would spend in a year for the established store.
The advertising/promotion program for a retail store should saturate the market with all three main media – print, broadcast and direct mail – to get attention and customers.
Wholesale and commercial businesses don’t need heavy advertising, although local business newspapers could be a logical choice. Consider a brochure that explains your operations, capabilities, products, experience and service philosophy, that can be used as a direct mailer to prospects, or as a leave behind after a face-to-face meeting with potential customers.
After all of that, you will have Dream II. And its success should be more assured than when you opened your first.