The more stores we open, the more money we will lose

We decided to enter the market with a multichannel strategy. We would have traditional retail shops and a website to sell our products. We only had three products when we launched. Each came in three sizes and three scents which was 27 skus. This meant we couldn’t have full retail shops but needed to rent boutique spaces or stores within a store.

We wanted to have a sales assistant in each store and needed 15 stores to cover the bulk of the market in the capital city, which is 45% of the volume of our retail sales. We built a traditional website which accept credit cards and direct payments by mobile.

We aimed for 60% online sales and 40% in store. Our costs, however, were 70% in-store. They were higher due to rent and labor costs. The average transaction value online was higher than in the store because people bought the larger sizes. We figured that people tried it in store and then bought online. The mix of sales by channel was critical.

We projected the profit and cash from the first three months data and it could never make a profit. The stores consistently lost money. We signed three years leases and each store requires our own sales staff. The more stores we open the more we will lose.

The importance of inventory and cash management

After leaving business school I moved back to my home country and started a retail business with money from family and friends. I had taken classes in finance, operations, retail management, and two in entrepreneurship and had done very well. I felt well-prepared.

I opened a bank account in my home country and started importing stock from the US and China. Sales went really well for the first 6 months. Then the economy started to slow and my sales also slowed. Inventory started to build up and the store began to look bad with stock from different seasons and odd sizes and colors piled up.

I had 30-day credit with my suppliers but I had to place minimum order quantities. The rent had to be paid at the first of each month and the shop staff were paid every two weeks. I did not want to reduce the margins as this would affect my profits even though everyone else in the shopping area where offering 40-60% sale discounts.

I always planned to have 45 days of cash in the bank but with slow sales, suppliers’ payments, salaries and rent, I found myself caught short. I had piles of stock but less than a week’s worth of cash and I could not pay the next month’s rent. By the time I decided to cut my margins and liquidate my stock, it was too late. I had to borrow more money from my family just to stay afloat. It took me 10 weeks to recover and over 6 months to get my credit line back at the bank.  

Always know what's happening in your supply chain

I have an apparel company employing different local tailors. We were launching our next collection with a fashion show. The tailors said they would have all the clothes ready by the 1st of the month, in time for the fashion show. I was totally focused on the show and assumed all the suppliers would do what they promised.

A week before the show, I went to one of the tailors and learned that he had only completed 10% of his quota. I looked at the garments and there were serious quality issues. The zippers did not work. The sleeves were different lengths and there were not enough stitches per centimeter. I panicked.

I went to seem some other tailors and the situation was no better. They had let me down. They all said “but I didn’t hear from you or see you, so I didn’t think it was urgent,” or “someone else came in with an emergency job, so I stopped working on your order.