Sometimes Smaller is Better
May 12, 2017
One of my first jobs in college was working for a sports apparel kiosk at Fashion Valley mall. It was an odd job for me because I’d never been a sports guy, nor did I play any sports when I was a kid. However, I did learn a lot about all the teams in different leagues and important players, so it was a good experience for me overall. I also happened to work at this kiosk during the time that the Chargers won the AFC championship, so needless to say it was a crazy experience.
It was a good time for the owner. He was experiencing significant growth and sales were good. Within a year or two he started opening other kiosks at other San Diego area malls. At one time he had about five different kiosks.
Business was good but with such rapid expansion came many problems. Now instead of two or three employees, he had 15 to 20 employees. Most of the time having more employees equals more problems. Doing payroll and hiring now became a project in itself.
With more stores the need for more inventory comes too. Spending a couple thousand dollars to buy hats, jerseys and helmets for one kiosk is somewhat doable for a small business owner. Now multiply inventory costs by five and it’s suddenly near impossible to manage the cost. Vendors will hesitate to grant so much credit on large orders and credit cards do not have such high spending limits.
Now you need to spend a lot more money just to stay in business. Daily sales will help pay for all the inventory, but stores are not like restaurants where you buy what you are going to sell in a week.
In an apparel store, some items sell and some don’t. So you need to factor that in and always have working capital to continue buying inventory and operating, especially during slow seasons.
Dealing with one landlord and their rules is one thing, but dealing with five is a project in itself because every mall has its own rules.
Also think about accounting for bank transactions, regulations, permits and more for five stores. Managing all of these things became a headache.
If that wasn’t enough, the owner decided to grow even more and move into a brick and mortar store in one of these malls. With brick and mortar stores come more problems: the lease is more complicated than with a kiosk so the negotiation is more labor intensive, you have to spend more money on a lawyer to review contracts, you must be Americans with Disability Act compliant, meet fire department regulations, deal with contractors and tenant improvements, city codes, and mall rules. On top of that, other permits and licenses are added to your to do list.
To make a long story short, rapid expansion was too much to manage and a little dip in sales killed all businesses. The owner filed for bankruptcy and ended up closing all of his stores.
Lesson learned, he grew too fast.
In retrospect, he should’ve stopped with his second store or a third and gotten used to managing those stores before moving forward.
I’m not against growth, in fact I’m always promoting it. But growth needs to be planned. No business owner should take rushed decisions. It’s important to take baby steps. Spend a few years learning your business operations, identifying business cycles, seasonality, growing your working capital reserve, knowing your clientele and building a brand before growing so much.
In my career, I’ve seen a lot of businesses grow too fast and suffer the consequences. Businesses should not be looked at as something where you’re going to become rich quickly. Businesses should be planned as a long term endeavor and growing should always be in the horizon but slowly because then you put what you’ve worked so hard for at risk.
The takeaway from this story is that taking baby steps is best on your road to business growth.