These three real-life scenarios illustrate the pros and cons of adding retail locations.
1. Working it out
A couple invested in a then state-of-the-art greenhouse growing range. Although the facility was highly efficient, the mortgage was secured with other real estate and they had a high mortgage payment.
They sold their crop wholesale at the “going rate” which didn’t allow them to meet the mortgage expense. The next year they decided to sell their crop retail to capture the additional margin required to pay the mortgage. After several years of restructuring debt and investing more and more to adapt the facility to retail, they reached the potential of the “destination location.” But despite all their best efforts, they were stalled for several years.
One of the attempts to prop up the business was to operate four seasonal pop-up stores around the community. Unfortunately, the locations didn’t generate enough traffic to provide sufficient sales or profitability. After several years, the owner recognized that these pop-ups were cannibalizing his main store, so he closed them down for good.
He needed to restructure the operating and wage structure of the business and did so by leasing an additional location and buying the business with seller financing from a couple who were retiring but had no other exit strategy than to sell. Fortunately those sellers were unaware of the financial condition of their buyer — so sellers beware.
The new location continued to operate pretty much as-is, with the new owners supplying it from their production at the now main store. This business is now stable and profitable. The new owners are now aging out and are looking for a buyer for both stores.
2. New to the industry
Leaving another industry brought a buyer back to his hometown with enough equity to buy an ongoing garden center that was marginally profitable. This one had cash flow but wasn’t profitable enough to keep up with ongoing maintenance and replacement expenses.
Before this became apparent, the new owner was approached by the owner of a garden center in another nearby town who also wanted to retire.
He bought out a retiree with seller financing, and leased the property with an option to buy the real estate. The new owner recognized that the second business had been operated in a highly price promotional manner. He thought he could reposition it as a high value-add store like his first store. However, the new store’s market area had a much lower average household income. He was unable to satisfy enough of the existing customers or find enough new ones to replace those who were lost to box stores in the repositioning.
The second location has been permanently closed and the option to buy the property was allowed to expire. The owner is now focused on improving his main store.
3. Expanding with family
All four of the kids came back to the business for a mid-size retail grower. While this is a good thing, the consequence is that as the kids married and had kids. As their incomes rose, the business reached the maximum retail potential of its location.
A second location was leased from a landscape operation that had tried to open a retail location but failed to establish it well enough and had given up on the venture. This seemed like a good opportunity, but the main competitor at the second location had a strong hold on the local market. The new location was unable to provide enough sales volume to cover the expenses and it was closed permanently after the initial lease expired.