You have successfully navigated the stormy waters of a relocation/expansion project. Your co-op has proudly opened the new store amidst celebration, praise, relief, adrenaline and exhaustion.
At this common juncture, I have had the privilege of being able to offer a number of co-ops a bit of needed but unwelcome advice: Now the real work begins.
Easy to say — but how does a co-op manager best proceed to meet the challenges of the first year in a new store?
Given the increasing size of co-op expansion projects, we are seeing greater complexity in operational challenges and increased risk and vulnerability.
Let’s make a distinction between putting out fires and building systems. You will need to do both as you open a new store. The key is to focus an increasing amount of the co-op’s energy on building systems. While it is assumed that you will have upgraded a lot of your systems in preparation for expansion, there is the need to continue and accelerate that process once you are actually in your new store. Your resources should be shifting quickly towards training, problem solving, preventative action, and systems building.
As a manager, it can be helpful if you maintain a logbook of the fires that you put out. Begin to be aware of the “energy drains” that consume and deplete you and your staff. On a daily basis, briefly note these energy drains. At the end of the week or the month, look over your list and analyze the patterns. In your logbook you might also note the response, response time, and corrective action you took or wished you had taken. Notice the energy drains that are repetitive. How effective is your corrective action? Keep working this approach systematically.
A common pitfall that ensnares many expanding co-ops is the inability to produce timely and accurate financial reports to all levels of management. An upgraded accounting department, including management information systems and tools for monitoring cash flow, are essential if you want to stand a chance of success in your new store.
Co-ops that had previously produced their weekly data at week’s end and monthly financial data within two weeks from month’s end find that it takes them 2 or 3 times longer to produce the equivalent data in their new stores. By the time the data is available for monitoring, it could be too late to take effective corrective action. And usually the accuracy of the numbers will be questionable the first few times through. So you might need to wait until next month or next quarter. The hole is beginning to be dug. And it gets deep very quickly.
Focus on building internal systems that will make a strong presentation and provide excellent service levels before you add the priority of attracting new customers
Setting priorities is an ongoing priority! With two years of work to do in the next two weeks, what is most important for the short-term and for the long-term? As a basic guideline, simplified priorities for marketing and operations in a new store.
1. Marketing from the inside. Before you can market effectively to the outside, your in-store presentation and service level need to be functioning at a high level. Focus on strengthening your in-store merchandising, including signage. Achieve high standards and consistent improvements with your customer service. If these aren’t in place it is hard to justify external advertising.
2. Marketing to the outside. Well in advance of marketing to the outside, you should develop a marketing and promotions plan. A good time for an official grand opening (as distinguished from your store opening) is up to two or three months after your “soft” store opening. It can be a big mistake to begin external marketing (print and audio/video advertising) before you are sure the new cash registers and freezers won’t crash on you. The last thing you want to do is attract potential customers into the store just as you are experiencing a crisis or before you are consistently presentable.
These marketing priorities allow you to put the focus on building internal systems that will make a strong presentation and provide excellent service levels before you add the priority of attracting new customers (who might show up only to be disappointed). Marketing from the inside puts the focus on satisfying your current customers first; then “word of mouth” will be a positive force rather than negative advertising for you.
Priorities for Store Operations
The following broad priorities can serve to guide you and your staff in the first year of a new store.
1. Sales: Building sales to at least your projected sales level is your first priority. Customer service training for the staff and effective merchandising will assist with this, as will a talented team of department managers who can build their departments through inventory and category management.
2. Gross Margin: Once you have established the necessary sales level, your focus shifts to building the projected gross margin (while maintaining your sales level).
3. Labor: Once you have established your projected gross margin level, your focus shifts to containing labor costs as a percentage of sales and reaching productivity goals (sales/labor hour) while maintaining sales and gross margin.
These points may not apply to every situation, but they will apply to most. Following these priorities, for example, does not give you license to ignore gross margin and labor costs while you are building sales. In following these priorities, you begin to develop the capacity to integrate a multiple focus.
Focusing on your priorities will consume a great deal of time and money. Many co-ops ruefully report that their budget for the first year was not sufficient to allow adequate time to build sales, build gross margin, and manage labor costs without jeopardizing store presentation. You don’t want to have to cut back on inventory and customer service to reduce costs three months after you have opened.
Initial operating losses (on a cash flow basis) should be projected to be at least 3% of sales (for a best case scenario). Be prepared for this type of loss, but don’t view it as an allowance.
Do all you can to minimize that loss without jeopardizing your store presentation and service levels. Make sure you have the working capital in place to cover these initial operating losses. It is possible to be profitable in the first year in a new store, but that is the rare exception. In a number of instances where co-ops have expanded rapidly without building up their internal capacity, operating losses have far exceeded 3% in the first year.
In addition to having a prioritizing process in place, it is important that you be operating against the basic backdrop of a written plan for your first year. Whether in the form of a business plan, a marketing plan, or simply an outline of key goals, you will have a roadmap along with your budget to guide you and help you monitor actual performance. Remember, the plan is not carved in stone. You need to be flexible in order to respond to changing market conditions, opportunities and threats. Having a plan as a foundation allows you to modify it as necessary rather than simply going into panic mode. Keep your plan simple and straightforward so that it can be easily summarized and communicated.
In addition to effective prioritizing and working from a plan, other guidelines for first year operations include:
Build on small successes. This reinforces confidence, morale, and teamwork. Don’t tackle the unachievable first.
Minimize unpleasant surprises. As with the “energy drains” discussed earlier, keep a chart of unpleasant surprises over a one to three month period. What is it telling you?
Develop your management team. As your co-op grows, it becomes imperative that the management function broadens and deepens. Write a one-year calendar and development plan for your team.
Have fun, celebrate and give praise. The first year in a new store can be extremely stressful. The board of directors and the general manager do a lot to set the tone for a rewarding workplace that includes fun and meaningful work. Reinforce and give praise to those who do a great job and contribute to positive morale.
Turning the corner to profitability
Your efforts in the first year are ultimately geared towards reaching the level of profitability that you are aiming for. As you begin to reach your sales goals, then effectively manage your gross margin, and then control labor costs — you are inching your way towards profitability. At a certain juncture you might not be able to see how you are ever going to get there. You will be looking for the one magic answer. Usually there isn’t one. It is a combination of incremental improvements, effective systems, and realized best practices. You will become aware of each tenth of a percent.
As you chart your way along this course, you will need to develop your own support team, including people from outside your organization. There is a network of support available through other food co-ops and the food co-op system. You will often need to hire timely and appropriate professional assistance to help you problem solve and make improvements.
Typically a budget for a co-op in the first year has minimal resources allocated for professional consulting assistance. When performance is worse than budgeted, there are even less resources available. And the hole grows deeper by the day. Thus the importance of prioritizing and having a plan reappears. Include an allocation for professional assistance in your first year budget, then triple the amount as a hedge. Use it wisely and in a timely way.
The race to profitability is not a 100-yard dash. It is more like a marathon or two. You should be prepared to lose money in the first year, at least break even in the second year, and have at least 1% net profit in the third year. You may be able to progress faster than this without jeopardizing your store presentation and service level. There are instances where co-ops have been profitable in their first year in a new store.
Do not view this timeline of initial losses and eventual profitability as a continuing excuse for inefficient systems and poor service. Rather, it is intended to help establish realistic expectations that have the potential to be exceeded.
Now the real work begins. Have fun.
Have more questions?
Get in touch with one of our consultants.