Thursday, July 10, 2008

When push comes to shove.

No wonder McMahan's was so uninspired when Linda and I were shopping there a couple of weeks ago: I should have recognized the signs. Another store that has been here in Bend longer than most who is giving up.

Why does this keep happening? Why is it the older businesses (Ernesto's; McMahans; Book Barn) who are quitting?

I was trying to explain this to someone yesterday, and came up with this: Let's say that you need a score of 50 out of 100 to stay viable. Let's say that you start at 100, but lose three points (ageing, wear and tear, motivation, etc.) for every year in business. Let's say you're hovering around 60 points, still viable if not exciting, and along comes a recession; or major competition; or any other complication that is inevitable. Suddenly you drop 10 or 15 points.

Your new competitor may have dropped to 85, or so, but still seems viable.

Anybody buy that explanation?

Something like that happens; newer businesses may not be any more viable in the long run, they just haven't got to the crunch point yet.

I also use the expression, friends comes and go, but enemies accumulate; or the variation of that, customers come and go, but mistakes accumulate. Ignorance is bliss, if you will. But if you've been through the mill a few times and you know what's coming and you have some may decide closing is the prudent option.

I've never really believed the dire statistics for start ups. I tend to believe that just about anyone, doesn't matter how misguided or under capitalized or badly run, can last 2 years and most can last 5 years.

But past that, it can become hard to make the changes necessary, to stay motivated, to revitalize your business. I'm pretty proud of the fact that not only has my business survived 24.5 years, but that I am currently thriving. But I was dancing pretty close to the cliff there a few times, and I'm never so far away from the edge that a giant wind couldn't push me over....Running a store is just too competitive to ever believe your cushion is very big.

Knock wood.

It turned out that it required a ridiculous amount of product lines and effort; or staying put in the same location as it turned viable around me; or weathering some big downturns and gaining experience; and probably most importantly, finding a product (comic books) that the big chain stores just hasn't figured out how to do -- yet.

Admittedly, not the most lucrative of businesses. But I think it was probably the best thing I could've done.

And I still think we're way over retailed in this town; we'll see a lot more old timer businesses deciding they've had enough.


eyepublius said...

"Why is it the older businesses (Ernesto's; McMahans; Book Barn)"

Could be that Ernesto's was just not a very good restaurant and McMahan's is just not a very good furniture store. They did okay when they didn't have much competition, but that era is over. As for Book Barn, it was a nice little shop but it couldn't offer the selection of a Barnes & Noble. As soon as B&N arrived it was doomed; I'm surprised it hung on as long as it did.

Duncan McGeary said...

Harsh assessments. But even then, I would argue that they didn't start that way, but that entropy and wear and tear and just age caught up to them.

Using the same 50 points viable, start at 100 example; I think that for every point you drop, you have to work three times harder to gain it back. Three times smarter, or luckier.

Left doing the same things, at the profits allowed, most stores will go downhill.

Profits allowed. It's easier to stay in business when you're new. You don't have all the mistakes product orders, the fixtures are all new, you have high energy and hopes.

Anyone can make enough money to stay in business, I think, given a bit of hard work and brains.

But making enough money to constantly reinvest -- or willing to make that constant reinvestment, that's very different.

You make 10k extra profits; do you buy an SUV for yourself and your growing family, or do you set it aside for the new carpet you're going to need in another couple years?

I'm just saying that all these shiny new businesses aren't any smarter at the start than the old businesses were. They just haven't been through the mill yet. There is more to making enough profit than is in the bank statements.

I'd even argue that this world is moving so fast that you almost have to EXPECT to spend MOST of your profits on changes that are inevitable.

Duncan McGeary said...

I read somewhere that it takes an average of ten years to make the kind of profits I'm talking about -- and I'll buy into that timeline, if you have no setbacks.

Except I don't know anyone who starts a business who doesn't have setbacks.

It took more than 20 years for me; and even then, it's relative to my own past. I say thriving, because I know where I've been. Someone else might see the same figures and use the word 'precarious.'

But that's the nature of the beast. Business is so competitive, that you can never try to take it easy or without risk.

If you do, someone will come along and work harder and take more risk.

So you are obligated to dance on the edge of the cliff, flailing your arms to keep the competition away.

That's why I look skeptically upon the mass market.

I've called them ponzi schemes. I think all they're doing is -- at that moment of crunch, where we see if their established businesses are actually doing well, they punt the ball. They borrow money and open a new store and then another.

Doesn't matter to them that the first stores might not ever really get over the viability hump. Close them and open another store!

They're churning capital. I recognize it, because I did it in a small way with my four stores.

Meanwhile, management can keep the balls in the air for years, scooping up bonuses, while the ACTUAL BUSINESS OF BUYING AND SELLING PRODUCT is completely secondary.

Then when they hit the end of the road, they suddenly find religion again. Starbucks is going to rededicate themselves to coffee.

Too late. Their focus has been on new stores for a generation, now.

They're probably screwed.

Duncan McGeary said...

So what about existing store sales, which appear to be going up?

Easy, you either close the lowest performing stores or renovate them completely.

For example, you open a Walmart in Redmond, costing, I assume millions of dollars. Assuming it's a profitable business, you pay your employees and management, and you pay dividends.

Then a few years later, you up the ante -- you build a super store and drop the smaller store.

Did the smaller store ever pay for itself in full? Who knows? Who cares? Sales are higher!

Here's where RDC probably comes along and tells me I'm not sophisticated enough to understand high finance.

But I extrapolate from small to large, and that usually seems to be valid, and to just doesn't pass the smell test.

RDC said...

As far as the store goes it depends:

1. How did it do on cahs flow

2. Did the cash flow cover depreciation.

3. Will the sales from the new store cover the depreciation remaining on the old store and the depreciation on the capital investment from the new store.

The reason the national chains do well is because of inventory turns.
I suspect that your store might turn 2-3, maybe four times a year.

A store like Walmart would fail at 12 and aims for much better. As such it has pretty good return on invested capital.

This was the entire concept which built Walmart. Actually 3 (inventory turns, acquisition price, smaller market penetration), but of those inventory turns is the most important.

RDC said...

One other note.

K-Mart combination with sears was really a real estate play, not a retail play.

Starbucks is more of the standard problem of what happens when a growth company matures. Many companies will fail if they are not able to change with their own status. They have reached a point where it is difficult to grow same store sales and the activities they have tried have made them less attractive to some of their exiting customer base, coupled with many others copying their model. Also I think that some of their real problems came from some of their acquisitions of other coffee chains (Seattle Best comes to mind).

Starbucks also had a substantial real estate component, but far less then Sears holding.

eyepublius said...

"I'm just saying that all these shiny new businesses aren't any smarter at the start than the old businesses were."

Oh hell yes. Dumber, in many cases. The fact that Ernesto's, McMahan's and the Book Barn survived as long as they did proves they were doing something right.

"Starbucks is more of the standard problem of what happens when a growth company matures."

Yep. An example of what happens to a business when growth is driven by the desire for higher stock prices rather than by market demand.

Anonymous said...

"Let's say that you need a score of 50 out of 100 to stay viable. Let's say that you start at 100, but lose three points (ageing, wear and tear, motivation, etc.) for every year in business."

Nice illustration. Your example would seem to work for any business closely identified with a particular personality.

So if "Pegasus Books" is to survive to the year 2050 and beyond, you're going to have to find another model -- turn it into a faceless organization managed by a CEO and board of directors, driven by growth and profits.