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27.12.16

The Ten Challenges and Problems of a New Retail Business

Tzah Berki, VP – Economics, Information and Research, Dan and Bradstreet

Small-retail-business-owners need a great deal of faith in order to succeed. They bring a good idea, a dream about financial success and independence, and hope that through hard work the business they founded would be able to thrive and provide a living for them and their families. Every new retail business faces challenges and obstacles on its way to financial success.

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Here are ten such challenges:

The first challenge is a lack of knowledge and experience in managing retail businesses – the best advice we can give to an entrepreneur who intends to build a retail business is to be very familiar with the market into which you enter and learn from the experience of others in the process. The business environment of the retail world changes frequently and unpredictably.  Changes in the business environment directly affect the business revenues, but the entrepreneur’s know-how and experience can mitigate the impact, or even prevent it, through the creation of competitive advantages and a loyal customer base.

After you’ve conducted your review and found out that your business can become what you imagined, it is time to handle the field challenges. Entrepreneurs who open small retail businesses usually rely on bootstrapping with a low equity, which is used for financing the initial investment. It is important to maintain a cash reserve in order to handle unexpected events during the first two years after opening the business.

The next challenge would be finance. A retail business normally operates on the basis of a positive cash flow from ongoing operations, since customers pay in cash/short-term credit while payments to suppliers are made with longer credit terms. The challenge of a new retail business is to receive credit from suppliers. Suppliers are not eager to provide credit terms, without collaterals, to new businesses, and therefore the entrepreneur would have to pay in cash at least during the initial period following the establishment of the business, until the supplier would start trusting the business’ resilience. It is important to convince the suppliers that the business is stable and its founder reliable, in order to open this necessary credit source – trade credit.

Another financing challenge is raising financial credit, for the purposes of bridging cash flow gaps, leasehold improvements and future expansion. Financial lenders steer clear of new retail businesses, due to their high level of risk, a lack of credit collaterals and low financial returns for the lender. It is recommended to raise financial credit from a bank, in relatively low sums, in spite of the high financial cost and the required guarantees, even just for building your borrower tenure.

An important and major commercial challenge is the entrepreneur’s bargaining power. The economic feasibility of investing in a retail business is materially affected by the gross margin of the transactions. Small businesses, and particularly new ones, usually lack bargaining power against suppliers, due to their low purchased quantities and their status as a new business. In order to receive better terms, you would need business knowledge, such as the cost of average purchased unit, customary credit periods in the industry, the commercial terms that are offered by several suppliers, and the financial situation of specific suppliers.

An equally important commercial challenge is cost-analysis and pricing of the products you sell. Quite a few new businesses choose an entry strategy of low consumer prices, in order to establish a loyal customer base, and raise their prices after a while. This strategy is not suitable for a new business for several reasons: first, it is possible that the profit margins would be low to negative and the business would be unable to meet its liabilities over time. Second, creating a customer base that is only loyal on the basis of low prices, without any value-adding in the buying process, would lead to losing this customer base, since it is only dependent on the price.

The business location is an important parameter during the establishment stage and the location decision would usually determine whether the business succeeds or fails. An entrepreneur should select the location of its business, in accordance with the characteristics of its target customers, the traffic of target customers in the business area and the cost of rent. An optimization of these factors would increase the feasibility of investing in a retail business.

Regulation is another prominent challenge that new retail businesses face, and it may be defined as one of the barriers of entry. The good news is that the regulator also provides entrepreneurs with agencies that assist and encourage businesses. It is recommended to receive support from such agencies.

One of the ways to mitigate the negative impact from the materialization of the risks that surround the business, is through improved access to information. Businesses might collapse, for example, as a result of a temporary closure of their access routes, or the construction of a nearby commercial center that would reduce buyers’ traffic, or the elimination of nearby parking spaces due to an expansion of a road. The more information on the business environment of our business that we have, the better we would be able to prepare for such events in advance. Sometimes such information would lead us to the conclusion that the business must be transferred to a new location in order to reduce the expected losses.

A new business can pass all of the aforementioned challenges with a profitability that would be dependent upon how well it handled the challenge. However, the most significant challenge is the creation of a loyal customer base. Such a customer base constitutes of a group of customers, who prefer to buy in our business rather than the competing business because of the shopping experience and the product quality and not just because of lower prices. A loyal customer base serves as an anchor to the business operations and is also likely to reduce a considerable part of the challenges we listed above.

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