A good example of why retailers/restaurants fail: poorly articulated business plan

Flickr photo by R D L.

If you ever take the Main Street Approach "four points" training on commercial district revitalization, one of the first things you learn in the session on "Economic Restructuring" is about what I call the  rent metric.

Typically, retailers should pay no more than 4% to 10% of their gross revenue in rent; although restaurants pay up to 15%, because they tend to be higher volume.  If you pay more money than that in rent, the probability of success drops precipitously.

I've written about this quite a bit, including in:

- "Retail and restaurant check up surveys
- "Cleveland Park Retail, my off-hand assessment is that the rents are too high"
- "Commercial retail rents #2"

The last entry gets into more detail about the economics of a retail establishment.

And I can't find the blog entry I wrote in response to this 2005 piece from Slate Magazine, "My coffeehouse nightmare," where the author writes:

There is a golden rule, long cherished by restaurateurs, for determining whether a business is viable. Rent should take up no more than 25 percent of your revenue, another 25 percent should go toward payroll, and 35 percent should go toward the product. The remaining 15 percent is what you take home. There's an even more elegant version of that rule: Make your rent in four days to be profitable, a week to break even. If you haven't hit the latter mark in a month, close.

I was flabbergasted. No wonder his business failed (although he had another big issue, that of "market development" because they sold an atypical product, which required a lot of "sales support" which is time consuming and costly). By paying 15 "extra" points in rent, the business was preordained to fail.

So the City Paper has a piece, "Closing Time: On Its Last Day, Yola Opens," on the failure of a yogurt-coffee shop Yola in Dupont Circle.  The rent was $10,000/month.  Based on the rent metric they should have been grossing at least $1.2 million/year, with a rent payment of $120,000/year.

Instead they were grossing less than $600,000, as their best revenue month was $50,000, not to mention that from October to April, most people don't buy frozen treats, with therefore even lower revenue in those months.

Just goes to show that if you don't know what you're doing, you're likely to fail.

Surprisingly, the proprietor's business partner, her father, works for a real estate development firm.  So just because you work in commercial real estate doesn't mean you know the ins and outs of successful retailing.

Lack of knowledge is a frequent problem with independent retailers.

And they are independent for a reason, they don't want to hear about what they should do from other people, they want to do it themselves.

When I was involved in Main Street commercial district revitalization efforts, one of the things I thought would be worth trying to "require" from a regulatory standpoint would be a business plan review with the local commercial district revitalization organization (such as a business association, Main Street organization, chamber of commerce, or business improvement district) before a "certificate of occupancy" could be granted for a new business to open.

It would be consultative only.  But it would be an important opportunity for "intervention." And in shopping malls and other commercial properties, this kind of involvement by the property owner and representatives is typical.

Most businesses, as long as they meet the use requirements of zoning regulations, don't require any kind of meeting or evaluation before they open.

But the failure of retailers, especially independents, who put real money, their own, on the line and risk it all, has negative impact on the perceptions of commercial districts.

Most people blame the district for the failure of individual businesses, fueling perceptions that the business district isn't successful or a desirable place to do business, even though more often failure is the fault of the proprietor.  Needing to manage perceptions and reduce business failure justifies having some type of "public involvement" at earlier stages in the business formation process.

Somehow, we need to reach them earlier, when they are developing their concept and business plan (hopefully they have one), not after they open, and especially not when they are on the verge of failure, when it is almost certain to be too late to help them.  (Also see "Why ask why? Because.")

Anyway, while I think it's unfortunate that Yola failed, I am sadder still that they spent all that money not knowing what they were doing, and because they didn't seek out professional assistance before they made the financial, time, and personal commitment to a project that was almost certain to fail, they destroyed their investment.