Main street is disappearing. It’s dying a slow, painful death. The killer? There are probably hundreds of possible suspects. However, we don’t have to look any further than the numbers to see why the economics just don’t work in this economy anymore.
The Brick and Mortar Business Model
Let’s see what it takes to start and run a successful brick and mortar store on main street in BenGil. Let’s say I want to start an Iphone accessory store in Gillespie. Rent will cost me around $400 per month. Utilities would be another $200 per month. Phone and internet would add another $150 per month. Insurance would be around $100 per month. There are probably at least another 1-2 monthly expenses I’m missing so we’ll add another $150 per month for a grand total of $1000 monthly fixed costs. So if I make 50 cents on every dollar I sell, I’ll need to sell at least $2000 per month to break even. Remember, we haven’t included wages or even talked about profit. So if my average purchase is $50, I’ll need 40 sales per month to break –even, around 2 sales per day if I’m open 5 days per week. Easily manageable.
Let’s say I’m the sole owner and only employee. I’m not a greedy man, and I don’t have crazy ambitions so paying myself $2,000 per month ($24k per year) would suffice. Now I need to sell $6,000 worth of inventory per month. That means I need 120 sales per month, around 6 sales per day. Again, manageable.
6 months into my business, disaster strikes. Wal-Mart and amazon.com started selling the exact same Iphone accessories as me. Not only that, but they’re selling it at half my price. Just to compete, I had to drop my price, and now my gross margin is only 25%. So if I’m only making 25 cents on every dollar I sell, now I need to sell $4,000 worth of inventory per month to break even. If I still want to make $2,000 per month, I’ll need to sell $12,000 worth of inventory per month. That means I need 240 people to walk through my door each month and make a $50 purchase. That’s 12 customers per day. Yikes. Now we’re fighting for our survival.
Side note: For the average reseller, a 25% gross margin is still really good. Amazon.com, one of the largest resellers on the planet, has an average gross margin of 22.5%. At Ageless, our average gross margin on dietary supplements is 20%. The average gross margin on prescription medications is around 25%.
And this is exactly why it’s tough for the average reseller-type business to make it on main street in BenGil. The gross margins and/or volume can’t keep it afloat. So what can we do? What’s our plan for long-term growth?