What turnover can my new store achieve?
What is our new store likely to sell? This should be the biggest question asked in selecting and opening a new business.
You are thinking of opening a new business so how do you estimate what your revenue is likely to be? Whether it is a large franchised brand, an ice cream or yoghurt store, a big box bulky good retail franchise or any other store business, the same basic questions need to be addressed.
How do you realistically estimate the sales dollars your new business will achieve?
In many cases, you are joining an established franchise chain, and the franchisor will offer to provide some information such as the demographics of the area, and maybe a listing of phone numbers of other franchisees for you to talk to. The final word from the franchisor is along the lines of “Do your own due diligence, as I cannot say what sales revenues you will generate”, (and you will probably be asked to sign a document confirming this).
Forecast profit and loss
In most businesses you think in terms of forecast profit, and you are relying on this to live, pay back your debts and secure your future. The simplest way (in my view) of looking at a forecast P&L is as follows:
Sales revenues (very hard to predict)
- Cost of goods sold (factor of sales revenue)
- Rent – fairly predictable cost
- Wages – fairly predictable cost (with some variable component)
- Other (power, phone, all fairly small)
While most of the costs are fairly predictable, and the cost of goods sold is a factor of the total revenue, the sales revenue is the most unpredictable factor in a simple forecast P & L.
If any of the other factors are out by a small percentage, there is a relatively small effect on the profit (up or down). If the sales revenue is out by a fair percentage, say up or down by 50 percent, then the effect on the bottom line is either fantastic or catastrophic.
So how do we do a good estimate of future sales? That’s the $64,000 question.
Research – the analogue approach
The simplest way to guesstimate sales is what I call the analogue approach. This means think of your future store or business, and look for similar stores or businesses in similar situations. Try and find out what their sales revenues are, and use that as the basis for forecasting your own. In a caf, consider asking how many kilos of coffee are used a week if talking actual dollars is a bit too sensitive.
If you are joining a franchise chain with a site in a food court of a shopping centre, and the franchisor has 10 other stores in similar situations find out how these outlets are performing. Shopping centres are normally measured with a few main factors:
- Gross leasable area retail (GLAR) – or how many square metres is the centre?
- Moving annual turnover (MAT) – total dollars transacted in a 12 month period.
- Seats in the food court
- Number of cinema screens
And then quite a few other factors.
This information is available from shopping centre directories which are available through the Property Council of Australia, and most large franchisors should have this information.
You might for example be going into a shopping centre of 60,000 sq m (GLAR), which has a MAT of $250M, 500 seats in the food court, and no theatre screens. Normally you will not find exactly the same analogue, but you can look for say two variables that are similar to the shopping centre you are considering, and I would suggest using GLAR and MAT.
In shopping centre terms, centres are grouped using the Property Council definitions by their GLAR as follows, and these are a good start to compare apples to apples:
- Super regional centres: 85,000 + sq m
- Major regional centres: 50,000 – 85,000 sq m
- Regional: 30,000 – 50,000 sq m
- Sub regional: 10,000 – 30,000 sq m
- Neighbourhood: < 10,000 sq m
If you are going into a regional shopping centre, don’t compare sales you would expect to those achieved in outlets in super regional centre.
If there is a network of stores, you can learn from their sales history. The franchisor should have store sales, and be able to bring together other information to explain why the good stores are top performers…. and why the poor stores are below par. In some cases it may be the franchisee, however in other cases, Superman could not run it at a profit!
More statistical methods
As a potential franchisee you may have reached your practical limit with the logic above. However the franchisor can provide more in-depth information.
Regression modelling is a proven statistical technique that looks at which individual factors contribute positively or negatively to a store’s performance. Once the strongest individual factors are identified, these can be combined by statistically trained people to create a prediction model.
As an example: in a coffee shop chain in shopping strips, the franchisor may have concluded from statistical modelling that the main positive and negative variables for sales are:
Number of households within 3 km radius is a positive.
Higher household income is a positive
- Size of the shop is a positive
- Number of seats inside is a positive
- Number of outside seats is a positive
- Number of retail shops in the strip is a positive
- Number of Coles or Woolworths supermarkets in the strip is positive
- Section in strip – busiest, middle, quietest section – rated (3,2,1) is positive
- More coffee shops in the shopping strip is a negative
If we only have a small number of stores to work with – say 15 stores in the network, we can really only create a check chart.
If there is a large network of more than 50 stores, we now may have a multiple regression model which may look something like:
Monthly Sales $ = 3.55 X number of households within 2 km
+ 1.28 X average household income within 3 km
+ 256 X sq m of store
+ 200 X number of seats inside
+ 150 X number of seats outside
+ 25 X number of shops in the strip
+ 2,567 X number of Coles and Woolworth outlets
+ 5,400 X rating of section of strip
– 3,233 X number of other coffee shops in the strip
[note this is an example only and not tested]
This will deliver a dollar prediction, and this is tested by looking at each individual store, and how closely the sales predictions are to the actual sales.
The closer they come to the diagonal line, the better the prediction model.
As a potential franchisee, it is comforting to know your franchisor uses some statistical process before it approves the site you are placing your capital in. While they may not be prepared to show you their internal workings and calculations, confidence in the process they use should help in making good decisions for both parties.
Your sales estimate is the number you will be building your business plans around, and the better the logic and the process that generates this, the higher the chances of your business meeting your expectations.
As a franchisee you cannot access all the resources your franchisor has, but you can use an analogue process to at least give yourself some logic in what sales revenues you should generate in your new business venture.
Having confidence in your franchisor that they have a proper site selection process is essential as it is your money that is being spent. If the site is a dud, it is your money that will be lost, and unless you are prepared to run a very costly legal battle with your franchisor, there is very little comeback.
Good luck with your new business.