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How to Start a Retail Business

Owning your own store is a dream shared by many. Be one of the few that makes it come true with help from this thorough guide.
How to Start a Retail Business

Editor's note: This article was excerpted from our Retail Business start-up guide, available from SmallBizBooks.com.

The retail industry provides an exciting way of life for the more than 24 million people who earn their livelihood in this sector of the U.S. economy. Retailers provide the goods and services that you and I need--from food, auto parts, apparel, home furnishings, appliances and electronics to advice, home improvement and skilled labor.

Retailing is one of the fastest-growing segments of the economy. As one of the nation's largest employers, the retail industry provides excellent business opportunities for you. At least one-third of the 500,000 or so new enterprises launched each year are retail operations. The entrepreneurs behind these ventures risk their capital, invest their time and make a living by offering consumers something they need or want.

Most retailing involves buying merchandise or a service from a manufacturer, wholesaler, agent, importer or other retailer and selling it to consumers for their personal use. The price charged for the goods or services covers the retailer's expenses and includes a profit. Each year, this vital sector of our economy accounts for about 38 percent of our gross national product--more than $3 trillion.

The National Retail Federation says more than 1 million retailing companies operate more than 1.4 million retail establishments in the United States. Most are store retailers, though there are other types of enterprises--such as e-commerce, mail order, automatic-merchandising (vending) machines, direct retailing (door-to-door and home party sales), and service providers.

Types of Retailers

 

To give you an overview of the competitive marketplace, we'll take a look at the various faces and configurations of selling to the consumer. Keep in mind that all these enterprises began as a simple concept and grew to various proportions through popularity and perseverance. At this point in your exploration, anything is possible for you, too.

  • Store retailing. The retail scene in America is a dazzling array of independent shops, department stores, discount and off-price enterprises, convenience stores, membership warehouse clubs, national and regional chains, category-killer stores, conventional supermarkets, and other large-scale enterprises that seem to dominate the retail sector.

Store retailers operate fixed point-of-sale locations designed to attract a high volume of walk-in customers. In general, stores have extensive merchandise displays and use mass-media advertising to attract customers. They typically sell merchandise to the general public for personal or household consumption, but some also serve business and institutional clients. These include establishments such as office supply stores, computer and software stores, building materials dealers, and plumbing and electrical supply stores.

  • Specialty retailing. While power retailers like Wal-Mart or Target tend to sell "needs," specialty retailers tend to sell "wants." They focus more on neighborhood convenience, the richness of the shopping experience, and inventory that meets the needs of their target customer on a personalized basis. Small stores show surprising strength and resilience in the face of competition from large-scale retailers and e-commerce outlets. They offer the consumer a warmer atmosphere, and perhaps a broader and deeper selection of merchandise.

Many stores can be owned and operated by one person with minimal assistance. Compared to manufacturing operations, specialty retail outfits are relatively easy to start both financially and operationally. However, a number of failures are due to undercapitalization, poor location and insufficient market analysis.

  • Nonstore retailing. When you look at the array of business opportunities in retailing, be sure and include the $123 billion nonstore retailing sector. These businesses are primarily engaged in the retail sale of products through television, electronic shopping, paper and electronic catalogs, door-to-door solicitation, in-home demonstration, portable stalls, vending machines, and mail order. With the exception of vending, these businesses do not ordinarily maintain stock for sale on the premises.

There are many advantages to this type of retailing--one being that buying, maintenance and protection of a large inventory is not necessary as you contract with others to handle these matters. The U.S. Census Bureau says there are more than 44,000 non-store retailers in the United States.

  • Mail order. From glossy wish books to basic brochures, catalogs are popular with those who live far from shopping areas, the elderly, those seeking the unusual or obscure, and those who simply hate to shop. With direct mail, sales materials can be sent to thousands of potential customers at one time to either make a sale or generate a sales lead.

Mail order enterprises include general merchandise businesses, companies that sell specialty goods of all kinds, novelty firms, various types of clubs (CDs, DVDs, books) and so on. In most cases, catalogs are sent to consumers in defined niches on a regular basis. You can work out of your home, a warehouse or a brick-and-mortar store. An up-to-date mailing list is the key to direct-mail profits with back-end fulfillment and relational database support. If you think this is the retail area for you, read our extensive how-to on mail order for more information.

  • The internet. The internet has changed the retail landscape, connecting companies, markets and individual consumers. "The retailer who does not understand the impact of the internet on its store and catalog channels is likely to under invest in the Internet, missing opportunities to capture incremental sales in all channels," according to Ken Cassar, a senior analyst with Jupiter Communications.

Regardless of the type of retail business you want to start, you cannot ignore the Internet. Don't let it discourage you, either. Each type of retailing has strengths and weaknesses, so you decide which approaches you want to use in your business.

  • Vending machines. Automatic merchandising--or vending machine retailing--has been a proven business concept for more than a century. Vending Times, the industry's trade magazine, reports that snacks and soda sales alone totaled more than $20 billion in 1999. As with any other sales venture, having the right product in the right place at the right time is key. This business is highly appealing because of the low startup cost, low working capital and low overhead. This is a cash business, with you collecting the money when you replenish supplies.
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