From the March 2005 issue of Entrepreneur

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The world of retail is everywhere you look. It's the coffee-cart kiosk you pass on your way to the office in the morning; it's the brick-and-mortar shoe store you hit during the lunch hour; and it's the online emporium where you order discount stereo equipment in the evening. As a nation of consumers, we spent $3.8 trillion at retail establishments in 2003, according to statistics from the National Retail Federation in Washington, DC. Trying to get your head around that number is tough--but trying to get a piece of that gargantuan pie? Now, that's doable.

The word retail encompasses many different types of stores and ways to sell goods, so we decided to break it down for you. We've compared three different kinds of retail startups: brick-and-mortar stores, kiosks and online stores. We talked to successful entrepreneurs in each category to get their secrets and interviewed experts to help you decipher which outlet is best for you. What are the pros and cons of each? How is each concept different? How do you decide? You've got questions, and we've got answers.

Feeling It Out

The first step, say experts, is to settle on what customer base you're going after, and determine where they tend to buy the product you're interested in selling and how they want to interact with that product. For example, "If you have a product reliant on customer traffic, and that's how your customer gets to the product, and there's a need for [good] customer service in the form of returns and complaints, you're going to want a brick-and-mortar store," says retail expert Gregory Fairchild, assistant professor of business administration at the Darden Graduate School of Business Administration at the University of Virginia in Charlottesville.

Some product categories lend themselves particularly well to the brick-and-mortar retail environment. People want to look at, touch and try on clothing--and they want to see and smell gourmet food items. "Brick-and-mortar businesses will have strong emotional ties--[these] establishments will have an ambience," Fairchild says.

Ambience is one of the first words that comes to mind when describing Sway & Cake , a trendy women's boutique in Seattle that's the place to be for fashion-conscious females in the Northwest. Tamara Donaghy-Bates founded the store in 2002 with $35,000 in startup capital: "I purchased over $100,000 worth of goods for the [first] three months--and [I thought] it better start selling."

Start selling it did, much to the delight of this former New York City fashion stylist. She had quite the eye for the decadent and fun ensembles and accessories that were so easy to find on the East Coast--and a bit scarce in her new neighborhood. As a young, professional, fashion-forward woman, she fit her target demographic exactly--which allowed Donaghy-Bates, 32, to trust her instincts when it came to choosing her merchandise mix. "I just buy what I like, and that works," she says. And because she worked at the store seven days a week for the first seven months, she got to know her customers well and was able to tailor her inventory to the precise tastes and styles of her clientele.

Finding the right merchandising mix is a challenge for any retail establishment, but it's especially crucial for the brick-and-mortar variety. "One needs to be very aware of the merchandise mix on a day-to-day, hour-to-hour basis," says Fairchild, "because you're trying to offset this high fixed cost you have [for the inventory]." Check out the National Retail Federation 's website for industry information, statistics and trade show listings.

A brick-and-mortar store is historically the most expensive type of retail business to start, due to inventory and labor costs, as well as potentially high leasing costs. To bring the startup costs down, you can try setting up shop in a location that's less in demand. But beware--if you open in a not-so-hot locale, you're going to have to go double-time with marketing and promotions. Create a destination store, suggests Rick Segel, author of The Retail Business Kit for Dummies , with events and special offerings to lure customers your way. Whether it's a jazz concert at a bookstore or a fashion show at a clothing store, be creative.

The worst thing any retailer can do--even those in high-traffic locations--is to expect that the customers will just come. You'll have to be proactive about it, but Segel notes that diligent promoters can make less pricey locales work. "Every store is a destination store," he says. "So location is not as important as some people feel. I can mention 10 stores in the middle of nowhere that people go to." Donaghy-Bates, whose customers didn't have to go to the middle of nowhere, had such a strong bottom line that she was able to open a second store in Seattle called TBC (which stands for To Be Continued), where she sells last season's clothes at discount prices. Initially she feared the two stores would split her customer base, but they only made it grow. Her ingenuity has helped push her combined sales to more than $1 million in 2004.

Cart-ography

If you like the idea of a brick-and-mortar store, but prefer a more fluid and affordable option, a kiosk might be right for you.

These carts are often found in the middle walkways of malls and shopping centers, as well as at carnivals, sporting events and even in office building lobbies. They sell everything from candles and cosmetics to jewelry and cell phone accessories. A kiosk business can be started for a great deal less than a brick-and-mortar store (most start at $3,000 and up), and the lease terms are generally shorter. Products that work well in a kiosk environment tend to be a bit more trendy and whimsical, says Fairchild. Kiosks are also heavily seasonal--you'll see lots of them during the holidays.

Still, don't be fooled by the fun exterior--it's going to be a challenge. If you decide to run the kiosk yourself, expect to work very long hours--as long as the mall is open, which can mean more than 12 to 14 hours a day during the holidays. If you plan to hire workers, set aside time to train them before you open the kiosk. And while the risk is smaller, the profits are smaller, too--experts note that a high-performing kiosk can bring in around $200,000 in annual sales (though your actual sales will vary greatly based on your products and location). Still, says Segel, this can be a great start for beginning retailers. "Most of the major malls have programs to make sure [kiosks] succeed," he says. Check out Specialty Retail Reportfor more industry information.

AJ and Meena Chad combined a great location with an appealing line of products to make their Spa At Homekiosk successful. Selling a line of specialty gel candles, bath products, specialty soaps and home décor, this husband-and-wife team opened their first cart in Tallahassee, Florida, in 1998. They initially procured their personal care products from an outside manufacturer, but because they didn't make huge orders, the supplier didn't want to work with them anymore. That's when Meena, 31, a chemist by trade, took matters into her own hands, and the pair started manufacturing their own products out of a local warehouse.

In 1999, their success inspired them to add another location. They also began wholesaling their products and now offer Spa At Home as a business opportunity to other entrepreneurs. Their two company-owned carts have brought in sales well into the six figures, and the Chads have sold 70 kiosks to other owner-operators.

Because the Chads have been in the business so long, they're able to give advice to kiosk novices. "One mistake people make [is that] they'll spend money on the rent and they won't research the market," says AJ, 34. Research will help people realize that Miami in July isn't the best time or place for a candle cart. Not having enough money on hand to get you through at least six months of rent is another mistake. "If you think you'll pay one month's rent and the next will come from sales . . . well, that's a fifty-fifty or less chance," says AJ. Have the rent funds on hand so you can worry about your cart presentation and gaining customer loyalty.

Nothing But Net

While a kiosk offers face-to-face interaction with customers, an online retail store suits entrepreneurs who are more comfortable with the technological side of things. Experts note that an online store works well for selling products that customers are already familiar with--stereo equipment, computer equipment, cameras--items you don't necessarily have to touch to know what you're getting. Still, it seems online stores exist to sell just about everything--it's just a matter of finding your audience on the web.

An online store can be inexpensive, or it can cost thousands for a professionally designed website. One benefit of starting online is that it can be done part time and at any hour of the day or night. The downside? It can be difficult to get the word out about your site. Segel notes that your placement on search engines is key to getting hits. Check out The Complete E-Commerce Book: Design, Build & Maintain a Successful Web-based Businessby Janice Reynolds or Success With Online Retailing: For Small Businessesby Patrick Tan for more information on e-commerce. For even more resources, check out Entrepreneur's E-Biz section.

Still, if you've got the technology down and you have the right product, an online store can be a huge success. KooKooBearKids.com, an online children's room decor and gift emporium, is just such a story. Founded in 2002 by husband-and-wife team Joe and Tara Mediate, 45 and 38, respectively, along with Tara's sister, Trace Walsh, 44, the e-commerce site used the combined talents of all three. Joe, a former software entrepreneur, brought his technological and operational expertise to the table, while Tara brought her retail background, and Walsh brought her knowledge of catalog retailing.

Working from their Roswell, Georgia, locale, the trio decided they didn't want to drop-ship inventory--they wanted to be different from other online startups and keep stock on hand so they could offer customers quick-turnaround shipping. They also made a strategic decision to print a catalog to complement their online sales--something that especially endeared them to their target demographic, which then spread the buzz to others via word-of-mouth. In fact, says Joe, "Seventy percent of our leads come from somebody's friend of a friend." The KooKooBearKids.com team has built its niche by offering unique, personalized gifts, and has built yearly sales to about $3 million.

What all these entrepreneurs have proved is that with determination, passion, a kick-ass product and a whole lot of chutzpah, retailing can be just the startup path for you. Be it peddling from a kiosk, hanging a shingle in front of your brick-and-mortar store or selling to the world from the comfort of your own desktop, you can be a retail giant--even if you start small.

Get Your Feet Wet

If you're not quite ready to jump into a kiosk or a brick-and-mortar business, and you're not sure about the e-commerce thing, you can still dip your toe into the retail pond. You might start by selling your product on online retail or auction sites like Amazon.com, eBay and Yahoo! Auctions to get a feel for what retail customers are looking for. There are myriad resources to help you get started, and every good site has tons of information for beginning sellers. Retail expert Gregory Fairchild also notes that home parties, trunk shows, craft fairs and flea markets are a great way to get started. "They're great for learning, and in certain businesses, you may not need to go further," he says. "In fact, those distribution [channels] might be the best place to reach consumers [with your particular product]."

Home shows, for instance, work well for products with a social component--like cosmetics or purses. Be ready, though. "If you're thinking about trunk shows . . . you'll have to be a bit of a showman," Fairchild says. "You need to be good at pulling people into discussions and have a good sense of humor. There needs to be a sense of showmanship and flair."

Before deciding which avenue is best for you, Fairchild suggests you answer these questions: Do you fit with the environment you're going into? Will you enjoy interacting with people from behind your table at a flea market? Do you feel comfortable going into people's homes to sell at parties in front of their families and friends? It's as much about your personality as it is about how much consumers like your product.

To Grow or Not to Grow

You're steaming along in your retail business. You've got regular customers, and you're starting to see some success. Do you see a chain on the horizon? Or are you envisioning a world where your company is proudly listed in Entrepreneur's Franchise 500®?

Before you lease that 25,000-square-foot retail space, heed retail expert Rick Segel's advice. "Profitability, profitability, profitability. Each store has to be profitable," he says. "[Many businesses] expand for all the wrong reasons. You expand because you've got a great idea that can be duplicated." If, for example, your retail business is consistently showing 5 percent net profits and you can clone that, then go ahead and expand, he says.

Also be sure to ask yourself if you are vital to making the company a success, says retail expert Gregory Fairchild. You can't be present in 10 stores like you are in your one store. And especially in a franchise system, you've got to sell other entrepreneurs a program that works. "To what degree is the current working business model contingent on a few things?" he notes. "Even if they're working in your market, are you sure that purchasing patterns, habits [and] desires will be the same in other areas? There has to be a careful analysis."