Choose Your Path

Ready to start a retail business? Don't get stuck at the fork in the road--we've mapped out 3 different retail paths so you can choose the one that's right for you.

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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.

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This article was originally published in the March 2005 print edition of Entrepreneur with the headline: Choose Your Path.

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