How to Calculate the ROI of Going Brick-and-Mortar
Opening a physical store requires an upfront investment, but for many businesses it’s a decision that will reap future rewards. That said, it's wise to weigh the costs of going brick-and-mortar against the opportunities it could unlock for your business before taking the leap.
Talking with a Realtor®, a member of the National Association of Realtors®, is an essential first step. A Realtor® can be your biggest advocate for making this decision given their extensive knowledge of the market and process of purchasing or leasing a commercial space.
Calculating the return on investment (ROI) of setting up shop is another important step every retailer must take before deciding to open a store. "Your rent, what your escalation costs are going to be, your inventory costs, your employees—all of this needs to be placed in your business plan," says real estate professional Beth Cristina, commercial committee vice chair for the National Association of Realtors®.
Here are key jumping-off points to help you determine whether opening a physical store is the right choice for your business.
Know your rent-to-sales ratio.
Determining your store's rent-to-sales ratio is a crucial step to understanding how much money you’re moving in your business. This figure will tell you how much of your profits are going to rent and what you have left over in the end.
To calculate a potential store's rent-to-sales ratio, divide your total annual rent costs by your estimated yearly sales. You want to keep that ratio as low as possible. Retailers should stay between the 2 percent to 20 percent ratio here, with the goal of not exceeding more than 5 percent to 10 percent in annual sales on rent.
Be meticulous about startup costs.
Chances are you'll be moving into a fairly basic space that will need upgrades and new fixtures to transform it into your ideal retail store. Make sure you've considered tthose investments when determining your startup costs.
Start by listing these expenses as well as your initial inventory cost, business insurance, advertising costs, and store equipment.
Making a line-item list will make the undertaking of opening a brick-and-mortar store far less daunting and will help you avoid missing major overlooked costs, Cristina says.
What are your operating expenses?
When you open a physical retail store, be prepared to not turn a profit for the first few months to a year, Cristina says. This means you'll need the cash to cover operating expenses even when your business is making a loss. "You might not make a profit the first year," she says. But that doesn't mean you've got a failing business on your hands. It might take some time for your retail store to build momentum and get off the ground, so be sure you've planned accordingly for that buffer time.
"You might consider taking a loss the first year because you're opening the first lady's clothing shop next to a Talbots," Cristina says. "You need to know your customer base and what they want."
You also need to know what expenses will be on your plate no matter how your business is fairing. Operating costs beyond rent include wages for employees, taxes, utilities and insurance fees.
Will you be able to keep your doors open and your lights on those first few months before your business has broken even? Talk to a Realtor® and weigh your options before taking the leap.
A Realtor®—a member of the National Association of Realtors®—can help you find the right place to grow your business.