Retailing involves buying products or services from a manufacturer or wholesaler and selling them directly to your own customers. Among the estimated 3.7 million retail stores in U.S., are department stores, restaurants, gas stations, auto mechanics, and more.
The retail industry employs 42 million workers across the U.S., with 98% of retail stores identifying as small businesses, providing excellent business potential. Should you already have an idea of the kind of products or services you are interested in selling, this article will outline the steps you need to follow to go from idea to grand opening.
How much does a retail store owner make?
On average, retail store owners can make between $49,000 and $65,000 a year. Profits largely depend on what kind of store you own, the type of products you sell, your store size, market, and location.
How much does it cost to start a retail store?
Because of the diverse nature of the retail industry, startup costs for retail stores can range from $2,000.00 to $100,000.00. Rent and operating expenses can reach $5,000.00 a month. Store size, market, and location will influence costs.
How to Open a Retail Store:
1. Decide what type of retail store you would like to open.
Retail stores are sorted into categories based on the channels they use to sell to their customers. There are four distinct categories of retail.
Store retailers include department stores, convenience stores, national and regional chains, and conventional supermarkets, etc. Think Walmart or Target. These types of stores use prominent merchandise displays and signage to advertise their most popular products. They sell both household and business items.
Specialty retailers target niche markets and focus on specific product categories. Specialty retailers are considered product experts and sell a breadth of items within their product specialty, be it clothing, office supplies, medical supplies, home decor, etc. Because they stock niche products, specialty retailers' inventory management is typically less cumbersome than most retailers.
Mail order retailers reach customers who are either unable to go shopping, live too far from a shop, or simply don't like the shopping experience. They send out informative catalogs and brochures advertising a broad range of products.
Online retailers cater to customers who want convenience in their shopping experience. Selling online means creating a shopping experience that is intuitive, reliable, and visually driven with detailed product descriptions and reviews. It should also have an easy ordering process and clear policies on warranties, returns, and refunds. Think Amazon.
What is a good retail business to start?
Mobile Retail Boutique.
Canned Goods Seller.
Corner Grocery Store.
Health Food Store.
Paper Products Shop.
Printed Products Designer.
Gift Basket Service.
Local Gift Shop.
Craft Supply Store.
Gadget Accessory Store.
Auto Parts Store.
2. Create a business plan.
Your business plan will serve as your founding document and reference point for managing your future operations. It also presents the case for your business's success as an investment and will determine how much funding you receive.
Essentials for a Retail Store Business Plan:
An effective business plan will achieve seven things.
- Summarize your business proposition.
- Define your company structure.
- Offer an extensive market analysis.
- Detail your business offerings.
- Describe your management plan and ownership structure.
- Explain your marketing and advertising strategy.
- Outline your financial projections.
3. Form your retail store company:
You will have to choose between being a sole proprietor, a corporation, or a Limited Liability Company (LLC). An LLC is the most common type of legal structure for retail stores. LLC taxes are reasonable and they protect personal assets in the event that you default on a loan or are sued. Hire a lawyer or business consultant to help with the process.
Read our article for instructions on how to form an LLC.
Know all the licenses and permits that you need.
Business registration laws will differ from state to state. Retail store owners will need to check their local government websites to find out more about state laws and procedures they need to follow, and if the type of retail business they open requires any additional licenses. Find out more about obtaining a business license here.
Registering with the IRS is critically important to avoid tax penalties. LLCs, partnerships, C Corporations, and S Corporations are all required to obtain an EIN Number. Click here to apply for your EIN Number.
It's very important that you both protect your intellectual property and not infringe upon others. We recommend consulting with a trademark attorney to oversee the process.
Before you undertake any store construction, you need to submit your intentions to local government.
You may need a Seller's Permit when purchasing wholesale merchandise for resale.
A Home Occupation Permit will be needed if you plan to sell from home.
A Resale Certificate allows you to buy items from distributors and resell them to your customers. Depending on the state you're operating from, you may need this certificate to avoid paying tax to the seller.
Additional permits include a Fire Department Permit, Building Construction Permit, Zoning and Land Use Permit, Sign Permit, and Air and Water Pollution Control Permit.
Once you've chosen a suitable store name, run that name against the U.S. Trademark Database to see if it's already in use. Be sure to create your web domain using the same name, as well as all your social media accounts. If you're unsure of the legal and financial aspects of selecting a business name, follow this handy guide.
What insurance do you need for a retail store?
4. Invest in the right technology.
From processing customer payments to managing your inventory, technology can help your store run more efficiently.
Retail Store Owner's Tech Toolbox:
POS systems process orders and sales. POS systems should have products and prices programmed into them to facilitate speedy transactions. We recommend Square and Loyverse but search through our comprehensive list to find one best suited to your needs.
2. eCommerce Site:
Accounting software simplifies invoicing, bill payment, expense reports, financial reports, POS syncing, and more for retail owners. We recommend FreshBooks, but check out our full list of options for something best suited to your needs, including free options.
4. Email Marketing:
Email marketing tools help retail owners stay on top of one of their primary customer communication channels. They assist in creating professional-quality emails, delivering them to a large audience, and staying out of the spam folder. Email is one of the most effective marketing channels and tends to see a high return on investment. We recommend SendinBlue and MailChimp, but our full list of options may have something more suitable. Explore our free options too.
Inventory management software aids in the management and tracking of materials, orders, and deliveries for your store. If you want to avoid overstocking or under-stocking products, investing in an inventory management tool is essential. We recommend Backstore and EZOfficeInventory, but check out our full list of products too, including free options.
6. Payroll Software:
5. Source your funding.
Before your retail store starts turning a profit, there are two types of funding you will need: startup capital and operational capital to support the business in its early stages.
Read our article on How To Get a Small Business Loan for an effective guide to secure startup capital.
Alternative Funding Options for Opening a Retail Store:
Invoice Financing is a process whereby unpaid invoices can be leveraged to secure business credit. Instead of waiting for the invoices to be paid, businesses can use their unpaid invoices to obtain funding.
Working Capital Loans are cash injections designed to help businesses experiencing short-term cash flow problems. These type of loans support a business's operational expenses during difficult periods.
Our article Short Term Business Loans provides more information on short-term funding.
Typical Costs for a Retail Store:
Business entity formation
Location improvement costs
Licensing and permits
Annual insurance coverage
Working with an attorney
$400.00 per hour.
Printing, promotion, and online marketing
$15.59 per square meter (Albuquerque, NM) - $3,400.00 per square foot (New York City, NY).
Average electricity per square foot
Annual workers’ compensation
6. Choose the right location.
Seven factors will influence the location of your retail store:
Ultimately your budget will have the most say over the location of your store. Determine how much you are able to spend on monthly rent and choose a location that offers potential. To figure out what percentage of your sales should go towards paying your rent, use the following formula.
Annual cost of rent divided by gross annual income.
The standard gross-to-rent percentage falls between 1% and 13%. Anything below 10% is a healthy figure.
Based on your customer research, you should have a good idea about who your target customers are and where they live, work or visit. It follows that you would select a location frequented by your target market.
Find out how many similar stores operate in your area. Too much competition may mean you can't get enough customers, but competition can also be a good thing. A neighborhood with a strong retail presence creates a pedestrian culture. You can also benefit from your competitors' efforts to attract customers to the neighborhood.
Some retail stores struggle with inactivity because their store is not ideally located, while others prosper in the most unwelcoming areas because they offer a great product. While your location and level of service can greatly impact your store, the general rule is to offer both. Bear in mind that visibility is positively correlated with rent, so areas that are easily accessible with a steady flow of pedestrians are likely to cost more.
5. Foot traffic.
Opening up in an area with a strong pedestrian culture can do wonders for your store. An area frequented by people on foot will make a chance visit to your store more likely.
6. Parking availability.
Uber may have made getting around an easier task, but for patrons who prefer their own transport, parking is essential. If they have to walk far from a parking spot to your store, they may just consider someplace else.
7. Crime statistics.
If your neighborhood has a reputation for criminal activity, it may deter customers from coming to your store. Check local crime statistics before setting up shop.
Why is store location important for retailers?
Your store's location will determine its rent.
A retail store in proximity to its competitors can benefit from their presence.
A retail store that is not clearly visible may not get noticed by customers.
A retail store can benefit from an established customer presence.
A store without adequate parking space may deter customers.
A store in an unsafe area may deter customers.
7. Set up your retail store.
You will need to create a list of all the essential equipment needed to operate a retail store. The aim here is to find the right balance of quality and affordability.
What equipment do I need to run a retail store?
$165.00 - $710.00.
Shelving and decor
$50.00 - $100.00 per hour (for contractor)
$0 - $79.00 /mo.
5 cents - 23 cents per bag.
$75.00 - $150.00 per cart.
$29.00 - $57.00 per basket.
$79.00 - $2699.00.
Pricing and tagging gun
$19.00 - $51.00 per gun.
$6.00 - $343.00 each.
$6.00 - $9.00 each.
$17.00 - $28.00 each.
"Wet floor" sign
$7.00 - $57.00 per sign.
$500.00 - $1,000.00.
"Open" and "closed" signs
$15.00 - $48.00 per sign.
When purchasing these items, keep in mind that some of them will take up plenty of space, come with maintenance costs and safety risks, require cleaning and repairs and will need to remain consistent with your design aesthetic. It is important that you plan and budget well for them.
8. Hire the right staff.
When hiring staff for your retail store, you need to ensure that all employees present themselves well, have excellent interpersonal skills, and are in keeping with the image and atmosphere your store wants to project.
Additionally, check out our list of job descriptions for the various positions you might need to fill at your retail store. They include the key attributes to look out for in each position and a list of crucial questions you should ask.
Retail Store Staff Key Attributes and Interview Questions:
9. Promote your retail store.
Your retail marketing plan should outline the ways in which you plan to reach your targeted customers and find new ones. It should include branding, merchandizing, and advertising strategies, as well as sales and promotions.
Use social media:
Where you buy media will depend on where your customers are. If they use Facebook and other social media platforms, it could benefit you to run targeted campaigns to reach them.
Social media marketing demands a level of creativity and research on the part of the marketer in order to be successful. No one platform or strategy will guarantee success, as you will need to know more about who your audience is online and how they use social media. The following are some helpful tips on where you could start.
Create Facebook, Instagram, and Twitter pages. Make the design aesthetic match that of your store. Be sure to include high-quality pictures on your page, especially the visually-driven Instagram. Clothing retailers could benefit the most from modeling their apparel on Instagram. Use these platforms to advertise specials, run promotions, and get customer reviews and feedback for your store.
Create your own hashtag and encourage customers to use it when posting. This is a great way for potential customers to find out about sales and promotions.
Use influencer marketing. Influencer marketing tends to hold more weight than traditional advertising since people assign a level of trust and familiarity with influencers, making it easier to recommend a product or service.
Use referral campaigns to incentivize your customers to spread the word to their friends. Whenever a sale is made by clicking on a shared link, the customer who shared the link gets a discount on their next purchase as a reward.
One way of better managing your marketing efforts is to invest in a marketing tool for your store. We recommend SendinBlue and Buffer as excellent software, but check out our full list too. Use these apps to create campaigns, gather customer information, and manage all your communication channels.
Search Engine Marketing:
When customers in your area search Google for a hardware store, for instance, they are likely to use search terms such as "hardware store near me." If you want customers to find you, you need to be at or near the top of search results. Search Engine Marketing (SEM) helps you rank in Google search results, making you visible to more potential customers. SEM is a highly technical field, so you may want to partner with a marketing agency.
Local SEM Essentials for Retail Stores:
Register for Google My Business.
Start a Yelp! profile.
Create a Facebook account.
Take photos of your store.
Upload images and descriptions to all your accounts.
Encourage customers to rate you.
Research pay per click advertising.
10. Establish vendor relationships.
To choose vendors you'll need to research their marketing support, return policy, credit terms, defective items, and payment terms, before entering an agreement. Additional factors that determine a good vendor relationship is product quality and reliable delivery. There are four types of vendors.
Manufacturers sell their products to retailers at wholesale and in large quantities. Contact them to find out if they sell directly to retailers or through distributors.
Importers bring in products from a different country to your country of operation. Retailers can buy directly from importers. Be sure to understand all the costs involved, paperwork, shipping times, and product life cycles.
Distributors act as a link between vendors and retailers in cases where reaching a vendor directly is too expensive.
Wholesalers and liquidators sell products that include closeouts, truckloads, and damaged goods.
How can I find distributors for my store?
Determine the quality of the distributor's products.
Ensure that they have reliable delivery.
Negotiate payment terms.
Find out about their credit policy.
Ask about their policy regarding defective products.
Inquire about marketing support.
11. Design your retail store.
Your store experience is part of your attraction to potential customers. But beyond branding and signage, the layout and design of your store are influential in determining a purchasing decision. Here are five retail store design principles to follow.
Ensure that all products are visible. Use signs, staircases, and strategic product positioning to organize your store and guide customers into different store locations or sections.
Ensure that the most profitable products or departments are placed in the most populated sections of the store.
Protect your products from theft by installing cameras, keeping expensive items under lock, and using mirrors to eliminate blind spots.
Buy store furniture that is mobile. This makes it easier to change the store design without too much hassle. Avoid fixed furniture.
Place similar products and departments next to or close by each other. Cosmetics and clothing attract similar customers.
Five Principles of Retail Store Design:
Understanding Inventory: Key Formulas and Metrics
There are a number of key inventory metrics that can help increase the profitability of your retail store. Inventory, when not carefully managed, can lead to a loss of profits. The following formulas and calculations will help you optimize your inventory management to prevent that from happening.
Average Inventory at Cost is the cost value of the inventory that you keep for a given period (typically a year). If your average inventory is higher than your sales, you will incur excessive inventory costs and be forced to sell at markdown prices.
Average Inventory at Cost: The sum of end-of-month inventory for 12 consecutive months, divided by 12.
Turnover Rate is the number of times in a year your total inventory is sold or the average number of months it takes for your inventory to be sold. A high turnover rate means you need to spend less to generate the same sales.
Turnover Rate: Cost of goods sold for the year, divided by average inventory at cost.
Gross Margin Return on Investment tells you how much of gross profit dollars you receive for every dollar invested in inventory. If your value is 1.5, it means that for every dollar you invest in inventory, you get $1.50 in gross profits back. Anything below 2 is excellent, while a value below 1 is considered poor.
Gross Margin Return on Investment: Annual gross profit dollars divided by average inventory at cost.
The Open-to-buy formula tells you how much inventory you can buy each month so that you can sell and not be overstocked, according to a specific turnover rate. It comes in two parts:
Open-to-buy (planning) formula: Planned sales in cost dollars, plus desired ending inventory, minus beginning inventory, minus open orders.
Open-to-buy (monitoring) formula: Beginning-of-month inventory at cost, plus month-to-date inventory receipts at cost, plus balance on order for the month at cost, minus month-to-date sales at cost, minus balance of month’s sales plan at cost.
The Weeks of Supply calculation tells you how many weeks it will take to completely sell all your stock of certain merchandise. The formula relies on current on-hand inventory and projected sales per week.
Weeks of Supply: Current on-hand, divided by projected weekly sales.
Real-World Tips, Tricks, and Strategies from Successful Retail Store Owners:
"There is a solid chance that you can be using square footage more productively… We don’t need another retailer selling jeans and black pants, unless they bring a point of view and an experience that no one else has."
"The biggest sources of opportunity are collaboration and partnership. And today, with digital communication, there is more of that everywhere. We need to expose ourselves to that as a matter of doing business."
"Retail is a customer business. You’re trying to take care of the customer — solve something for the customer. And there’s no way to learn that in the classroom or in the corner office, or away from the customer. You’ve got to be in front of the customer."
How much does it cost to open a brick and mortar store?
Opening a physical location for your store can cost up to $50,000 and operating expenses can total $5,000 per month.
How much does it cost to rent a store in the mall?
A permanent retail location in a mall can cost up to $100,000, but there are cheaper outlets too. A kiosk or a cart can cost between $2,000 and $10,000.
How much does it cost to start a clothing store?
Depending on your state, the market you're operating in, and the type of clothing you sell, a clothing store can cost anywhere between $50,000 and $150,000 to run.
How can I be a successful retailer?
Do your research.
Make sure your business plan is air-tight.
Be smart with your advertising.
Always look for repeat business.
Ensure that you hire strong employees in every position.
How can I increase retail clothing sales?
Increase advertising spend.
Use creative displays to attract customers.
Use music to create a fun shopping experience.
Train your employees to pay attention to customers.
Train your managers to act as sales people too.
Emphasize listening over talking, and focusing on forming connections.
Think like your customer.
Train your employees to use your customers' names when talking to them.
How do I drive traffic to my retail store?
Create visually appealing signage and window displays.
Place your best products at the front of the store.
Decorate the outside of your store.
Use NFC and QR codes on your window displays to give customers more information about those products after store hours.
Best Books to Read Before Starting a Retail Store:
The Retail Revival - Dough Stephens
The Paradox of Choice: Why More is Less - Barry Schwartz
BUYOLOGY - Martin Lindstrom
Delivering Happiness - Tony Hsien
Why We Buy - Paco Underhill
Reality Check - Guy Kawasaki
The New Rules of Retail: Competing in the World's Toughest Marketplace - Robin Lewis and Michael Dart
The Everything Store: Jeff Bezos and the Age of Amazon - Brad Stone