Should I open a second shop given current economic turmoil? Dave Fishwick replies

I started a business in lockdown selling electric bikes online from a storage unit.

After initially doing well it became obvious I needed a workshop to deal with customer returns. I decided to open our first high street shop instead so that we could have a workshop and get a bit of walk in trade – it was a bit of a gamble if I’m honest.

After a bit of a tricky year the shop now makes a profit in its own right and seems to be going well.

We have no problem converting people away from the big internet companies as they cannot compete with us on after sale care.

With the current climate of recession on the cards and high rents, is now a good time to open a second shop, or should we just be happy to be profitable and wait out the storm?

Ironically the business should do better in the current climate due to high fuel costs and people looking to cut these costs. 

However, the bikes are a big initial outlay and if the news is to believed, no one will have any money by December…

Dave Fishwick, This is Money business doctor, replies: Congratulations on starting a successful new business, particularly during the pandemic. 

It shows that even in turbulent times If you put your mind to it, you can achieve anything. 

Like many people in lockdown, I bought an e-bike myself and I have enjoyed using it.

I think the way you started with low overheads from a storage unit was spot on. 

Keeping your overheads to a minimum is generally the right approach. This is imperative in the early days when managing cash flow; this can be make or break for any new business.

The logical next step for you was to find business premises, which could also have been a small industrial unit, but it seems you made the right call to move to a shop with walk-in trade bringing in extra custom; you’re making the most of the additional costs of having high street premises.

Now that you have your shop, the question is will you see the same benefit from opening another?

I call this the third milk-round scenario; if you have one milk round making good money, you logically presume opening a second or third milk round will make even more money. 

However, more often than not, opening a second will make a little more money, but not necessarily double the profits due to increased overheads, extra management, more vehicles, extra staff and fuel costs, and overhead increases. 

The opening of a third milk-round increases the overhead costs even more and quite substantially. 

You then need a massive increase in customer demand, far beyond the local area, requiring extra marketing budgets, advertising, extra staff to cover holidays, additional cash flow, more energy costs and then the added costs of borrowing money. It is a big decision.

Initially, I would suggest trying to increase business with the space and resources you already have by perhaps building up into the loft space or adding an extra floor in your shop and or storage facility, using a mezzanine floor. 

This is the cheapest way to double your space, with very little or no overhead increases (other than the initial cost of the mezzanine floor). 

Also, if you have access to a couple of car parking spaces, you could perhaps buy a couple of second-hand secure steel shipping containers, which have no rates, and no extra rent costs, but the extra storage space can be invaluable. 

I have recently seen both these examples used very successfully in a furniture store, local to me in Accrington, Lancashire. 

There are several other factors to consider. Who will operate the new premises, and how far is it from your existing shop? 

Is it far enough to have unique customers who wouldn’t be prepared to travel to your existing shop? 

If it’s too near your current location, it’ll likely be of limited benefit, and it could become the second milk-round scenario if you are not careful.

If it is further away, have you factored in all the extra costs of having a new site miles away from your base? 

Aside from the rent, staff wages, logistics costs, renovations, display and signage, tools and equipment, security, business rates etc. As you’ll have found, the list can be very long.

In my experience, with big purchases, people are prepared to travel quite a long way to buy the right product at a reasonable price, especially if it’s available straight away from stock and from a trustworthy seller.

Will you have to oversee both shops? If so, you might spend far longer on the road than you do now. Or have you already got staff lined up to work there? If so, will they be able to sell as well as you and offer the same high level of service and complete repairs too?

Future of transport? Many people have been tempted into buying an e-bike

Unless you have all the same skills and facilities at the following site, the customer experience there might not be to the same standard as your current site, which is what positions you ahead of the big online competitors.

An alternative strategy to grow the business might be to wait until you’ve fully outgrown your premises, and then move to larger premises and develop online sales. 

I understand your point about the superior service you can offer as a physical retailer, and I agree. 

Still, if your customers know that you are a physical shop that they could visit if they need to, that might go some way to mitigate the disadvantages of buying online, particularly from sellers based abroad.

Do you currently do your deliveries? Online retailers usually use general couriers, who don’t have time to offer customer service on delivery. 

Using your staff to deliver, you could unpack the products with the customer present, set them up and demonstrate them. 

You could also consider a ‘white glove’ specialist courier (you can find these specialist courier services available online) who can offer enhanced service levels. 

This could reduce the number of returns that many online retailers have to deal with, though, of course, distance selling rules still apply where customers orders online or by phone.

There are undoubtedly many new challenges facing the economy over the next year or more. Spiralling energy prices are just one. 

The pound falling to a historic low against the dollar and high fuel costs will likely continue to push up prices of imported goods in the short term, which you’ll have to pass on to your customers or take a hit on your margins. 

Many economists do now predict a recession, which can bring unforeseen challenges.

Bike shops saw a significant benefit from the lockdown and furlough payments, which boosted the overall level of personal savings. 

Still, now that’s over, individual savings rates have declined to levels more associated with an economic downturn. Though as you said, this could lead to reduced car usage, which will benefit alternative forms of transport.

I would undoubtedly think carefully before signing a long lease on new shop premises, mainly as you say because rents are expensive at the moment. This is reflective of the record levels reached in property prices recently. 

Still, it’s worth remembering that during the last recession, some landlords were prepared to offer shops rent-free to avoid the business rates liability, so consider that, like your business, the economy also has a cyclical nature.

Given the uncertainty, it may be wise to improve your current space and consolidate and streamline the business for a while. 

This way, you’ll be better placed to weather harsh economic conditions and grow your customer base, leading to more sales through word of mouth and repeat custom, reducing your advertising costs relative to turnover.

If you don’t already, I would recommend that you ask every customer how they heard about your business and make sure you record and compile this information, so you can build up an accurate picture of how much of your sales come from passing trade and how much from each type of advertising you’re doing, word of mouth, repeat business etc.

In such an uncertain climate, it might not be worth risking what you’ve already achieved over the last couple of years by moving forward and expanding too quickly. 

I have a saying in these new unprecedented times, ‘do not risk what you have and need for something that you would quite like to have but don’t necessarily need at the moment.’

Over time, hopefully, you’ll be able to grow your business sustainably without risking the family silver; try to maximise all the space you already have before you go for the second and third high street shops. 

Remember, you can already beat the giant retailer’s on service because you’re a small, efficient, and profitable operation. 

My advice is to continue to offer your superior service and expertise to your customers. 

Bigger doesn’t necessarily mean better. It is better to be a little smaller and roughly right than precisely wrong.

Remember, You don’t need to be brilliant to be in business; you just need to avoid the big mistakes. Take your time, and expand carefully. Best of luck!