Content: Page 15, Becoming Your Own Banker Fifth Edition
Continuing our exercise in imagination, I would like to put you into a business in which you are both a seller and a consumer of products. I pick the grocery business since everyone uses groceries — there are no exceptions. Someone must perform the function of the grocer. You have an unlimited market. Everyone is a potential customer — as well as you and your family and maybe some other “captive customers” – these are folks who are not going somewhere else to buy groceries.
Before getting into the business you need to study it for at least two years. You had better understand it inside and out before you start or your competition will “eat your lunch!” It is a very competitive business. This is going to take some time and expense.
Next, you must find a superior location for your business. Real estate agents say there are three qualities of real estate — location, location, and location. This is not an overnight activity. You are going to spend some time getting the right property and for this you are going to have to pay a premium price.
Now you are going to have to put an attractive building on that very high-priced property. This, too, is going to cost you a lot of money.
Then, you must stock the store with quality merchandise and it must be attractively arranged and maintained. This means you are going to have to have “hired help” (that’s “Southern” for employees)– you are never going to be able to run this business alone. Mom and Pop grocery stores are gone forever. Face it! Your employees must be attentive to customer needs, courteous and neat. You have spent a lot of money and time just to get to this point — and you haven’t made a dime yet!
At long last, you open the front door for customers — they come in and load their carts with groceries and take them by the cashier who collects their money at the front of the store. This is going to leave empty spaces in the display of goods. Your “hired help” is busy cruising the aisles, noticing where goods have been sold and very quickly going to the storeroom at the back of the store to get more things to fill up those spaces. It is imperative that the store appear to be fully stocked at all times. The customers demand it. Have you ever been to a grocery that was only partially stocked? Do you go back there to shop or do you go to some other store where managers pay closer attention to their business?
All of this means that you are going to have to re-stock the storeroom at other intervals to insure that you have immediate access to an adequate supply of groceries. Once you have all this set up and in operation, the difference between the “front door” and the “back door” is a very good living — if you can turn the inventory enough times during the year. If you sell a can of peas for 60 cents at the front door, you have to replace it at the back door at a cost of 57 cents. (I have found this to be a shocking revelation to most everyone). Grocery stores operate on a very small margin on such items. There is a different markup on meats, produce, and certain other items, but for things like canned goods that’s the way it is.
The can of peas sitting on your shelves is inventory and you must turn the inventory 15 times just to break even. There is all that interest you must pay on the huge sums of money you have borrowed to buy the land, the building, the inventory, the signs, advertising, payroll and fringe benefits, utilities, legal fees, accounting, etc. just to name a few. Turn the inventory 17 times per year and you have a nice profit. If you can turn the inventory 20 times per year you can retire early. Something dramatic happens once you get “over the hump.”
This reminds me of a phenomenon in physics – get a bucket of water at seaside (I want you at sea level) and heat it up to 210 degrees Fahrenheit and all you have is very hot water. Heat is up just 2 more degrees and you have live steam with unbelievable power! The steam engine changed the world. But it doesn’t happen until you get to 212 degrees F at sea level. Lots of heat goes into the process up to the boiling point but the dramatic power comes suddenly.
The objective of the business is to provide you with an income and to show a continuous profit picture over a long period of time, say 30 to 40 years. Then you sell the business and use the proceeds to buy a large annuity that will pay you retirement income for the remainder of your life.
So far, we have a very simple business. In the next lesson we will introduce the complications that can destroy your business. See you then!