Summer 2003 The Inside View
Unless you’ve been living on another planet the past couple of years, you know that the economy could be better. Despite glimmers of hope and the shining star of low-interest loans, the economy seems feeble compared to a few years ago, and the pundits say consumer confidence is down. Yet statistics show that people are spending. But are they spending with specialty retailers? How do things look for the specialty retail sector?
Many industry insiders see specialty retail as a lucrative segment of the overall retail picture, now and in the future. “If you find the right product and can demonstrate it well, you can do extremely well,” says Tim Runner, president of Awesome Specialties International (Laguna Hills, CA), an importer, manufacturer and distributor of several cart product lines. From Runner’s vantage point—he has worked on both sides of specialty retail, formerly as the owner/operator of five carts, and now as a wholesaler specifically to carts and kiosks—he sees specialty retail as being lucrative for several reasons. And many other leading wholesalers agree with him. Here are a number of factors they say contribute to its potential for profitability.
For Runner, the product is the number-one determinant of success in the industry. So finding products that are attractive, easily demonstrated, and with high margins, is essential to doing well. The best products meet those criteria and can be marked up three to four times, he says; “some products can even be marked up as much as five times.” The challenge is finding an impulse-buy item that retails between $10 and $20, one that comes alive when demonstrated. That’s the kind of product Runner looks for. “If we have a product priced under $20 that can be shown, odds are we can close the sale,” he says.
To improve his odds, Runner sticks with products that can be demonstrated. In fact, he believes demonstration is another major advantage of specialty retail, especially for carts and kiosks—one area he says has a competitive advantage because traditional retailers generally don’t have the space, staff or ability to demonstrate their products consistently. In effect, those retailers have given specialty retailers that edge.
Demonstration products themselves are “the most lucrative in the industry,” says Cristina Davison, VP of operations for Razzle Dazzle (Phoenix, AZ), manufacturer and distributor of a jewelry/glass cleaner and Australia’s Best herbal-therapy spray. “You can make 50 to 100 percent more by demonstrating a product,” she says, because it’s a way to connect with customers.
While specialty retail offers higher margins than traditional retailers, “don’t just look at the product cost,” says Pat Yates, owner of Happy Feet (Goshen, KY), a line of fun slippers that look like tennis shoes. “You need to look at how well the product sells.” How well and how quickly it sells are the best indicators of how lucrative specialty retail can be.
Another major advantage of specialty retail is that “the mall brings customers to you,” says Runner. Likening a cart to a booth at a trade show, he says a mall draws shoppers to you, the specialty retailer, with no effort on your part. Nonetheless, “your job is to attract them,” he says, and you have just “10 to 15 seconds to capture their attention.”
Drawing on existing mall shoppers makes marketing easier for cart operators, but there’s a downside: When mall traffic is down, there’s little an owner can do. Runner says “we suffer when people don’t go to the mall,” as happened after 9/11 and during the sniper attacks in the Washington, DC, area last year. But that shows how important it is to be prepared to catch those who do appear.
The speed with which a new product is brought to market can make or break a company. “Response speed”—the time it takes to recognize and respond to a market opportunity—is surprisingly high in specialty retail. And it’s another of the major advantages.
Entrepreneurs with new products and concepts get those items into the marketplace and onto carts quickly, so that cart operators can profit from them before big-name retailers copy and sell knock-offs of the hottest ones—and they will, often in a matter of months. “If you run across a hot product, you can move faster [to introduce it] with a pushcart” than a permanent in-line store, says Davison.
Being the first in your area to represent a product and establishing yourself as the source for that product can make a big difference in sales. The only limiting factors: being able to lease a cart (which may be fairly easy at this time, given the mall vacancy rate); and the availability of the product. Of course, existing cart operators have the advantage over first-time specialty retailers in introducing a new product: they can easily convert the cart from one concept to another, which can be done in a matter of hours, rather than starting from scratch.
Being able to shut down one type of cart operation to transform it into a new one overnight can radically impact a retailer’s sales figures. “You can move with a trend quickly to take advantage of what’s hot at the time,” says Debi Allison, owner of Deb & Co. (Buena Vista, VA). She recalls that one year, she cleaned out a cart in one night just before Easter, and reopened it the next day as Basically Bunnies, stocked for the upcoming holiday. “Sales more than doubled” that week, she says.
While some cart operators have seen sales fall after 9/11 and the subsequent poor economy, many companies report solid, steady sales; some companies even show very high numbers. Deb & Co., for example, “did better during the down economy,” says Allison, in large part because her personalized polymer-clay Christmas ornaments are affordable. And while price points play a role, the fact is that some products seem to be recession-proof. Yates believes Happy Feet is one of them.
Short and sweet
Temporary by definition, another key benefit of specialty retail is the short-term commitment. Davison says, “Any new [specialty retailer] should do a month’s lease to minimize the risk… [and] test the waters.” Mark Baer, president of Rapid Retail (Las Vegas, NV), which specializes in health, wellness and massage products, says “It’s easier to rent space now.” He’s even found some malls that are willing to do weekend trials. Davison echoes that observation: “It’s a good time to get in,” she says. Nearly every mall has vacancies, making it easier for cart operators to negotiate better space.
Or “you can also focus just on the holidays and do well,” says Allison. Her company sells their personalized ornaments by setting up for just two weeks during the holiday season. Of course, those kinds of opportunities depend on whether mall management will allow such short leases. Assuming they do, and however long (or short) the term of the lease, she advises against focusing too much on the rent rate. You want a reasonable rent, of course, but “if the mall rent is too low, you may find customers lacking,” she says. “It’s better to pay more for an upscale mall location.”
The short-term element also leads to what may be one of the biggest advantages of specialty retail—the ability to test a concept on a short-term basis. That’s Yates’ perspective. “With a cart, you can test a concept for one to three months vs. six to seven years in an in-line store,” he says, because the lease terms are much more flexible. “A lot of malls are really trying hard to help cart operators.”
And once a merchandise concept has been tested in one location, Runner says a further advantage is that the specialty retailer can quickly, easily and fairly inexpensively expand that concept into other malls in a matter of days, simply by leasing additional carts. And when you can show strong sales in other locations, you’re in a good negotiating position when you approach malls for additional locations, and better locations within the malls. Similarly, as you prove your concept’s popularity with solid sales figures, you’re likely to land better locations in the malls you’re already in.
Doing the homework
Another big plus is low start-up costs. It doesn’t take deep pockets to get a cart up and running. “Today, everyone can get into a cart business,” says Baer. Unlike starting up most permanent in-line stores, Runner says “you can get into [a cart or kiosk] for less capital than any other business—five to ten thousand dollars is all it takes.” In addition to relatively low start-up, another “great thing about the cart business is the low risk—there’s very little risk and very little money required,” he says.
Still, anyone who is considering getting into specialty retail for the first time has to do their homework to prepare for the realities and help ensure their success. “People really don’t do as much research as they should” before starting a specialty-retail business, says Yates. For example, research the companies you’re considering (suppliers, turnkeys), and “ask for references—including people who have left [a turnkey] program,” he says. “Ask how long the company has been in business, and look for at least three to five years.” When you’ve narrowed the choices of suppliers and potential locations, prepare sales projections and associated labor costs, to confirm that you’re likely to be profitable. The companies you’re dealing with should be able to give you reasonable sales projections to work with, says Yates.
Before committing to a particular mall or other location, spend a good deal of time there, says Runner. “Talk to cart operators to see what’s selling, what the hot products are, and what kinds of customers are in the mall.” Davison suggests talking to leasing agents, as well. So does Yates. Leasing agents should be able to tell you the top five and bottom five cart concepts at their mall, he says; and vendors should be able to tell you whether their product will do well at a particular mall, based on the product’s features, the target market, and the mall’s demographics.
One good option to starting a new specialty-retail business from scratch is to buy into a turnkey package. By investing in a turnkey program from a full-service company, you get the benefit of their expertise, reducing your risk. “Find a company that offers the whole package,” says Allison, “including training, visual merchandising, fixturing, and hiring employees. You’ll be better off in the long run.”
Baer recommends finding a company that has experience selling, “has a good track record,” and can demonstrate that its concept or product is successful. “Great ideas don’t always sell well,” he says, which is why he advises asking companies how many corporate carts the company itself owns. If the product is as easy to sell as they claim, they should have carts nationwide. If they don’t, find out why not.
Keep it simple
Whether you’re a solo retailer or in a turnkey program, keep the selling message simple. Stick to one theme, concept or type of product, so that shoppers walking by easily understand what you’re selling, says Runner. “If a cart is a hodge-podge with too many things, you’ll lose customers.” A mix of products can be in just one category, such as hair accessories, slippers, or toys he says. “You can mix [different] toys on a cart,” for example, “as long as they’re all the same type,” such as all remote-controlled or all puzzle-track cars.
Whatever the product type, keep displays tidy and organized. “Too much stuff makes the cart look messy,” says Runner, and that doesn’t draw customers. Engaging the help of a visual merchandiser can often improve a cart’s appearance. Many malls can recommend someone to you; some have people on staff to work with cart operators. In fact, some malls require that specialty retailers work with the mall’s merchandiser, because mall management recognizes the impact that colorful, neat displays have on sales. And since malls take 10-15 percent of gross sales (in addition to rent), it’s in their own interest to ensure that all of the carts, kiosks and temporary stores in their malls sell as much as possible.
Despite the advantages and unique benefits of specialty retail, making money in this industry isn’t automatic, and it isn’t necessarily easy. Far from it, say some insiders like Baer. Making money is harder than it looks, he says: “People think it’s so easy to get into business and make money, but it takes a lot of work.” And while there may be less up-front risk and lower start-up costs with a cart operation, it’s not an automaton; it’s not the proverbial business that runs itself. “There’s a misconception that it’s like a vending machine,” he says. On the contrary: it takes a skilled salesperson to do well.
In some cases, it also takes more than one cart. “Two to three good mall locations are required to generate enough income if you’re not personally working the cart,” says Davison. Cart owners who are looking for passive income will find it difficult to achieve with only one cart, she says, because the labor costs eat up the profits.
Whether you go it alone or tap into a turnkey, the key elements for success are the same. Insiders such as Baer believe specialty retail is a numbers game weighted in favor of the cart operator: “Everyone buys—everyone in a mall is there to buy,” he says, which is why he and others believe opportunities to make money in specialty retail will continue to exist.
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