Basics on how to open a Dollar Store
Having been in the dollar store business for 10 years I can give you some ideas and recommendations to help you be a success.
First of all you do not need to hire a broker or some other firm to assist with the set up of your store, your initial inventory and equipment needs. From experience I can tell you that 5 years after our store was opened there was still unsold inventory from the group that set the store up. In addition many of these groups will set up a deal with your suppliers which results in a 2 or 3% kickback on each item you buy and you know who really pays for that.
First and foremost one of the worst things you can do is go into any business undercapitalized. You cannot borrow 100% of what you need for equipment, inventory and working capital. If you do not understand what this sentence means it may not be a good idea for you to go into business at this time. I would recommend that you attend start up business classes at your local Tech School or even through your city or county economic development corporation. Many Tech Schools offer low cost evening business classes. In addition these programs will also assist you with writing a business plan that can be used to seek financing and for your own road map to success. If you don’t understand how to write a business plan you should attend local classes to understand this important management tool.
Assuming you have the educational background and business management abilities you now need to look for financing. I prefer dealing with Community Banks or Credit Unions as they seem to be more attuned to local needs and may know you personally. Not all large national banks may be difficult to deal with but many times the loan operation is based on a cookie cutter model. That means what works in a large metro area must also work in a small rural area. Never go into a bank asking how much you can get or say, “I know it will work” without facts to back up that statement. You will be dead in the water if you start out that way. Also do not complain that there is no money for the little guy, the banks don’t want to lend money, they don’t care. All of these comments start you out on the wrong foot. Measure what you are going to say and do not criticize the industry you are looking to for your financing needs.
Before you look for financing you will need to educate yourself on where you can buy inventory and equipment. I recommend buying as much good used equipment as you can. New and shiny is great but it cuts into profits and requires more upfront investment, which may mean more borrowed funds, which comes with an added cost. There are many reputable used equipment dealers that can set you up at a fraction of the cost for new. Don’t buy junk just to save some money. Be sure to purchase quality used equipment.
Suppliers come in many sizes and are in many large metro areas. Trade shows are held on a regular basis. Trade shows may be as small as a few dozen vendors to thousands held in cities such as Las Vegas. Vendors at many of these shows will help you set up a store and if they are reputable which most are they will sell you quality fast moving products. Don’t get caught with buying full cases of everyone at start up. Vendors often will say they cannot break cases and if they will not budge find someone that will. Having to purchase 144 pieces of a single item runs up your cost of initial inventories. Not only can you bring in more variety for less money but you can also have less money tied up in slow moving items. Try to buy in lots of no more than 72 pieces at the start. Later you may push a supplier for 36 pieces to fill items that are running low.
In addition to trade shows you can find vendors names on packages at most independent dollar stores. Many vendors are importers for dollar store goods and will sell mainly to independents using the vendors packaging. If they are importing for the large national chains they may well use the retailers packaging. By going to an independent dollar store you will see packages from many suppliers and you may see the same supplier on a number of different items. A supplier that sells a large variety to a single store is generally good to work with and will have people that will help you set up a store.
Location – Location – Location. This saying was never more true that with the dollar store business. The trick is to find an affordable location with about 3,000 square feet of sale area. Keep in mind that rent at strip malls and regular malls are bases on the number of square feet that you occupy in total and not just the sales area. You need to keep the backroom space at a minimum yet allowing you enough room for additional stock and seasonal items that come in early during the buying season.
Location is important but you cannot afford to pay $15 per square foot plus triple net costs and make a go of it. Many triple net costs can add more than $3 per square foot to your cost. Assuming you are paying $12 per square foot with $3 triple net your rent on a 3,000 square foot store would total $45,000 per year. That is a lot of items that need to be sold before you cover other costs such as utilities, insurance, employees, advertising, show expense and freight.
At one time we averaged about 52% margin on our sales, which resulted in a cost of .48 for each item purchased. This may sound like a lot of margin but there is an unbelievable amount of labor in keeping a store stocked, customer service, cleaning and management activities not to mention freight costs.
Freight costs can be a killer depending on where you are located in comparison to a supplier. Our store was in the mid-west so we could bring in inventory the entire continental U.S. and yes, even Canada. To keep margins in line we would often negotiate maximum freight costs for larger orders. As time went on this become more and more of a problem. Our main location was about 350 miles from a major metro area that had many suppliers of dollar store items. When we first started we could get a full skid of freight delivered to our store for $55. On average there was about $1,000 worth of inventory at cost on a skid. This resulted in a cost of 5.5% for freight alone. Adding this to our cost of 48 cents we now had a cost of 53.5 cents, which left us with a margin of 46.5 cents. Ten years later with the fuel costs having gone through the roof that same skid cost $115 for freight. This resulted in our cost now being 58.5 cents resulting in a margin of 41.5 cents. As you can see freight can be a killer and must be negotiated as often as possible. We liked dealing with local and regional freight carriers as they seemed to be more anxious for the business and would trim the cost down as far as they could.
Dollar Stores are a lot of work and can be costly to set up. You need to investigate funding sources and costs, suppliers and average costs, equipment needs, freight and a location that if affordable yet has enough traffic by the door to bring in the buyers. A small freestanding dollar store is not a destination and may struggle to bring shoppers into the store.
We will continue to write other articles on dollar stores, which will give you more insight into the business and what to expect in return for your hard work. This article is only intended to give you the basics of opening a dollar store. You will have to investigate, educate yourself and spend countless hours planning and researching information for your own venture. Should you decide to move forward I wish you luck and hope that this will have helped in some way.