Over 100 years ago, Nathaniel Hawthorne wrote a book titled "The House of the Seven Gables." This one quote has always stuck with me:
"See here!" cried he; "what do you think of this? Trade seems to be looking up in Pyncheon Street!""Well, well, this is a sight, to be sure!" exclaimed the other. "In the old Pyncheon House, and underneath the Pyncheon Elm! Who would have thought it? Old Maid Pyncheon is setting up a cent-shop!""Will she make it go, think you, Dixey?" said his friend. "I don't call it a very good stand. There's another shop just round the corner.""Make it go!" cried Dixey, with a most contemptuous expression, as if the very idea were impossible to be conceived. "Not a bit of it! Why, her face—I've seen it, for I dug her garden for her one year—her face is enough to frighten the Old Nick himself, if he had ever so great a mind to trade with her. People can't stand it, I tell you! She scowls dreadfully, reason or none, out of pure ugliness of temper.""Well, that's not so much matter," remarked the other man. "These sour-tempered folks are mostly handy at business, and know pretty well what they are about. But, as you say, I don't think she'll do much. This business of keeping cent-shops is overdone, like all other kinds of trade, handicraft, and bodily labor. I know it, to my cost! My wife kept a cent-shop three months, and lost five dollars on her outlay.""Poor business!" responded Dixey, in a tone as if he were shaking his head,—"poor business."
In the olden days, old maids like Mrs. Pyncheon might make a go of it, as their overhead costs were virtually nil. She already owned the house, so opening a shop there cost little, other than to set up some fixtures and buy some inventory. And many older villages and towns were laid out this way - with storefronts on the bottom floor, and living quarters above. The shopkeeper literally lived at his place of work. Commuting time was zero, and business hours were, well, all the time.
Today, it is a different deal. Most folks commute to such a shop and often pay exorbitant rents to landlords. Most don't do the math and try to understand exactly how much money they will have to make just to cover overhead, much less pay themselves any kind of salary.
I know this from experience, as my late Mother decided, late in life, to open and run a small bookstore in our home town. While it gave her something to do with her time, it never really made her any money, and caused her no end of frustration and grief - and by extension, frustration and grief for the rest of the family.
The book business, even back then, was in trouble. Books traditionally have a very small markup - only 40% or so, which in a world of 100% markups in retail is scandalously small. Compounding this problem was the emergence of the "mega" bookstores in the late 1970s and early 1980s, such as Barnes & Noble. Using their huge leverage of buying power, the big bookstores bought in bulk and negotiated discounts with publishers. As a result, the "latest bestseller" would be on sale at the mall bookstore for 40% off - about my Mother's wholesale cost for the same tome.
Customers, of course, noticed this, and often annoyed Mom by saying, "Well, I can buy this same book at the Mall for far less!" not realizing that the big bookstore also paid less for the same book. She was already losing money as it was - trying to compete head-to-head with a mega-book chain would have been suicide.
Initially, her business model was insane - which is often the case for many small businesses. She decided only to sell books that she liked to read and not what was popular with the public. One afternoon after school, I watched the shop for her and a little old lady came in and asked if we had "Harlequin Romances" - a series of trashy soft-core sex romance novels that little old ladies like to read (and many younger old ladies as well). I looked but did not find any.
When my Mother returned, I told her about the request, and she said, "We don't carry that trash!"
Well, it took a few years and a few iterations of her store before she caved in and carried a whole rack of romance novels. The little old ladies were regular customers and romance novels were a good profitable item.
She also branched off into greeting cards and gift items - both things with huge mark-ups that sold well. You can make 100-500% markup on a greeting card - after all, it is just some printed cardboard and an envelope, right? So her original vision of a bookstore selling only Virginia Woolf morphed into something else.
Sadly, the enterprise, while making more money, had more expenses. She had moved to a new, more expensive location, of course, the costs ate up the additional profits. She was now hiring others to mind the store, even though the store was not yet profitable.
The recurring losses, which reduced my Dad's taxes a bit, ended up causing an audit with the IRS. If you claim a loss more than, say, five years in a row, the IRS steps in and accuses you of running a "hobby" business - which some people try to do, morphing their interest in, say, collector cars, into a money-losing "business" that is no longer an expense, but a write-off. If you don't declare income every so often, it is pure audit-bait.
Of course, this pissed her off even more. Working for years without pay, and now being called a "hobby!" It sent her into a rage.
But eventually, she pulled the plug on the store. It lasted several years - it often takes that long for any business to fail. After all, look at Radio Shack, Sears, and JC Penny. You can make just enough money and work for free for years, before you realize you've run through thousands, tens of thousands, or maybe hundreds of thousands of dollars.
Nine out of ten new businesses fail -in the first year alone. Most are ill-conceived ventures, where no one sat down and thought, "Gee, just to cover the rent here, I would have to sell 50 cups of coffee at my coffee shop, every day!" If they did, they'd realize that there weren't enough customers in the area, and moreover, after the first month, when they averaged ten cups a day, they were doomed.
And of course, internet commerce has squashed a lot of local shops who will never return. If I want to buy some commodity item, be it a coffee cup or a lawnmower part, I can find it online far more easier, faster, and cheaper, than I can by driving around my local town trying to find it. Where small businesses can succeed is in offering services, expertise, or something unique the Internet can't offer. The local guy who repairs lawnmowers might be able to make a go of it. But even then, the advent of cheap, disposable lawn mowers has made his business a sketchy one. Times have changed and you have to move with the times.
One would think the failure rate of small businesses would drive down commercial property values and thus make overhead lower. One would think, anyway. In our small town, "For Lease" and "Space Available" are the two most popular enterprises, based on the number of faded, falling down signs on commercial retail properties. And yet they keep building more. How anyone can make money building a strip-mall that has only one tenant (for more than a decade, now) is beyond me. But we have dozens of such places around town - all asking astronomical rents for properties that aren't even in very good locations.
On our resort island - as in most resort places - is the problem of what the Simpson's called, "the candle district." These are shops that sell "gifts" and are usually demarcated by the presence of scented candles and incense that usually drives the husbands away - to sit in shame on the "husband's bench" outside while the wives shop to their heart's content. As I noted in another posting, I believe these shops use a product called MAN-AWAY(tm) to keep skeptical and critical husbands at bay while the wife runs up the credit card debt another notch.
The problem for these gift stores is that there are too many of them and they all sell the same things. We had a "candle district" of historic shops with maybe a dozen such gift stores each competing with the other. One is a bookstore, but sells few books, of course, in this day of Kindles and online reading. Like my Mother's store, they have been forced to sell gifts to make ends meet.
However, we have built a brand-new shopping village on the island as well, replete with a number of gift shops - doubling the number on the island in a matter of months. These are taking away sales from the ones in the candle district, which are struggling and closing, one by one.
The problem is, of course, that all of these shops sell the same stuff from the same sources. Mark works at a gift shop on a neighboring island, and we go to The Mart in Atlanta once or twice a year to stock up and order gift items, ladies handbags and all the
This is not to say all these products are bad, but just that they are all the same and when you have a dozen stores in a square mile (as well as the island authority stores) all selling the same merchandise, well, one or more is going to go belly-up in no time.
As you might expect, most of these gift items are made in China, are very cheap, wholesale, and have huge markups and are quite profitable. A sign saying "Welcome to the Beach!" costs maybe $2 wholesale and retails for $15.
As a funny aside, every so often rednecks come into Mark's shop and ask, "Is anything here NOT made in China?" as if these Donald-Trump wannabees had some special insight into world trade. Mark would usually say something non-committal but finally broke down one day and said, "Well, guess where all the clothes you are wearing were made? Or your smart phone? Or half the electronics in your 'American' pickup truck? China! That's right! Where everything is made these days!"
So, what will become of all these gift shops? Well, I think a number are going to go away. In that business, there is a regular turnover of people who decide to "open a gift shop" and like my late Mother, struggle for several years, and then throw in the towel. It is like people entering a fundamentalist religion. One third are joining, one-third are members, one-third are leaving. There is turnover.
But a core group or core number of shops will continue to exist, so long as people like to browse and buy crap on vacation. "Shopping" is always listed as a "recreational activity" in most vacation brochures.
And maybe something else will take the place of the other gift shops - providing some product or service that is in demand. What that could be, remains to be seen.
The shops that will survive, I think, will be ones with low overhead. Shops run by the authority, for example, or the store that Mark works at, have effectively zero overhead for rent, and thus can claim "profits" for their non-profit owners, since the space is paid for regardless of whether a shop is there or not. Gift shops run on a for-profit basis, who have to pay rent, on the other hand, well, they have a tough row to hoe.
It is tempting to think about starting a business as a way of making money. And many an unemployed person or early retiree has toyed with the idea of "opening a store" as a way of making money. And usually it is a horrifically bad idea, too. They take their "early out" money and "invest" it in the business, only to see it all slip away, and find themselves, after years of unpaid work, broke and with no retirement.
Don't be like Old Maid Pyncheon. Think hard before starting your own business. Who are your customers? How much can you make? What is your overhead? How many widgets a day do you have to sell in order to break-even? If you don't have a valid business plan and business model, it is just a surefire way to go bankrupt.
UPDATE: See Also: