Deciding to Grow
When a business is successful, it's only natural to want to expand it, but be careful: bigger isn't always better
I've often noted that failure is a great teacher. When you fail in business, you can look back, see what you did wrong, and learn the appropriate lesson.
Success is another matter. It's often difficult, if not impossible, to figure out why a particular business concept clicks. You may be able to list a number of important factors, but you still won't necessarily know exactly what combination of them came together at the right moment and in the right proportions to make the business take off.
That's worth bearing in mind when you're deciding how you're going to take your business to the next level in sales. If you don't really know what's driving your success, you have to be careful about the strategy you adopt. There's a risk, after all, that you may accidentally undermine whatever made your company successful in the first place.
Consider a friend of mine who owns one of the hottest little stores around these days. For purposes of this column, I'll call him Seymour and his store Hot Pants. It's a tiny shop -- about 1,250 square feet -- located in a suburban strip mall, and it specializes in jeans and casual clothing, mainly for young women and teenage girls. From that one location, Seymour racks up several million dollars a year in sales, giving him one of the highest sales-per-square-foot figures in his segment of the retail clothing industry.
For Seymour, the shop has been a dream come true. A self-taught businessman, he'd had several previous ventures that did well enough, but none of them took off the way Hot Pants did following its launch, in 1994. His plan, he says, is to grow the business and sell it in five years or so. Toward that end, he's opened a second Hot Pants, in a town about 60 miles away from the first store. He also has a discount outlet, where he sells his old and discontinued inventory.
A couple of months ago, I got a call from Seymour, who said he had to see me. A big opportunity had come along, and he wanted my advice.
It turned out that the space next to the original Hot Pants was becoming vacant. Seymour wanted to lease it, knock down the wall, and double the size of his store. He figured he could generate between $1 million and $2 million in additional sales pretty much overnight. What did I think?
Now, you have to understand that Hot Pants is a very crowded place. On most days there are lines at the cash registers and the dressing rooms. Somehow Seymour has managed to generate tremendous buzz among middle-class girls of a certain age -- say, 13 to 18 years old -- and large numbers of them show up on a regular basis, not only to shop but to socialize with their friends.
That's good for the buzz, but Seymour thought he was losing a significant amount of business from customers who didn't want to wait in line or deal with the crowds. He figured he could solve the problem by expanding.
I was skeptical. For one thing, I wasn't sure he could make enough additional profit to justify the investment. "What does the landlord want?" I asked. Seymour said the landlord wanted him to give up his old lease and sign a new one for the combined space at the current market rate. Because rates have increased since he signed his original lease, he'd wind up paying about 25% more on his old space, in addition to the rent for the new space. He'd also have to put up "key money" -- a sort of signing bonus for the landlord. Then there was the cost of fixing up the new space, carrying additional inventory, and hiring more staff.
"You have to look at the effect on your margins," I said. Seymour agreed. So we went through the numbers. It quickly became clear that he'd need more than $1 million in additional sales just to break even on his investment.
And could he, in fact, count on getting those sales? I had my doubts. A specialty-clothing store is not a restaurant. When a would-be diner walks out of a restaurant because the wait is too long, that sale is probably lost. Why? Because it almost always goes to a competitor. I wasn't convinced, however, that the same thing happened when Seymour's customers decided against waiting. When you have a hot store, people come partly because they want to say they bought from you. They're looking for prestige as well as merchandise. My guess was that most Hot Pants customers who left because of the crowds would simply return when the store was less busy.
In that case, I pointed out, Seymour was losing few, if any, sales because of overcrowding. He'd saturated his marketplace. Everybody who wanted to shop at Hot Pants already did. "Well, then, maybe I'll bring in new lines," Seymour said, "like for young guys."
That's what I was afraid of. To justify his investment, Seymour might be tempted to change his concept. "You're talking about a whole new business," I said. "You could be jeopardizing what you already have. Maybe the girls want to be there alone."
The truth is, Seymour doesn't know why his business is so successful, and neither do I. It could be the music he plays or the quality of his staff or the store's name or his own personality. Most likely, it's some combination of those things and a dozen other factors -- perhaps even the lack of space. The kids may like being jammed together. They may not mind waiting in line to use a dressing room.
All Seymour knows for sure is that right now he's blowing away all the standard projections for a business of his type, size, and location. His sales are two and a half times the amount anyone would have predicted for a jeans store in a strip mall with limited foot traffic.
You can't explain that kind of success. You can only recognize it, respect it, and handle it with care. Seymour's most valuable asset is the brand he's created. By doubling the size of his store, he's taking a chance that he'll inadvertently devalue the brand. It's a risk that, in my view at least, is way out of proportion to the potential reward.
I'm not saying that Seymour shouldn't grow his business. He already has a second Hot Pants up and running. It hasn't yet matched the performance of the first store, but it probably just needs time.
So what should Seymour do? I urged him to think about starting a third Hot Pants. I suggested he choose a location near enough to the original store that the local kids would have heard the buzz but far enough away that they wouldn't already be regular customers. If the new store did well, Seymour would have a proven concept that he could sell in five years to someone interested in taking it national. If the spin-off failed, well, at least he wouldn't have damaged his core business.
But Seymour wasn't looking for that type of advice. He mainly wanted to know whether I thought he was crazy to double the size of the original Hot Pants. "Do you think I'll go out of business?" he asked.
"No," I said, "but I think you'll hurt yourself."
Seymour didn't care -- or maybe he simply disagreed. In any case, he plans to go ahead with his expansion, and that may be the right decision for him personally, even if it's wrong for the business. It's much easier to expand an existing store than to start a new one. It's also less expensive. Seymour already works six or seven days a week, putting in long hours, and he's a guy who likes to have direct control of operations. So he may be happier with a larger main store than with a third smaller one.
I'm just afraid he'll lose some of the value he's worked so hard to build. This is one time I hope I'm wrong.
Norm Brodsky is a veteran entrepreneur whose six businesses include a three-time Inc. 500 company. This column was coauthored by Bo Burlingham. Previous Street Smarts columns are available online at www.inc.com/keyword/streetsmarts.
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