Business: Laws of Economics
When you do a business, the Laws of Economics apply to that also. You buy things add your overheads, add profit and sell the product.
Or you sell a product and from that you deduct all your costs and what gets left is profits.
In the retail business – especially the book business – about which I am planning to write, there seems to be no justification to be in business. If you run a retail book shop – say of 400 sq ft, the economics works as under. Assuming that you have a sales of Rs. 300,000 a month (amazingly high figure, the real figure is more like Rs. 100,000), your profits would be Rs. 90,000 (assuming 30% GROSS margin). The MONTHLY profit and loss account would look as under:
Gross Margin Rs. 90,000
From this you need to deduct salaries (15000), rent (12000), electricity (5000), miscellaneous (4000).
This leaves you with a net profit of Rs. 44,000. Not bad, eh?
If you are reasonably qualified, you can earn this figure in your FIRST job. If you are just a graduate, this will be your salary in 4 years time. So the owner’s time is NOT being compensated AT ALL.
One of the comments that I heard is ‘they should match the price of the web stores’. Sorry most of the owners will rather shut down – though of course Strand book stall et al have created their own website, and do online sales. Not sure how popular it is…
so simple if your business cannot afford the rent at that place, cannot afford the salary that a promoter deserves (or is capable of getting for whatever reasons) …just shut it down. Sell off the shop – hey land makes money! So the shop which was not generating enough business cash flow is now the asset which is the CASH FLOW…LOL…
JJ
Hi Subra
You miscalculated the net profit; it should be Rs. 54,000 :p
Anyways, I’ve found that good retail shops supporting the whole family do make a sales of more than Rs. 300,000. Yes, book retail shops have been visibly suffering since online shopping began, but I think it has also got to do with the reading habits of us Indians, if we have any left.
siddhant
But this is a problem in all the shops & most of the business is it not,
The small guy is getting squeezed out of business because it makes more sense to either sell & live on the interest or rent the shop to some other unfortunate poor soul or rent to the Great big corporations for whom this is only an overhead……
Vince
Sounds like the movie “You’ve Got Mail”
🙂
Atul
Hi Subra,
Local Retail stores operate on higher margin compared to online sales. Operating cost is also less. Online sales need more volume to achieve reasonable margin, although margins cannot meet local retail stores.
Only common thing is that both focus on individual Contribution margins across different categories.
Cheers
Atul
Jayant
I know of 1 small shop in South Mumbai almost on verge of bankruptcy. The Senior owner (father) won’t let the shop die. Junior (son) wanted to sell it off. One day the senior departs from the world and Junior sells that shop for coool 3.5 crores. Junior has now retired from all sort of works just based on interest this money is fetching him. 🙂
pravin
@siddhant.
whats with the ‘small guy is getting squeezed’ narrative?
the small guy simply is not serving his customers anymore effectively.that is why the customers have left him.
nobody is owed a livelihood by his customers.
Atul
Hi Jayant,
Small retailers and in this case book shops need to work out their strategy to remain competitive. For example, Amazon is on the verge of killing all local retail shops. One of the US retailer Borders found tough to compete with Amazon and decided to use Amazon platform to sell its books in return for commission. Borders could have setup its own Ecommerce/Ebusiness platform but may be CB analyis suggested otherwise.
Another example is traditional bookstore in UK known as waterstones.
I think either retail shop keepers have not kept with reality OR still feel immunity from competition.
Atul
subra
pravin and Atul,
the Indian retail businessman is far far far smarter than all the management consultants. They are nimble footed also. One retailer I know moves to a locality when there is no shop in the vicinity and sells everything. Vegetables, et al. Then the place gets crowded..Big Bazaar is set up..he knows margin will vanish, he sells his SHOP at 4x the price, and moves to his next LOCATION. Most of them know. They do not ask for a livelihood from the govt. – only the educated class beg. These guys know when to cut losses and run. Clients need them just as much as they need clients. No favors here.
aditya
Subra: I will remember this SLAP for life- “Only the educated class beg”!!!! worth it to shake my conscience.
Thank you..:)