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How to Branch Out — Without Going Out on a Limb

Features
By William George Shuster, Senior Editor
This story appears in the August 1999 issue of JCK magazine
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If you run one store successfully, it should be easy to open a second one, right? Wrong. “There are a lot of growing pains in learning to run a second store,” notes St. Paul, Minn., jeweler Mark Moeller, who went through the experience with his Edina, Minn., store. “Running two stores isn’t just doubly hard. It’s 10 times harder.”

Although difficult, opening a second store can be an independent jeweler’s key to success. Here’s some advice from consultants and jewelers on when and why you should branch out with a second store.

When to open a second store. A jeweler, like any good businessperson, should always be open to new opportunities. But when exactly should you think about opening a second store? There are some signposts.

  • Family reasons. Most of the retail jewelry business is composed of independent jewelers, and most of those stores are family businesses. Often, adult children or relatives want a say in how the store is run, especially if the business is successful. That’s one reason to open a second store—especially if those vying to run the first store have different ideas on issues like merchandising and marketing, says jewelry industry consultant Janice Mack Talcott, who was born into a jewelry family and was once a jeweler herself. Opening a second family store avoids fraternal bickering, hurt feelings, and divided staff loyalties, she notes. It also expands the company’s market.

  • Need to expand. If your current store is running out of space or if your market is well-covered, adding a second store nearby is an option. Gumer & Co. in Louisville, Ky., had no room for physical expansion on the ground floor of the 17-story building where it’s located. Owner Bruce Gumer opened a second store this year in the east end of town, which has more traffic and a wealthier clientele.

Perhaps you’d like to expand a certain department of your business. In Plainview, N.Y., owner Al Solomon of Solomons Jewelers was concerned about his dwindling gift business. “We need giftware accessories to be a one-stop store for gifts for all occasions,” he says. But while strong in watches and jewelry, “we were losing gift business to other stores.”

So he opened a second store specializing in giftware (bridal items, crystal, etc.) next to his jewelry store. Moving his giftware inventory into the other store also enabled Solomon to double the size of the men’s jewelry department in the original store.

  • Changing demographics. New housing or new growth in your market may cause changes or shifts in your customer base. You have what Talcott calls “divided demographics”—and a possible reason for a second store. Fred Weber of Weber Jewelers in Kettering, Ohio, noticed a few years ago that some business in his store “began to shift direction” because customers were coming from a new area. “So, we followed our customer base and the new customer opportunities,” and opened a new store there, he says.

A good way to evaluate your demographics is to plot your customers’ addresses on a wall map of your area, says Jeffrey S. Green, president of The Green Group, which does market analysis for jewelers. Such maps are available from your municipal or regional planning or zoning offices. Use colored pins to represent different ZIP codes and towns.

This way you will define your geographic market by showing where most of your customers come from (70% of your sales should be from your primary trade area). It will also highlight new or underdeveloped opportunities based on the number and type of customers from outside your market. And it will indicate how much overlap there would be between your first and second markets and help determine where a second store should go.

  • Business stability. A store shouldn’t expand until it reaches a certain financial level. Robert La Perla of La Perla Ltd. in West Hartford, Conn., suggests a minimum of $3 million in annual sales before branching out. Others say specific numbers are less important than having what Solomon calls “the financial ability to increase all obligations.” If a jeweler’s volume is growing at least 10% a year, he or she should consider opening another store, says Green. Moeller adds, “Your first store should have reached most of its potential before you even consider a second store.”

The business climate is a factor, too. “Thanks to this healthy economy,” notes Green, “independent retailers are opening a second store on average two or three years after they have opened their first. By then, customer awareness of their business has matured.”

But Talcott, a partner in Performance Concepts, a consulting firm that advises retail jewelers on business development, adds that financial stability alone isn’t enough. “It isn’t just a matter of being able to make money hand over fist,” she says. Before you open a second store, “have a good working operational formula for your first store. That includes a good staff, having buying and inventory under control, and being sure your cash flow can withstand the capital outlay.”

When not to open a store. Anyone making less than $200 a square foot definitely shouldn’t consider it, says Green. Also, don’t let dreams of entrepreneurial success cloud your vision. “Be sure, first, that the investment you would make in a second store won’t bring a better return [if left] in the original one,” suggests Weber.

Forget vanity or spur-of-the-moment hunches. “Don’t open a second store just for the sake of it,” says Moeller. “Do it only if an opportunity exists or if it gives you a competitive advantage.” For him, that opportunity was the chance to buy a successful store in a nearby market with a clientele similar to his.

How to open a second store. Okay. You’ve decided to take the plunge. Here’s what should happen next:

  • Planning. A general who goes into battle unprepared will lose. So will a businessperson who expands without careful planning. Therefore, spend six months to a year planning your expansion. “You need at least that much time to get all your ducks in order,” says Moeller. “A badly planned or operated second store will pull down the first.”

What should planning entail? First, learn the do’s and don’ts from fellow jewelers and retailers in your home town who have added branch stores, or gather intelligence at trade shows or state association meetings. Second, hire a market analyst to do a study of the business potential and problems of the market of your proposed store. (Look under “Market Analysis” in the phone book.) A study, which will cost hundreds to thousands of dollars depending on its detail, will objectively define your project’s feasibility and be useful when it’s time to obtain financing, says Green.

Finally, review and revise your operations. Running two or more stores is different from running one, warns Talcott. For example, “How will you handle inventory orders and transfers between the two? Will you have a single location for repairs or do them in both stores?”

  • Financing. Underfinancing is a major pitfall for many jewelers opening a branch store. “They do it on a shoestring, and it kills them,” notes Moeller.

Too many jewelers assume they can finance a second store themselves. Others underestimate what they need or don’t borrow enough. To avoid such problems, says John Michaels of the 12-store Michaels Jewelers in Waterbury, Conn., you should do a cost analysis. Questions you should answer include “Can you can afford it? Are the sales there [in the new location] to support it? Do the economics work?” Consider, too, the effects on your staff, customer service, advertising, and merchandise. Factor in additional salary and inventory costs.

It’s like building a house, says Talcott. “You must design it first according to what you need and what you can afford.” Otherwise, you could be like one Midwest jeweler who thought he had enough cash for the project but found, once he began, that he was “borrowing money from right and left, asking for memo and borrowing more.”

Confer with your senior manager, accountant, banker or other lenders, and local Small Business Administration office (see p. 99) for help in calculating what you need and how much to borrow. The real estate broker who helps you find a location for the second store can also provide a checklist of information about such costs as rents, taxes, and common-maintenance-area charges (for malls), adds Green.

Ask your suppliers to assist you by providing more memo goods and longer terms—though you may have to get tough to convince some. One jeweler’s long-term vendors agreed to extended dating only after he threatened to get new suppliers.

Expect to spend anywhere from several hundred thousand dollars to more than a million on a second store (for leasehold improvements, rent or acquisition, inventory, fixtures, etc.). Weber Jewelers borrowed $85,000 from the bank for leasehold improvements and fixtures, covered $300,000 in new inventory through extended terms from its suppliers and a second mortgage, and borrowed another $50,000 in working capital from the bank.

Gumer & Co. spent $650,000 for its second store, which opened in June. That included about $150,000 for fixtures, furniture, plans, and interior design; $300,000 for new inventory (plus $150,000 of merchandise from the first store); and $50,000 for advertising and personnel costs. Gumer financed it with $100,000 borrowed from the bank and another $100,000 from his bank accounts. He also convinced some major vendors to give him extended dating through January 2000 by agreeing to take a percentage of memo merchandise that didn’t sell.

  • Location. How far from the first store should a second store be? Green suggests at least 10 miles to avoid cannibalizing the first store’s business. “A branch store should be far enough away so that it doesn’t take sales away from the original store, but close enough to share advertising expenses,” says jeweler Robert La Perla.

In choosing a site, consider several factors. Accessibility, traffic, and parking should be at least as good as they are at your current store. Customer demographics and lifestyles should be similar as well. Otherwise, warns Moeller, “If it is a different market, then what has made the first store successful won’t be there for the second one.”

Even so, don’t assume that everything that sells in your original store will do well in your second one, says Green. “One obstacle to branching out,” he notes, “is not considering a new market’s lifestyles and competitive environment. Too many independent retailers assume they can do better than the competition, rather than keeping their eyes open and learning.” Visit other retail and jewelry stores in the new market—especially those that are similar to yours or others in your home market—to get an idea of what sells and at what prices.

Find out about growth, renovation, and development plans for the new area that could affect your business. Municipal planning or zoning offices are good sources of this information.

Consider neighboring stores and businesses. Does what they sell and the appearance of their store help or hinder your business? “You want healthy co-tenants,” urges jeweler Phil Silverstein of Anderson, S.C.“Are they your type of store? Will they support the class of customers you want?”

Be prepared to wait, if necessary, for the right location. Don’t sacrifice the long-term advantages of a good site for what one jeweler calls “a cheap but lousy location.” Tom Branscomb of Sierra West Jewelers, a four-store business in Orem, Utah, was willing to look and wait “a long time [until] the right location, one with accessibility and visibility, finally became available to purchase.”

  • Customer service. An unanticipated problem in opening one or more branch stores, notes Talcott, is a decline in customer service. “Everyone is stretched thin. It’s harder to be consistent. You pay less attention to details, and the quality of service drops. The more locations you have, the harder it is to be consistent—and so, the more important it becomes to maintain the level of service.”

Many jewelers agree. Says George Baker of Baker’s Fine Jewelry Gifts in Virginia Beach, Va., “You must bend over backwards to be accommodating.”

  • Staffing. This is the most critical consideration in opening a branch store, according to Branscomb. Most jewelers and consultants recommend that the manager of your second store should be a veteran salesperson from your first. “Don’t weaken your first store by transferring its experienced manager to the second,” warns Talcott.

Filling out the rest of the staff can be done in a couple ways. “Hire from competing jewelers and retailers,” suggests Green. “You want experienced salespeople, but if you move those in your own [first] store, you weaken its operations. And if you hire all new people, you have to train them in your policies and procedures at the same time they’re running the new store.”

“Using seasoned veterans is better,” agrees Gumer, who “went to the best stores and hired the best salespeople in those stores, offering them the best salaries, commissions, and profit incentives in the market.” Don’t build a staff “on a shoestring,” he says.

Others suggest expanding and training the staff in your current store in anticipation of future opportunities. Moeller, for example, now brings in “as many qualified salespeople as possible so that when opportunity presents itself again, we will be ready.”

“Develop managers in your current store for more than one location,” suggests Talcott. “Have a career-development track in your store which enables staffers to advance and which provides you with qualified people able to take on new responsibilities as they arise.”

Despite its problems and headaches, branching out has its rewards, both personal and profitable. If anyone had asked Moeller if opening his second store was the right thing to do during its first three years, the jeweler would have said no. But now, having survived and learned from those first years, and with the store showing healthy profits, Moeller says, “This is the greatest decision I ever made.”

Ask Uncle Sam

Need business or financial advice before you open your second store? Ask Uncle Sam. The federal Small Business Administration has more than 1,050 Small Business Development Centers around the country—one Lead Center in each state, usually in a major city, and more than 1,000 smaller “sub-centers” in various cities and college towns.

The tax-supported centers offer free advice from experts, technical assistance, resources (such as business-information libraries), and other services to retailers who want to expand their businesses. In addition, SBA has 70 district offices and numerous branch offices throughout the United States and its territories.

SBA also has a number of loan programs available through commercial lenders. If your bank or lender believes your business plan for a second store doesn’t meet underwriting requirements or is weak in collateral credit, it will go to SBA to guarantee the loan.

For more information, call the SBA Answer Desk at (800) 8-ASK-SBA or go to SBA’s Web site (www.sba.gov).

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