" Our Dollar store owners offer their customers merchandise of exceptional value at a very low fixed price. This low price point creates an impulse shopping experience. We hear comments daily from prospective clients, like yourself, about their experience in shopping dollar stores and how they go into a new store to investigate and leave having spent forty to seventy dollars .
The combination of exceptional value at incredibly low prices have made Dollar Stores the fastest growing retail segment in recent years.
Profitability, of course, depends on many variables. The location, the cost and variety of merchandise, and the management skill of the owner are just a few of the many factors that will ultimately determine the level of profit.
Many expenses in this business are fixed; they stay constant regardless of the sales generated. The following table lists typical FIXED cost categories and it provides a model to use in determining what your costs will be.
Therefore, a few key VARIABLE cost categories will determine how well the store performs. They include:
Merchandise
Store-owners will control their average cost of merchandise based on the suppliers they purchase from and the product mix they decide to put in the store. The average a cost of the merchandise orders we create to open most stores is typically between fifty-two and fifty-five cents per item on a store-wide basis. (Opening store orders take into account the geographical location of each store and freight and delivery time considerations, and are placed with the suppliers best situated to provide economical, timely stock replenishment. This helps each store a identify a group of suppliers best suited to serve them as they go forward.) Keep in mind that the average cost of merchandise for some departments runs at a higher average cost. For example, liquid Health and Beauty Aids (HBA) cost in the range of sixty-two to seventy-three cents per item, and jewelry costs range from thirty-five to fifty cents. If a store-owner decides to put a higher percentage of HBA in the store than we originally recommended, their average cost on a store wide basis will be higher.
Wages
Each client should strive to keep labor cost, including that of the owner and manager, in the range of 10 to not more than 13 percent of sales
Freight
This is usually discussed in terms of freight cost as a percentage of merchandise purchased. The store owner should try to keep the range of freight cost to merchandise purchased between 3 and 5 percent. Stores that are located in states where the population density is lower, such as Montana, Wyoming, Idaho, and North Dakota may realize slightly higher costs due to the infrequency of truck routes.
Sales
Sales level is the other key factor that will help determine your profit level. Sales per square foot will vary from location to location and from store owner to store owner based on a myriad of factors. The size of the community, general customer traffic of the shopping center, store location, proximity to the anchor, previous business ownership, management and merchandising experience of the owner, and personal daily involvement of the store owner are just a few examples of the variables that will determine your level of sales. The business skill and experience of each owner, along with the level of involvement in and commitment to their store will have an impact on their success.
SAMPLE OF FIXED COST CATEGORIES
DESCRIPTION – RECOMMENDATIONS ON HOW TO DETERMINE COST
Health Insurance
Typically, this is a major medical policy for the store manager. You can offer no coverage, major medical coverage, or different levels of more complete coverage. It is recommended that this cost be kept at around $100 per month.
Insurance
This category relates to general business coverage and includes public liability, fixed articles, theft, and other coverages. Contact a local insurance agent for quotes.
Electric
The local power company can give you estimates of electric cost for retail establishments by square foot.
Telephone
Determine usage — again, your local phone company will give you insight into this nominal cost.
Personnel
This typically includes items such as pizzas once a month and a year end party. Determine what you would like to do for your employees.
Rent
This figure includes the monthly stated rent and charge for common area costs. The lease agreement will state these charges. For preliminary planning purposes, contact with local realty will give you a good idea of the cost range.
Supplies
This category pertains to office and store supplies. Pens, tape, paper, printer cartridges, and like items.
Advertising
Routine advertising is always recommended to keep your store in front of the public. The local newspaper will provide various rates and programs.
Depreciation
Pertains to the periodic write-off of capital cost items. Your local accountant can provide further information.
Other Expenses
This is a catch-all for other costs that pertain to your business operation.
THIS EXAMPLE OF KEY FIXED COST CATEGORIES IS NOT INTENDED TO BE COMPLETE AND SHOULD BE USED FOR GENERAL INFORMATION PURPOSES. IT IS ALWAYS PRUDENT TO DO YOUR HOMEWORK AND DEVELOP A RANGE OF COST LEVELS THAT CAN BE USED FOR FINANCIAL PLANNING PURPOSES. AT THE END OF THIS SECTION YOU WILL FIND A BLANK WORKSHEET TO USE TO CREATE YOUR OWN ESTIMATES.
THE FOLLOWING ILLUSTRATION SHOWS THE FORMULA FOR HOW YOU CAN DETERMINE THE SALES NEEDED TO BREAK-EVEN AND TO GENERATE VARIOUS LEVELS OF PROFIT FOR YOUR STORE:
ILLUSTRATION FOR A SMALL STORE |
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SUMMARY OF VARIABLE COST RANGES AS A PERCENTAGE OF SALES
SUMMARY OF ANNUAL FIXED COSTS
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| NEXT, WE PUT THE ESTIMATED ANNUAL FIGURES INTO THE FOLLOWING EQUATION TO DETERMINE THE TOTAL SALES NEEDED TO BREAK-EVEN. TAXES NOT INCLUDED FOR THIS ILLUSTRATION.SALES = VARIABLE COSTS + FIXED COSTS + PROFITSALES = 64.7% + $47,550 + 0 (NOTE: PROFIT = 0 AT BREAK-EVEN)
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100% SALES = 64.7% + $47,550
35.3% SALES = $47,550 (NOTE: 100.0 – 64.7 = 35.3)
SALES = $134,703 (NOTE: 47,550 / 0.353 = 134,703)
TO PROVE THE FORMULA, WE PLUG THE NUMBERS INTO THE FORMULA
SALES = VARIABLE COSTS + FIXED COSTS + PROFIT
$134,703 = $87,153 + $47,550 + 0
SO, WE SEE THE FORMULA WORKS – IF YOU GENERATE $134,703 IN SALES, VARIABLE COSTS WILL BE $87,153 ($134,703 * 0.647) AND THE FIXED COSTS WERE DETERMINED TO BE $47,550.
THUS, IF YOUR COST STRUCTURE IS THE SAME AS IN THE ILLUSTRATION, ONE WOULD NEED TO GENERATE $134,703 IN SALES TO EXACTLY BREAK-EVEN ON THE BUSINESS.
BREAK-EVEN MEANS TO NEITHER MAKE NOR LOSE MONEY.
HOW MUCH IN SALES REVENUE WOULD ONE NEED TO GENERATE EACH DAY TO BREAK-EVEN IN A BUSINESS?
ASSUMING 360 WORK DAYS, $134,703 / 360 = $374.20
SO, IF ONE AVERAGED $374.20 IN SALES PER DAY FOR THE YEAR, THEY WOULD EXACTLY BREAK-EVEN ON A BUSINESS
HOW MUCH IN SALES REVENUE WOULD ONE NEED TO GENERATE EACH HOUR TO BREAK-EVEN IN A BUSINESS?
GOING ONE STEP FURTHER, ASSUME THAT STORE IS OPEN 10 HOURS PER DAY. A STORE WOULD NEED TO GENERATE $37.42 (374.20 / 10 = 37.42) IN SALES PER HOUR, ON THE AVERAGE, FOR EACH DAY OF THE YEAR..
HOW MANY CUSTOMERS PER HOUR DO I NEED TO BREAK-EVEN?
IF THE AVERAGE CUSTOMER SPENDS $12.00 PER PURCHASE, YOU WOULD NEED TO SERVICE 3.12 CUSTOMERS PER HOUR (37.42 / 12 = 3.12) TO ACHIEVE BREAK-EVEN ON THE BUSINESS.
THANK YOU FOR STAYING WITH THIS LENGTHY ILLUSTRATION. NOW WE CAN USE OUR FORMULA TO DETERMINE DIFFERENT LEVELS OF POTENTIAL PROFIT.
WHAT IF I WANT TO MAKE A 10% PROFIT – HOW MUCH SALES REVENUE WOULD I NEED?
COMPLETE THE STANDARD FORMULA
SALES = VARIABLE COST + FIXED COST = PROFIT
100% SALES = 64.7% + $47,550 + 10% (PROFIT)
SOLVING
100% SALES = 74.7% + $47,550 (64.7% + 10% = 74.7%)
25.3% SALES = $47,550 (100.0 – 74.7 = 25.3%)
SALES = $187,945 NOTE ($47,550 / 0.253 = $187,945)
SALES PER DAY = $522.10
SALES PER HOUR = $52.21
CUSTOMERS PER HOUR = 4.35 (ASSUMES AVERAGE PURCHASE OF $12.00)
WE COMPUTED THE SALES NECESSARY TO MAKE VARIOUS LEVELS OF PROFIT FOR A 1,000 SQUARE FOOT STORE – SEE FOLLOWING TABLE:
ASSUMPTIONS:
- OPEN 360 DAYS A YEAR, 10 HOURS PER DAY
- VARIABLE AND FIXED COST DATA FROM EXAMPLE ABOVE
- THE RESULTS FOR AN ACTUAL LOCATION WILL VARY
|
IF YOU DESIRE (PROFIT) |
ANNUAL SALES RQD
|
AVG. DAILY SALES RQD
|
HOURLY SALES RQD
|
CUST- OMERS PER HOUR RQD |
PROFIT BEFORE TAXES
|
| EVEN |
$134,703
|
$374
|
$37.42
|
3.12
|
$0
|
| 1% |
$138,630
|
$385
|
$38.51
|
3.21
|
$1,386
|
| 2% |
$142,793
|
$397
|
$39.66
|
3.31
|
$2,856
|
| 3% |
$147,214
|
$409
|
$40.89
|
3.41
|
$4,416
|
| 4% |
$151,917
|
$422
|
$42.20
|
3.52
|
$6,077
|
| 5% |
$156,931
|
$436
|
$43.59
|
3.63
|
$7,847
|
| 6% |
$162,287
|
$451
|
$45.08
|
3.76
|
$9,737
|
| 7% |
$168,021
|
$467
|
$46.67
|
3.89
|
$11,761
|
| 8% |
$174,176
|
$484
|
$48.38
|
4.03
|
$13,934
|
| 9% |
$180,798
|
$502
|
$50.22
|
4.19
|
$16,272
|
| 10% |
$187,945
|
$522
|
$52.21
|
4.35
|
$18,794
|
| 11% |
$195,679
|
$544
|
$54.36
|
4.53
|
$21,525
|
| 12% |
$204,077
|
$567
|
$56.69
|
4.72
|
$24,489
|
| 13% |
$213,229
|
$592
|
$59.23
|
4.94
|
$27,720
|
| 14% |
$223,239
|
$620
|
$62.01
|
5.17
|
$31.254
|
| 15% |
$234,236
|
$651
|
$65.07
|
5.42
|
$35,135
|
| 16% |
$246,373
|
$684
|
$68.44
|
5.7
|
$39,420
|
| 17% |
$259,836
|
$722
|
$72.18
|
6.01
|
$44,172
|
| 18% |
$274,855
|
$763
|
$76.35
|
6.36
|
$49,474
|
| 19% |
$291,718
|
$810
|
$81.03
|
6.75
|
$55,426
|
| 20% |
$310,784
|
$863
|
$86.33
|
7.19
|
$62.157
|
| 21% |
$332,517
|
$924
|
$92.57
|
7.7
|
$69,829
|
THE VARIABLE COST AND FIXED COST RANGE INFORMATION, ALONG WITH THE COSTS USED IN THE ILLUSTRATION ARE NOT TO BE USED BY YOU TO DETERMINE YOUR COST LEVELS. ALSO, THE PROFIT, ANNUAL SALES, SALES PER DAY, SALES PER HOUR, AND PROFIT ARE SIMPLY A BY-PRODUCT OF THE VARIABLE AND FIXED COST DATA SUPPLIED FOR ILLUSTRATION PURPOSES AND SHOULD NOT BE USED BY YOU TO DETERMINE YOUR FINANCIAL PERFORMANCE, INCLUDING PROFIT LEVELS. THIS ILLUSTRATION SIMPLY ALLOWS YOU TO FOLLOW THE MATHEMATICAL CALCULATIONS IN DETERMINING YOUR FIGURES.
THERE IS A TREMENDOUS AMOUNT OF INFORMATION LOCATED ON THE INTERNET THAT COULD BE USEFUL IN DETERMINING THE COST STRUCTURE OF YOUR STORE.
***BECAUSE RENT VARIES FROM REGION TO REGION, PLEASE TALK TO YOUR SALES REPRESENTATIVE FOR ADDITIONAL INFORMATION.
****THE AMOUNT YOU SPEND ON ADVERTISING IS COMPLETELY UP TO YOUR DISCRETION.
CLICK HERE TO GET THE FINANCIAL WORKSHEET (Microsoft Excel Required)
NOTE: The financial performance of each and every store is dependent upon many variables including location, population, average income of customers, merchandising habits, management experience, etc.
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