Day 525

For the prospective brewer, two very interesting classes today. In Promotion & Sales: setting up a retail store.

First of all, what type of person should open a store? Well, you probably need a creative type who can envision what the store should look like–but you should also have a number cruncher who will delve into daily and monthly sales figures to see what is selling and what is not.

There are a number of factors that will govern the success of any retail store:

  1. The Right Product. (Hint: beer!)
  2. The Right Location
  3. The Right Timing
  4. Correct Quantities of Stock (not so little that your shelves are half empty, not so much that you have months of oversupply)
  5. The Right Price
  6. Customer Service

In addition, you have to consider the three factors that make a customer come into your store: Assortment, Price and Best Experience. It’s impossible to excel at all three (at least for a mere mortal), so choose one, be excellent at it, and be very competitive at the other two. So if you offer the Best.Ever.Customer.Experience, complete with a free car wash and a mani-pedi just for coming into the store, you can probably afford to be merely competitive with price and assortment. On the other hand, having two dozen of everything in the universe in your store probably cuts you some slack with price and customer experience. Et cetera.

In addition to these three areas, you also need a “secret weapon”–something your business can boast of that none of your other competitors have. (This sounds suspiciously similar to the “competitive advantage” that Jason Fisher talked about in Beer Industry yesterday.)

Know the types of shoppers, and know which one you want to attract:

  • Quality shoppers, usually older and fairly well-off, will pay more for quality products. They make up about 10% of the shopping population.
  • Social shoppers look for the wonderful experience. They too will pay more if they find a store they enjoy. That’s another 10%.
  • Specialty shoppers are intensely brand loyal, and don’t really like shopping. Quality and a good, efficient in-store experience are what they are after–they know what they want, so don’t get in their way while they get in and out quickly. 15% of shoppers are like this.
  • Price-sensitive NON-shoppers are after moderate prices, hopefully in one place, since they don’t like to shop around. This is how Winners and Marshall’s stay in business, because a full 35% of shoppers fall in this category.
  • Price sensitive shoppers are also price-driven but they like to shop. Malls are full of them, since they make up 30% of the shopping public.

But wait, there’s more to consider. Who are your direct competitors, and what niche are they not already filling? Don’t know? Visit three competitors–you know, the places you will be stealing customers from. What are their strengths? (Avoid these.) What don’t they do well? (Do these things.)

Next up: location. Downtown? Warehouse district? Tourist area? Suburban street? All have their advantages and disadvantages, but which work best for your business?

Then you need to think about your in-store design, flow and displays, signage (be consistent and try to avoid hand-made signs drawn with Sharpies), lighting (fluourescent is cheaper but track incandescent is the most flexible and focusses on displays), use of wall space (it’s your most productive space in terms of sales per square foot).

Hint: Hire a professional designer to help. Look for one that talks in terms of better sales and productivity relevant to your target market, not just store design.

Once you have your store in place, better have some sophisticated Point of Sale (POS) software that can track your daily and monthly sales, right down to item size. First, its easier to know when to restock when inventory gets low. Second, good POS software will allow you to figure out what parts of your store are working, in terms of sales, and which parts aren’t. This will allow you to adjust displays, put lesser-selling merchandise on sale, and generally let you know if your store design is working.

Finally, are you providing an excellent overall store experience? A recent Harvard Business School study found that a customer with a low to moderate shopping experience only had a 20% chance of returning to the store. A customer with a moderately good experience would return 50% of the time. And a customer with a very good to excellent experience would return 90% of the time. Okay, I wasn’t shocked to hear that a better experience equates to a better return rate. What was surprising was that even a moderately good experience only resulted in a 50% return rate. You need to provide an excellent experience just to have a better than even chance of seeing the customer again. Huh.

In Brewery Management, Mike Arnold warmed us up by discussing how the industry defines a craft brewer. This is a a constantly changing target, and the various definitions that have been used (amount of beer, use of corn adjuncts, controlling interest by larger corporation, styles brewed, etc.) always leaves somebody’s nose out of joint.

On to the main topic of the day, starting up a brewery.

First, set up a company structure, set up a bank account, order equipment, get your permits, get quotes on insurance and start planning production.

Whoa, let’s back up a bit. Each of these is going to take some time over the next few weeks.

Okay, Step 1: Company structure.

Sole proprietership is the easiest: you own the whole company, you get all the profits. Yay!

Problem is, you are also liable if the company goes bust. The bank will come looking for your house, your car, your clothes and your little dog too. Same thing if you get sued. You are personally liable.

A simple partnership works much the same way, except now there are two of you to share the liability. The bank gets two homes. And two little dogs.

The only way to avoid financial liability is to incorporate. That simply means formally registering your company with the Ministry of Government Services. Of course, you have to structure your company a certain way to meet the legal requirements for company governance: shareholders, Board of Directors, and company officers (the Head Brewer, CEO, CFO, etc.) The shareholders provide the equity, and they elect a board of directors to oversee the strategic vision of the company. The board of directors in turn hires (and fires) the company officers, decides what firm or person will audit the company books and approves the salaries and expense accounts of the company officers. The company officers make the day-to-day decisions about running the company. At least once a year, the shareholders have a meeting where they can retain or replace the board of directors.

There are some added extras of course. Shareholder voting. Minority shareholder rights. What happens to a person’s shares if he or she dies? Selling your shares. Shotgun clauses if there is a falling out between shareholders.

(A shotgun clause is kind of a neat “prenuptial agreement” between shareholders. In the case of a falling out between partners, the clause forces a partner to make a fair offer for the other partner’s shares or risk losing money. Suppose Cain and Abel buy a sheep worth 50 shekels by each putting up half the cost, 25 shekels. After a few months, the two partners are not getting along. Cain  decides to buy Abel’s share so he can own the entire sheep. Knowing that Abel needs the cash and will probably accept a lowball offer, he craftily offers Abel only 20 shekels for Abel’s share of the sheep.

“Aha!” Abel thunders, as he hauls out the roll of papyrus holding their partnership contract. “We have a shotgun clause.” It turns out that if Abel turns down the offer to buy, he himself must then buy Cain’s share of the sheep at the offered price. Cain mutters darkly as he thinks murderous thoughts about his brother as Abel buys Cain’s share of the sheep for only 20 shekels, 5 shekels below market value.

“If only I had remembered about the shotgun clause,” mutters Cain, “I would have offered you 35 shekels for your share. Then I would have profited!”

Abel shakes his head. “Brother, a shotgun clause is meant to force partners to make a fair offer. You only offered 20 shekels, which I refused, allowing me to buy your share for only 20 shekels. If you had offered 35 shekels, I would have agreed to sell my share to you and made a profit of 10 shekels, while you would have spent 60 shekels on a sheep only worth 50. In the end, by not making a fair offer, you either lose your share and lose money, or end up with my share and also lose money. The only way to break even with a shotgun clause is to offer me a fair price for my share, which I will then either accept, making you sole owner of the sheep, or decline, making me sole owner of the sheep.”

But I digress…)

The way to incorporate is actually pretty simple. First do a name search (or have someone do a name search) on your proposed corporation name. It has to be unique. If you don’t want to think up a unique name, get a number for your corporation. (You can always call the operating company whatever you want, it’s just the corporation name that has to be unique.) Generally a name search will cost around $60.

Then there’s an incorporation form to fill in. You can get a lawyer to fill it out for around $1000, or you can fill it out for free. The government wants  details like the number of directors who will sit on the board (Fixed number of directors? Or a variable number between 2-6?), who the founding directors will be (at least until the first shareholders’ meeting), any restrictions on who can be a shareholder (for instance, perhaps you have to be an employee to be a shareholder), the number and type of shares (common, preferred, non-voting, etc.), conditions for transfer of shares, who are the incorporators, etc. Take the form and $400 and skip down to a Ministry of Government Services office, take a number, stand in line, have a government drone look over your paperwork. Done. Two weeks later, an form called an Initial Notice arrives. Who sits on your board of directors? And other exciting details. Fill it out, send it in. (Send in a new one everytime there is a change to the board of directors.) You’ll also get a box of incorporation papers and an embossing stamp so you can sign and seal legal dcouments with your corporation stamp. Cool, if that’s the way you roll.

Next week, we’ll take a break from planning our brewery in order to make a presentation of a business plan for a proposed brewery before a panel of real experts–a real banker and three real brewery owners.

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