Starting a retail store – and ensuring that it succeeds – is a major undertaking.
Organizing and securing premises, paying utilities, outfitting the shop, and stocking inventory are often easier said than done, creating a challenging and costly web that requires careful research and planning. So, how much does it cost to start a retail store?
For many hopeful retailers, the startup cost poses a significant barrier to entry. With all of the components required to launch a retail business, it’s easy to miss something major, putting your operations at risk before the shop doors even open. However, appropriate analysis can do wonders to alleviate the burden of the startup process. This is what you can expect when starting a retail store.
Crafting a Business Plan
A business plan is one of the most essential steps in starting a new retail business. You’ll need to map out what you’re going to do and how you’re going to do it. Far more than a basic outline, your business plan should be an in-depth, fully personalized document that considers everything from your plans for growth to market research to demonstrate exactly how your blossoming company will move forward.
While there’s no right or wrong way to write a business plan, yours should cover as many details as possible related to expected costs, income projections, industry analysis, and even your business structure.
A standard business plan includes the following sections:
- An executive summary, offering a snapshot of your business and what you hope to accomplish.
- A company description that describes how exactly your company will function.
- An analysis utilizing relevant, topical research based on the current market, industry dynamics, and competitors.
- A description of your organization and management structure.
- A comprehensive review of the service or product you’ll offer, including design ideas, specific plans, and more.
- Marketing methods and sales strategies that describe how you’ll promote your offerings, acquire customers, and grow sales for the foreseeable future.
- Funding requirements detailing the money you’ll need over the next several years.
- Financial projections, including income statements, balance sheets, and statements of cash flow.
- An appendix containing any other relevant information, such as permits and publications.
Evaluating Operating Expenses
In-depth market research may sound exhausting, but it’s a critical part of properly planning your retail business. Through your analysis, you’ll be better prepared to estimate your business expenses, allowing you to put together a valuable proposal that will satisfy lender and investor needs.
Take rent, for example. Cost per square foot per year varies significantly based on location. In New York City, the average annual sale price per square foot in commercial spaces in 2016 was a whopping $1,300, up 40% from 2012, with retail spaces on the city’s hottest streets coming in around $3,400 per square foot. In an average retail space of 1,000 square feet, a year’s rent could cost you $1,300,000 or more in the Big Apple. These rates don’t usually include utilities either. In the U.S., the average cost per square foot for electricity is approximately $1.47, while gas clocks in at $0.29. In addition, water and sewer charges, phone expenses, and internet and cable bills should also factor into your calculations.
Costs are much more reasonable outside of Tier 1 cities, such as New York or San Francisco. Des Moines, Iowa, for example, had an average price per square foot per year of $87.55 in June of 2016. However, with a population 37 times less than that of New York City, a retail store in central Iowa will see significantly fewer customers. While theoretically all 215,000 residents could become customers of your small shop, this is unlikely. Your research should help you determine precisely how many shoppers to expect based on area averages and local competitors.
Another option may be to opt for a pop-up shop in a temporary location to test the market before you commit to a long-term lease at a more permanent location. You may find out that while it may cost you a little more to have a prime downtown location, that area also generates a ton of foot traffic that translates into more customers and sales for you.
Calculating Insurance Coverage and Joining the Community
Think comprehensive insurance coverage is a waste of time and money? Think again. Just as you insure your health, life, and car, you’ll need to properly insure your business. Some forms of insurance are required to receive financing, while others are just a smart idea to ensure the continuity of operations.
The insurance options you may want or need are:
Property Insurance – covers losses from physical damage or theft, including the contents of your business.
Liability Insurance – protects against lawsuits related to incidents on your property or accidents caused through normal operations.
Business Interruption Insurance – covers any unforeseen disturbances that lead to temporary closure, such as natural disasters, that can interrupt the course of business and diminish profits.
Health Insurance – helps offset the cost of bills for covered illnesses and injuries, both for yourself and for your employees. Corporate health insurance is often cheaper than an individual policy.
Key Person Insurance – covers the cost of an owner’s or manager’s disability or death, protecting against loss of revenue from any related reorganization or new hire.
Workers’ Compensation Insurance – is a legal requirement in many states. Workers’ comp policies protect workers who get sick or injured on the job.
While there’s no way to accurately estimate the cost of coverage without receiving a quote from a local carrier based on number of employees, loss limits, and other personal details, most small retail stores pay around $1,500 a year for an inclusive Business Owners’ Package policy and an additional $1,400 for workers’ compensation coverage.
Coverage costs don’t stop at insurance, however. To stand out in your community and abide by local business policies, your membership in small business owner groups and retail-specific organizations – and the associated costs – may be required. Joining the local Chamber of Commerce, for example, can connect you with other small business owners, offer networking opportunities, and ensure your retail business is listed in area publications for a cost of $200 to $600 per year, based on location.
Understanding Startup Costs
Buying insurance and renting a retail space are great first steps, but you have a long way to go before you’re ready to start selling. The initial costs associated with getting your shop started will likely consume a significant portion of your budget, especially if your store requires anything out of the ordinary. While many of these expenses, such as computer purchases and cosmetic upgrades, are only incurred in the first year or every few years, it’s important to be realistic about the often pricey nature of a retail business start-up.
Equipment and Technology
Even if your products aren’t tech-savvy, your store should be. Essentials such as a point of sale system (POS), computers, web access, televisions, mobile payment platforms, and other IT expenses may not be cheap, so plan accordingly. On average, a POS system costs around $2,000, with an additional $550 for each workstation. Televisions may be $300 to $500 each, while web access can cost $100 or more a month.
Website Hosting and Ecommerce
If you want a website, you need a website builder and a host to keep it online. Free builders and hosts are available, but their capabilities are limited and may reflect poorly on your brand. Instead, expect to invest a minimum of $30 – $200 a month on your site and hosting.
Alternatively, you may build a site with ecommerce capabilities versus a static website. The benefit here for savvy retailers is that ecommerce becomes a second sales channel for your business, allowing you to grow faster. The negative is, ecommerce is highly competitive. Being successful requires a significant investment of time, which may be hard to come by if you’re busy with the launch of your brick and mortar store. That being said, we recommend that at a minimum, you keep ecommerce as part of your long term business plan.
This means accounting for it when you make technology decisions like choosing a POS system. A POS system like ShopKeep, for example, integrates with BigCommerce, a very popular ecommerce platform. This saves you time and effort in two ways. First, you can push your product listings and inventory info from ShopKeep into BigCommerce, saving you time when you initially set up your store. Second, inventory will be kept in-sync between the physical and online stores; meaning that an in-store sale is reflected in your online inventory. This prevents stock and potential customer service issues.
Similar to a static website, most hosted ecommerce platforms will run you from $30 – $300+ per month. If you want to hire someone to design and build your store for you, you should also budget anywhere from several hundred to several thousand dollars as a one-time purchase. The price is dependent on the sophistication of the project.
Interior Decor and Aesthetics
It’s unlikely that the space you decide to rent will be completely ready for sales without any improvements or upgrades. Instead, you’ll probably have to paint the walls, install shelving, add a counter, replace flooring, and make other changes. While some fixes can be handled independently, bigger projects may require a general contractor at a rate of $50 to $100 an hour in addition to the cost of materials.
Entity Formation Costs
Starting a business requires more than physically setting up a shop. Legally, you need to establish a business organization. Options include:
- Sole Proprietorship
- Limited Liability Company
- Limited Liability Partnership
If you’re not sure which option is best, an attorney can help you evaluate the pros and cons and file the proper paperwork, which can cost anywhere from $100 to $1,000 or more, depending on the state in question and the type of organization selected.
Professional and Legal Fees
Many steps in the startup process may involve help from lawyers, accountants, and other business professionals, especially if you’re new to the world of business ownership. Working with a lawyer to incorporate your business or an accountant to set up your books and file your taxes won’t be cheap, costing anywhere from $1,000 to $10,000 or more.
Licensing and Permitting Fees
Numerous licenses and permits go hand in hand with starting a business, and all have associated costs. Before you get your business off the ground, you’ll need to file for things like:
- An Employer Identification Number (EIN) for tax purposes.
- State and local licenses, as indicated by the Small Business Administration.
- A Resale Certificate (for those who won’t be selling exclusively independent products).
- A Seller’s Permit.
- A Certificate of Occupancy for your retail space.
Costs for these can vary from $200 to $2,000 depending on your business and the state in which you’re operating.
Marketing, Promotion, and Public Relations
Marketing, promotion, and PR spending will be an important part of your beginning budget. While many strategies are lower cost than ever before, especially with the growing popularity of digital marketing, social media, and SEO, properly advertising your business isn’t a corner you can cut. While your spending will largely depend on the strategies you have in mind, many business experts suggest a budget of 9% to 12% of estimated sales.
Branding and Logo Design
Your brand is a vital part of your business’ identity, and that means a great logo that speaks to your operations. A professional logo and branded materials are a necessary part of establishing your presence in the corporate world, with costs ranging from $200 to $500 or more.
Once you have a well-designed logo, you’ll need signs to go inside and outside your property. The kinds of signs you choose will dictate the price, but expect to spend $500 to $1,000 for interior and exterior branding. It’s also important to remember that your real estate selection may dictate your exterior signage. For example, some strip malls may require the exterior signage on all retail stores is the same, in order to promote a more uniformed look.
Your brand extends beyond your logo and signage to influence all customer touchpoints. We covered store design earlier in the post, but what about other aspects of the in-store experience? As store owner, it’s essential that you, along with your team, live and breathe your brand at all times. To that end, here are a few other costs to consider:
- Do you want employees to wear uniforms?
- Do you need to hire an outside consultant to train your staff?
- Will you offer complimentary refreshments or other amenities like a waiting area with magazines/newspapers?
Grand Opening Event
A grand opening event can ensure you get seen in the community, guaranteeing a steady flow of customers on your first day. Experts suggest allocating 20% of your first-year marketing budget or no less than $6,000 to the promotions and advertising materials that go into making this pivotal day a win for your store.
Business Cards and Flyers
When you want to represent your business in the best possible way, you need business cards and flyers that you can distribute while networking with local industry experts and influencers. While affordable – averaging $50 – $200 – this expense is a big part of spreading the word about your new retail business and getting customers in the door.
Initial inventory will be one of your largest and most important expenses. Determining estimates can be complex and depends entirely on what you’ll be stocking and how much inventory you’ll need. While you’ve likely researched wholesalers and manufacturers, not all pricing will be completely transparent until contracts are signed.
If you don’t know the exact prices, use an estimated markup assumption to back into the rates you’re likely to see from your distributors. For example, if you know the sweaters you want to sell normally retail for $20, you can assume that with a 25% margin, you’ll be able to purchase them from the manufacturer for $15.
Janitorial Supplies and Services
A dirty store isn’t likely to keep customers coming back. If you choose to hire a cleaning service, you can expect to spend between $50 to $200 a week, while personally handling cleaning in-house will likely cost $500 to $1,000 for an initial investment in supplies and heavier equipment, such as vacuums.
Financing for startup retailers can be a challenge, especially when you don’t have a long credit history to back you up. How you choose to finance can indeed play into your expenses, particularly when it comes to repayment schedules and interest rates (which can range from short-term loans with higher rates to long-term bank loans with lower rates). Different loans have different costs, so do your research and speak with local lenders about start-up capital.
The Bottom Line
As one of the largest industries in the United States with 98% of all stores qualifying as small businesses, there’s plenty of room to grow in the retail space. With the right planning, it’s fully possible to create a plan that will succeed, no matter what you’re selling or where you’re setting up shop.
However, getting started without knowing the costs to expect may put you in the red sooner than you anticipated. So, how much does it cost to start a retail store? The average costs for starting a store – around $100,000 – may or may not apply to you, but the more time and effort you spend planning ahead, the better. With these guidelines, you can best estimate the funds you need, helping you hedge your bets for success.