For eCommerce sellers, expanding your business to offline channel is a big decision. Opening your first brick-and-mortar store in the U.S. requires multiple upfront investments and ongoing expenses. The actual costs can vary based on the type of your retail business, its size, and its location. Renting a storefront, purchasing inventory, and paying utilities are often easier said than done. You’ll also need to pay for salaries, equipment, software, and marketing costs. To help you get a clear picture of the costs to start a retail store, we’ve summarized the must-have elements for your budget.
Rent expenses
The lease is usually the biggest initial cost in your financial plan. You should make sure to have enough capital for at least 2-year renting. In the U.S., the average lease for retail space is $38.06 per square foot, going up in Western states and going down in the Midwest.
The cost of a lease varies a lot depending on your location, for example, a store in a busy street will cost much higher than a shop in the suburb. However, while the cost of a prime downtown location is higher, it also generates more foot traffic and more sales. Therefore, you should estimate the cost vs. benefit for each option to choose your location.
Depending on your product and target customers, you can consider opening your store outside of big cities, or getting a smaller store size if you want to stay in the city. You can also test your market before signing a long-term rent contract, such as opening a short-lived store in a temporary location.
Inventory costs
If you’re already selling online, you may have established your inventory warehouse and procedures. Just make sure you can optimize the movement of products between your warehouse and your store, while ensuring the quality condition of the items.
However, if you’re doing dropshipping or affiliate eCommerce, it’s time for you to set up your own process of purchasing and stocking inventory. The initial inventory costs are an important factor to determine your profit, how much, and how long capital is tied up in the stock. Consider the product types you’ll be stocking to estimate a reasonable inventory quantity and cost. Different products will have different lifespans and different storage methods. This is critical if you’re selling food or perishable goods.
You can choose to procure items from your existing suppliers or source more options to get the best inventory prices and favorable terms and conditions. Whichever the case, your capital should be enough to pay for 4 to 6 months of inventory. A research by Shopify reveals that merchants spend around 31.6% of their first-year expenses on inventory and product development.
Operating costs
Operating costs consist of both upfront and ongoing expenses. There are some areas you already have as an online merchant, while other aspects need your upgrade or investment to meet the requirement of a physical store. Here are the costs you must account for when planning your budget:
Equipment and technology:
A POS system to handle online transaction is a must for eCommerce owners. Make sure it can scale with you to the offline channel, otherwise you should look for another service provider. If you want go omnichannel and grow in the long term, retail store software is a valuable investment which can connect all sales channels, manage inventory seamlessly, and control vendors and purchase orders.
In addition, you’ll need extra hardware like credit card readers, customer-facing displays, stations, scales, receipt printers, etc. Since these gears is a big investment, carefully select a vendor who can offer quality products at good prices.
When moving from online to offline store, check with your payment processor company about the commission or percentage on each in-person transaction. Look for a processor that has the lowest cost in the long run.
Interior decor and aesthetics:
When you rent a premise, it’s likely to require some renovation to create a good in-store experience for customers. You may need to paint the walls, add a counter, revamp the lighting system, replace the flooring, install shelving, do locksmithing, and other changes. Depending on the complexity, you may need a contractor to perform the fixings at a rate of around $14 - $55 an hour, plus the material costs.
Recruiting and managing staff:
Operating a retail store requires teamwork. Hence, you should figure out what positions you need to hire and budget for their salaries. To give you an overview, here are the average hourly wage of typical retail employees in the U.S.:
- Retail sales associate: $13 - $17 per hour;
- Assistant store manager: $19 - $29 per hour;
- Store manager: $28 – $42 per hour.
Marketing and advertising:
Your marketing strategy will determine your exact spending. You may choose to do in-house marketing or hire an agency, and the cost will vary based on your requirements and scope. Still, here are a few areas to consider:
- Advertising: Google ads, social media, flyers, and posters for target markets;
- Promotion: marketing campaigns for new buyers with discounts or other incentives;
One important thing to remember is integrating your current eCommerce with your new retail store — the omnichannel approach. It creates a personalized and consistent shopping journey for each customer segment to boost their satisfaction and loyalty. You’ll need to plan suitable content and suggest relevant products to customers. To do that, you need analysis tools and systems to gain customer insights, and engage with them at the right time and place.
For example, you may already have a website for your existing online business. Consider if you need any upgrade to drive people to your physical store. You can apply click-and-collect method, where customers can place an order online and collect it in-store. This also creates an upsell opportunity when the customer arrives at your physical shop.
Other administrative costs
- Utilities: Utilities contains various expenses like electricity, gas, water and sewer, phone, and internet bills. The costs can vary depending on your location, size, store layout, and if you control it well.
- Janitorial supplies and services: Hiring a cleaning service may cost you between $50 and $200 a week, while in-house cleaning requires an initial investment from $500 to $1,000 for supplies and heavier equipment like vacuums.
While adding up all the costs, remember to calculate when you will reach your break-even point. Most retail stores are not likely to be profitable in a few months, it may take years.
Borrowing costs
To acquire capital for retail business, the most common way is debt financing, where you can get a loan from banks, savings institutions, and the SBA with an interest rate. The interest rate will fluctuate depending on the economic situation but typically range from 8% to 13% per annum. Therefore, before signing a loan, anticipate your cash flow to ensure you have a healthy financial status to pay debts.
In conclusion
Starting a retail store requires many aspects of costs. After taking into account all the above costs, the total capital required to open a retail shop can range from $50,000 to $100,000 or more. You should account for all internal and external factors that can impact your expenses and revenue. Preparing a detailed plan for the budget will get you a good expectation of the expenditures before opening your first store.
Keep reading
- 3 steps for optimizing operating costs in retail
- eCommerce versus retail and why you should integrate them
Published February 1, 2023
