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5 Pitfalls No One Warns You About Retail Expansion

The Indian retail industry is a thriving market that is expected to reach 1 trillion dollars by 2027. With an easing of the purse strings, there is an increase in demand for retail products. Making this a perfect opportunity for new entrants to expand into untapped markets. 

But opening a new store is always fraught with difficulties. Even when all the problems have been considered and adequately addressed, persistent challenges wreck the momentum of a business.

This article explores five common pitfalls associated with retail failures globally.

  • We delve into the critical oversight of retail brands venturing into new markets without assessing the financial resilience of their existing stores
  • Unveil the pitfalls of neglecting a data-driven approach in navigating their retail expansion
  • We examine the multi-faceted reasons behind retail store closures—from overlooking the target audience to the dynamics of changing customer interests
  • Additionally, we dissect instances where rapid expansion precipitated the downfall of numerous retail brands on a global scale
  • Finally, we examine the technological challenges that might lead to the collapse of a retail brand

The Growth Mirage

Business leaders often develop tunnel vision when it comes to growth. After all, a good growth strategy leads to better valuation and gives the business an extra pair of legs to move forward.  

But, unrestricted growth or growth without sufficient data-backed reasoning will derail the business’s success. If companies approach the issue of extraordinary growth without considering the cash-flow problem, it is a recipe for disaster. This statement has precedent. 

Did you know that in India, 90% of all start-ups fail in their first five years?

This is a staggering statistic for an emerging economy. The pedal-to-the-metal approach adopted by most founders does not consider the financial and logistical problems that might arise in the future. Their drive to achieve market share at the expense of their financial health impedes the very growth they are trying to achieve. 

Started in 1997 in Chennai, Subiksha reached the apogee of rapid expansion in 2008 and by the end of 2009, they were defaulting on their lender payments. Their crash came only a couple of years after considering going public. The fall from positive cash burn was faster than the time to reach their heady heights in 2008. 

Subiksha crashed even after having a pan-India presence because it did not understand its customers. This Chennai-based brand started its expansion without considering the merchandise mix or the catchment population around its store. 

Subiksha failed to understand their customers’ needs properly, leading to them shutting the doors to stores across the country. 

Growth mirage or failures due to rapid expansion is a pitfall that might seem obvious in hindsight. But, a business head or investor experiencing the rush of rapid growth only realizes the danger when it becomes too late. 

In the case of Subiksha, their rapid speed of retail expansion was not supported by any data-backed insights, which led to their premature collapse.

Data Drought 

Data analysis has proliferated into every aspect of human existence today. Leveraging data allows businesses to build responsive lists to predict their customer preferences. 

Retail brands are missing out on potential opportunities due to the unavailability of data. Retail stores can leverage their customers’ online data better to understand the spending patterns of their target audience.

For a D2C brand opening its first physical retail outlet, its online sales data allows it to identify the clusters of sales activity and help the brand business expansion managers determine the locations to expand its business. 

An activity that will be further enhanced if the business expansion managers have access to the spending quotient of a selected area. From this, a machine learning model can extract the business’s real potential and help determine its actual demand granularly. 

Customer data improves the omnichannel retail experience by allowing retailers to anticipate customer spending pattern changes. Retail managers can minimize inventory losses by aligning inventory restocking with customers’ changing preferences and needs.

Renting out a location to build a store is a Capital Expenditure-intensive activity. Access to data about rental rates in a given area helps business heads negotiate more favorable deals. This location data helps the business development team more accurately analyze the site location. Business development teams armed with this site location data can determine the factors responsible for a retail store’s success. 

Store Shutdown 

Consumer interest is like a dying wick of light; it only takes a strong enough wind to extinguish its curiosity. And unlike reigniting a wick, consumer interest is challenging to capture once lost.

The first step in developing a coherent expansion strategy for a retail store is identifying the features responsible for success in any given location. When business heads do not consider the multi-faceted nature of their customers in their immediate catchment area, it is a recipe for disaster. 

Population Interests 

The interests of a population tend to transform with time. What is popular today might not necessarily hold next year. And businesses that fail to evolve with the changing dynamics of the world around them will get lost in the rivers of time. 

Consider the example of the Music World in India.

Once a ubiquitous presence in all the metro cities in India, the advent of the internet and music streaming sounded its death knell.

Footfall and Customer Interests

Or, that of Papa John’s, who had a late start in the Indian market and faced an uphill battle against Pizza Hut and market leader Domino’s. But Papa John’s did not present any diversification in their menu – they did not Indianize it. Instead, they continued to offer pork on their menu to a country whose majority abstains from consuming the protein. 

Store closures cannot be viewed through an uni-directional lens. Multiple factors determine a store’s closure; some are beyond human control (like the COVID-19 pandemic), and others can be defined through analysis of geographic locations and human interactions.

Availability of TG in Catchment 

Data drought can lead to business heads relying on inaccurate data to expand into a location without the TG in the catchment. For example, you might consider that a high street that specializes in apparel might be a good location for your eyewear brand. But, your target audience might not live within the catchment area of this high street.

Better Location

Just because a retail store starts its business on a high street does not imply that it will start generating revenue. If the store has a tree or an obstruction in front of it, it will reduce its profitability. Or, if your store does not have good accessibility options, metro stations, or bus stations, this too will reduce the profitability of your store. 

Financial Fumbles 

Retail is a capital-heavy business. Positive cash flow helps keep the store stocked, generates a profit, and allows the business to expand into new markets. Among the primary reasons responsible for retail failures around the world are business practices that do not utilize data to develop their physical stores 

The downfall of Forever 21 is a cautionary tale to every new retail entrepreneur chasing continuous expansion. Forever 21 was a fast fashion brand whose target audience was young customers who wanted the latest fashion designs at a low cost. The profits from their expansion drove the business heads to open outlets in 47 countries in just six years. The declining sales at Forever 21 couldn’t rescue the company, given the rapid expansion and the substantial size of their stores, each spanning approximately 36,000 sq. ft.

Closer to home, one of India’s largest conglomerates operating retail stores pan-India was sold piecemeal to the largest retail chain in the country. The business leaders of this retail chain expanded across the country, saddling the entity with debt that it could not repay.

To cater to their customers’ requirements, this retail chain’s leaders diversified into various other income streams like insurance, financial services, and the real estate sector. When this did not pan out as the leadership had envisioned, they had no choice but to seek help from outside to pay back their lenders.

Without data established through prudent groundwork and analysis, all business heads are subject to similar failure conditions, albeit at a smaller scale. 

Financial Troubles With Generating Break-Even Revenue?

Launching a retail business involves critical financial decisions, including real estate, property upgrades, equipment, and business software investments. As the store operates, ongoing considerations shift to managing operational expenditures (OpEx).

The break-even period for any retail business is when the total revenue and total costs are equal, i.e., when the operating expenditure of a retail store is similar to the revenue generated. Not relying on data-backed decisions to start a retail store extends the break-even period and might lead to store closure and loss. 

Tech Tangles 

Technology has become a quintessential part of our everyday lives. The pandemic forced Indians to use and master the art of using online payment services like Google Pay and PayTM. With a reported 500 million users by 2030, India is among the largest e-retailing countries in the world. 

To expand a retail business in India today, business expansion managers should understand the various technologies used to improve workflow. This includes payment methods, inventory management, enterprise resource planning, etc. 

When technology isn’t handled correctly, it can lead to disastrous results. A famous example is that of Target’s expansion into Canada. The employees who were not trained to input data into SAP erroneously entered incorrect fields, and without the safety net to catch the errors, the system crashed.

Developing expertise to solve problems that might arise from implementing technical resources could be difficult, considering the content required to learn. However, retailers should have a basic understanding of the technical processes and be able to troubleshoot the bare minimum of problems before calling in the experts. 

Retail business leaders can harness the power of big data by employing machine learning models with predictive analytics for enhanced decision-making capabilities and to mitigate technology-related issues, improving the profitability of their retail business.

How Do You Avoid the Retail Pitfalls That No One Warns You About?

Prudent Expansion: Learn the market and understand the risks that might await you if you consider expanding your business with GeoIQ. If you choose expansion, ensure that your finances are strong and that you can weather a small storm. 

Data-backed Decisions: Employ data in your business decision to ensure you make preceptive decisions backed by logic and sound reasoning. Invest in predictive analytics to know the probable outcomes of current actions and decisions beforehand. A foresight into store performance at different locations is a critical factor in deciding overall success.

Become Tech-Savvy: The world has become dependent on technology, and the retail marketplace has evolved to accommodate modern software and services. Going beyond Implementing resources like ERPs in your business, delve into the possibilities with big data, alternate data sources, and how AI-ML capabilities can derive intelligent and actionable insights from data for smarter decisions.

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