Buying a business: Convenience stores

Why this lucrative business appeals to a wide range of people

It is not a great time for small independent food stores. They are an endangered species, threatened by the fiercely competitive superstore giants that are battling for the loyalty of Britain’s food shoppers.

Local butchers, bakers and greengrocers are finding it increasingly difficult to survive as their mammoth counterparts increase stock levels and squeeze prices in an attempt to provide the perfect ‘everything-under-one-roof’ shopping experience.

However, all is not lost for the local storeowner. Reclaiming much of the territory lost by local specialised food retailers is a more hybrid breed, a store that relies as much on where it is than on what it stocks – the convenience store.

At a time of economic uncertainty, the market in these local retailers seems remarkably solid. According to the Association of Convenience Stores (ACS), 10 million customers visit convenience stores every day. So if you’re looking to buy a business, this could be an attractive option.

“National sales of convenience stores at the end of September this year were up 31% on the same month last year – and those figures were up on the previous year,” says Mike Carr, group managing director of EM&F. “Due to a degree of uncertainty in the general economic climate, people are buying businesses that are more likely to continue to grow. Convenience stores fit this bill because everyone needs food.”

What is it?

Convenience stores are, in essence, local grocery stores. They stock a wide range of food and household products and, depending on the store, cigarettes, alcoholic drinks and newspapers.

They are there to serve a need, providing a practical alternative to the out-of-town superstores. Rarely do they attract customers shopping for the week. Instead, they draw their custom from impulse or emergency purchases, from people topping-up their cupboards or from those simply getting the daily essentials like milk and bread.

With the demise of the local specialist store, convenience stores have also become centres of the community in more isolated locations. Some 5000 members of the ACS operate Post Offices, and many provide services such as photocopying, faxing and even cash withdrawal.

Who is it suited to?

According to Mike Carr of business agents Everett, Masson & Furby, there is not a typical convenience store owner. “You get people going into business for the first time who want a business that they can understand fairly quickly. You also get people who have come out of the professions – retired bank managers for example. The good thing about the market is that it appeals to a wide variety of people.”

Another advantage of this business is that you can come to it without prior retailing experience. And if you are a little unsure about jumping in at the deep end, you can often arrange a settling in period at the start.

Paul Williamson, director of business transfer agents Ernest Wilson, explains, “When we sell a business there is a period of time before completion during which people can go in and work with the vendors, learn how to do the job and also check the figures.”

A lot of people don’t know where to buy their stock from, what to charge etc. The vendors can show them how to run the business and also introduce them to the customers, which is important.”

Not everything can be gained from experience, however. Andrew Bresnan, a convenience store owner in Dorset, says that having the right personality is crucial. “The most important aspect is to be able to get on with the general public. Another factor is to be very well organised and stay on top of the paperwork. There is a lot of paperwork in this business, with invoices and so forth.”

You will also need to be prepared to put in the hours. Many convenience stores attract business by staying open when the superstores are closed. This is especially relevant on Sundays, when superstores, by law, can only open for six hours. You may need to stay open late at night if you are selling alcohol, and likewise, if you are running newspaper delivery rounds, you’ll have to be up with the dawn chorus.

Even if you keep your day short, you may struggle to cope on your own. At the very least, this is a business for a couple who can share the long hours and alternate between running the shop floor and running the back office. However, sharing your business and your home life can put a lot of pressure on a relationship, so make sure you are ready to take that step.

Before you buy

Once you have decided that the life of a convenience store owner is for you, you need to start looking for a suitable business to buy. It sounds easy, but there are several decisions that you will have to make along the way.

First of all, where do you want to locate? Not just which part of the country, but also do you want to run a rural store or one in a residential area of a town? A store situated in a countryside village will often take centre stage in the community. This means that as well as simply stocking food and drink, you may also be expected to act as a newsagent, bakery, Post Office and even video store. You will get to know everyone and assume a pivotal role in the community.

When you locate in a more populated area, however, many of these additional functions may already be covered nearby, allowing you to concentrate on supplying food, drink and cigarettes.

You will also need to consider how much money you have to spend. As with house prices, the location will greatly affect this, as Mike Carr explains.

“We’ve seen similar businesses with up to a 50% price difference because of their locations. The reason for this is that, firstly, more people want to live in a nice location. Also in these locations there is often less competition. And because of the first two factors, more people want to buy the business, pushing the price up.”

You should also think about how much work you want to put into the business at the start, says Paul Williamson of business transfer agents Ernest Wilson. “If you are looking to buy a relatively cheap business and build it up yourself, you will want somewhere with lots of space and that was badly run before. It is usually people who have bought businesses or have worked in retailing before that take this route. First-time buyers tend to go somewhere that is already well established, with good trade and earning a good living from day one.”

Also affecting the price, and how much of it you will be able to borrow, is whether the business is freehold or leasehold. Freehold businesses are more expensive, since you will own the business outright. Leaseholds involve the ongoing expense of paying rent to the landlord on top of the initial purchase price.

Whatever option you choose, it is more than likely that you will need to approach a bank or commercial mortgage supplier for funding. But what percentage will you need to provide yourself? “If you’re buying a leasehold business, you will need to have half of the purchase price. If you’re buying freehold, you’ve got to have between 25% and 30%,” explains Mike Carr of business transfer agents EM&F.

How much does it cost?

A few years ago, mini-market chains such as Londis were expanding quickly, buying up convenience stores and pushing up prices. These chains have subsequently struggled, however, and their progress has slowed, which is good news for independent convenience stores. “The pricing is realistic, profit returns are much better these days, and the accounting processes are better – people are much better prepared for selling with much more recent accounts. The market has stabilised,” says Mike Carr.

So how much can you expect to pay? Naturally, prices vary greatly depending on a range of factors, but Carr suggests, “A leasehold that was making £25-£30,000 net profit (tbk), you can pick up a business like that for around £35-£45,000, depending on which part of the country you are buying in.”

However, prices can rocket for attractive freeholds. “We sold one business recently that had a turnover of £346,000 and a net profit of £35,500. It had everything going for it – it was a very nice property in a village with extensive accommodation although the shop itself was quite small – we had five people wanting to buy it for £255,000,” remembers Carr.

On top of the purchase price, you will also need some money to keep you going while you settle in. The amount once again depends on the size of business and the amount of investment you want to put into it from the start.

“Once you have bought the business and stock, I would say that you generally need an average of around £4,000 working capital. As a general rule, if you have 1-2 weeks turnover as working capital, then you should be OK,” explains Paul Williamson of business agents Ernest Wilson.

Before you start trading, you will need to get the necessary licences. Since your business will store, sell, and possibly prepare food you will need to register with your local Environmental Health department. You may have to go on a course to get a food hygiene certificate. If you are selling alcohol, you will have to apply to your local Licensing Justices (or Licensing Board in Scotland) for an off-licence.

How much can I earn?

Although it is unlikely to make you a millionaire, running a convenience store can be a lucrative business if managed well. “The income depends on the size of the business. A mathematical average would probably be a return of around £25,000. If you purchased a leasehold for £100,000, I would imagine your annual profit would be in the region of £40,000,” says Paul Williamson of business agents Ernest Wilson.

On top of the income from the business, you should also factor in the savings that can be made from living over the shop and having access to cheap food and supplies – one store owner declared that he never realised it would be so cheap. Added to this is the dubious benefit that, since the shop will invariably take up a lot of your time, you won’t have many opportunities to actually go out and spend your hard-earned money.

Added extras

Convenience stores are about offering as many services as possible. Here are some ingredients to boost your appeal.

Lottery
What it is: Some outlets can sell tickets for all National Lottery draws and National Lottery Instants, others can sell Instants only.
How to get one: You must have over 750 sq ft shop floor, over 750 customers per day, and be open 9am-6pm daily and until 7.30pm on draw days. The number of lottery outlets is not currently increasing, so new opportunities only arise when an existing outlet has its contract terminated – for failing to meet sales targets or breaking lottery rules for example. Camelot selects a replacement from the applicants it has on file.
What it costs: Installation and training on the machine is free and there are no ongoing expenses.
What you can make: Retailers earn 5% commission on every sale and 1% on every prize payout over £10 and below £200. The average annual income for an online independent retailer is £8,187.
Cash Machine
What it is: The ability to give customers instant access to cash through an ATM.
How to get one: ATMs are supplied to independent retailers by companies such as MoneyBox, CardPoint and InfoCash.
What it costs: The shop has to rent the machine from the ATM provider. One provider quoted costs from £100 per week.
What you can make: The store makes a commission on every transaction. ATM supplier, Moneybox, also claims that the subsequent increased footfall and spending can lead to an 8-15% total increase in revenue.
In-store bakery
What it is: Buying frozen, part-baked bread, cakes and pastries, which can be prepared quickly each morning to be sold as freshly baked items.
How to get one: Suppliers include Delice de France (who also provide a cabinet, signs, labels and training) and Le Pain Croustillant.
What it costs: You buy the part-baked bread like any other supplies. If you require a bake-off oven, however, this could cost you as much as £1000.
What you can make: Freshly baked bread gives customers another reason to visit your store and the aroma is believed to encourage shopping, leading to an increase in general sales.
Video rental
What it is: Renting out videos to customers and selling ex-rental copies.
How to get one: You don’t need a licence to rent videos. You can buy the videos direct from a wholesaler, lease them, or buy a franchise from companies such as Movie Concession.
What it costs: New releases cost between £35 and £55 and need to be regularly replaced. If you lease videos are updated regularly by the leasing company.
What you can make: Once you have made back the purchase price everything else is profit. Ex-rental videos can be sold on. If you lease, your profit is the margin between your rental costs and what you earn from your customers. Movie Concession said clients turn over between £325 and £680 a week.

Tips for success

Trying to satisfy the need of every shopper within the limited space of your humble convenience store is not an easy task – but if you succeed, you’ll have a loyal and regular stream of customers through your door. James Lowman of the ACS says it is important to get your stock right to start with.

“The area in which convenience stores can be strong is in top-up, emergency or impulse buying. Research shows that £10 billion of superstore purchases are under £10 – these are certainly purchases that can be won by convenience stores.

“Things such as ready meals, snacks, alcoholic drinks, and newspapers for example. [Convenience stores] also need to concentrate on the basic availability of stock and getting the range right – they should offer a wide variety of products but they don’t need to offer too much choice in terms of brands, just a leading name and an own brand name.”

As well as the basics, many convenience stores add to their income and customer base by offering a range of other services, such as lottery tickets or video rental (see box out).

“It’s the convenience ethos – to give people as many reasons as possible to enter the store, explains Lowman. “If someone goes in to buy a paper, and they can also buy freshly baked bread, milk, cigarettes etc. The competition may only offer one of these things, whereas a convenience store can offer all of them.”

Finally, make sure your pricing is right. “Customers expect to pay a premium of 10-12% on top of supermarket prices. Above that and it starts to get close to ‘insult pricing’, and they start to feel that they are being exploited because they don’t have the option of going anywhere else. If this happens they won’t come back.”

Contacts

The Association of Convenience Stores
Represents both convenience store chains and independents. Produces an annual Yearbook. Negotiates deals for its members on shop insurance, finance, health insurance etc.Membership: £50 per year for single shop Website: www.cstoreretailing.co.uk Telephone: 01252 515011
Alliance of Independent Retailers
Membership organisation representing 18,000 independent retailers. Services include a free legal helpline, insurance deals and a copy of Monthly Trade magazine, “The Independent Retailer”.Membership: £50 per year + VAT Website: www.indretailer.co.uk Telephone: 01905 612 733

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