危= 机？Our offline retail client decided to expand her business now and saving future monthly rent by 80%
About a week ago, I was dropping down some notes on how we frequent travelers are grounded outside China and to run a China business from not being there. I shared what software I was using to help us work from home.
This week I would like to share how we worked from home, assisted this new client on detailed breakeven (profit breakeven and cash flows breakeven) analysis (even in this adverse business environment) and help this retail client save quite a lot of money.
The coronavirus is keeping us at home and that makes the retail businesses get the virus as well. The ones who are selling foods are turning their focus to take outs and on online sales. This shows how business owners are quick and flexible in responding to crisis. True we are panicking but we are also managing the shock via solving the problems and finding a viable solution. I am sure what I am describing below is happening everywhere……
Last week when I was working from home of course, received a call from a chain of bakery shops’ sole owner John (For confidentiality reason we of course hide our client’s identity and actual deal figure) and he told me he was approached by a well-known high-end supermarket (it would be very beneficial to his brand). I was wondering back of my mind – ha? In this time of the crisis?
He continued and said he needs our advice on how to counter offer a proposal to the supermarket. He is offered a store space that would attract lots of traffic and the lease will commence starting April 2020, but he is not sure whether he should take it because under normal circumstances, due to the excellent location of the supermarket, the rent is pretty high.
John’s bakery shops are supplied by the production in his small factory and it has developed its brand via its unique selling point of using organic yeasts for baking the breads and other products. Recently it also went into making fresh pasta and homemade pasta sources. It is also selling fresh produce such as tomatoes, fresh herbs and mozzarella cheese imported from Italy. Sales during the past few weeks only reached to 25% to 30% of the normal level.
The rental charge is offered to be 25% of the store’s monthly sales amount and it also has a minimum rent of RMB88,000 (US$12,500) per month. “This is a really high rent and how can John a small store owner afford it?” I was wondering. Then John asked: How shall I counter propose to them? What should I take into account? And…. He needs the analysis in a day or so because the supermarket has been chasing him for a month or so but with this virus crisis, he has not been able to make up his mind but the offer is going to expire in a day or so.
Since I only knew John just now we don’t have any financial information of his business and the only way we can do it is “sitting at home” and ask. We asked for the itemized costs of the ingredients that made up of the products, the fixed manufacturing costs and the usage of these machines, the work hours and pay for their workers …. Bingo we came out of an estimate of the cost of production. And he also told us the 20% of wastage and the likelihood of unsold items (that are to be thrown away), and the levels of expected sales of the new store with 3 storekeepers.
We constructed worksheets after worksheets of possible scenarios of the breakeven point and the potential profit based on the answers John provided to our questions (analysis done via inquiry thru the phone). The columns and rows of numbers started to make sense to John after a few hours’ work. And we analyze in depth how would the coronavirus affect the traffic thus the sales and cost of goods of the store space at the supermarket in the coming few months.
With the result of our analysis, John understands he needs to get how much sales in order to make the space affordable. The question is – can he make so much sales in such a special period of time? And in addition to the ongoing breakeven point and profit analysis, we also considered whether the factory has excess capacity to meet the increase in demand as well as the potential one-time cash needed to open a new store.
John even paid a visit (I know he should have stayed at home) the next day to the store and wanted to see whether there are people passing thru the area.
After 2 days’ detailed work – John counter proposed a RMB16,000 (US$2,280) effective minimum monthly rent (a 80% discount over the original proposal) to protect the downside and more sophisticated stepping up arrangement for the % of sales rent in order to be able to capture most of the potential profit for this new expansion of his business, 10% for monthly sales below RMB140,000(US$20,000), 12% for monthly sales below RMB210,000 (US$30,000), and 15% for monthly sales over RMB210,000(US$30,000).
Getting this counter proposal done in such a short time and without any prior production or accounting information of this new company probably can only be done during this “sitting at home coronavirus period” because we can be so focused on doing one thing. And communicating via phone and other means now become so effective and could make things work even without seeing each other. So much time is saved and work done! I am inspired. Find opportunity in a distressed period of time can be rewarding. 危=机！？
I would like to thank all business owners and management who have inspired me and my team to work better.
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