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Slim, If you ever decide to consider opening a hobby shop, open up a speadsheet on your computer and do a simple financial analysis. This will require a few telephone calls to gather some meaningful information. Anyone can do this to satisfy their curiosity. I have spent some time looking over the shoulder of a close friend that owns an LHS. Here's what I have learned. The rental cost of retail floor space varies from $1.00 to $2.00 per square foot per month. A 1,500 square foot store could cost you as much as $3,000 per month for rent alone. The better the location, the higher the rent. You will probably have to sign a "no out" contract for 3 years to 7 years for better locations. You can't have a storefront without insurance. You need to have at least $1,000,000 in liability coverage as well as coverage for fire, theft, and damage to glass and store contents. Your deductible would very likely be about $500.00 per incident. So for every break-in or incident of vandalism, the first $500.00 comes out of your pocket. Plan on one break-in or act of vandalism every 12 months. Your monthly cost for insurance will probably be about between $125 to $300 depending on the neighborhood and your insurance company. Utility costs really aren't too bad. For a 1,500 square foot store, your power bill will be about $100/mo and your heating bill (or air conditioning) will be about $50/mo. Garbage will cost about $25/mo. Water will also cost about $25/mo. Don't forget, each of the utility companys are going to want a deposit before they will start your service. Deposits are usually about $300 each. Communications costs (telephone, fax, and internet) will likely be about $125/mo. A DSL connection is really useful when you have to put orders together over the internet. Walther, Great Planes, Horizon, and others all use internet based ordering systems. If you plan to protect your store with an monitored alarm system you will be paying a monthly fee, probably about $20/mo. Advertising is a must for any small business. A small dealer directory advertisement in Model Railroader runs about $50/mo One small ad in your local newspaper will run you anywhere from $100 to $300. This is for one issue! Forget about radio or television, you would not believe how expensive they can be. You may need to plan on becoming an unpaid sales tax collector for your state. You get to do the record keeping for them and send them a check evey month or so. The penalties are pretty stiff if you fall behind or fail to keep accurate records. Be wary, the state will not hesitate to put a padlock on your doors. You may be audited from time to time by either the state internal revenue department or the state department of labor and industries (if you have employees). You will need to establish a business checking account. You can expect to pay anywhere from $10.00 to $30.00 per month. Business check printing is not free. An inital book of business checks (with carbons) will run you about $140. Lots of folks like to pay for their goods with credit cards. If you want to accept crddit cards, then you will have to get an account with a credit card service provider and hook them up with your business checking account. You can expect to pay 2% to 4% of the value of the transaction plus about 25 cents per transaction to the credit card service company. American Express is the most expensive at about 4%. For planning purposes, consider that 50% of your monthly sales will be made by credit card. You may think twice about accepting a credit card for a $2 pack of rail joiners. Bad checks are a problem for most retailers. Model railroaders are a pretty good bunch of folks, but a stinker slips in every once in a while. You need to estimate your monthly losses from bad checks. For planning purposes, allow about $20/month for bad check losses. Theft or shoplifting is a problem for everyone. My friend has carefully laid out his shop and used lots of glass cases for hot theft items. N scale items need tio have extra protection since expensive items will fit easily in a shirt pocket. A lot of guys are using 2% of the retail values of their inventories as your annual inventory shrinkage. For example, if you have $150,000 of inventory, then your annual inventory shrinkage would be about $3,000. Divide that number by 12 to get you monthly losses. It is really hard to account for missing items because they are gone and you can't count them. Damaged items will come out of your pocket. You will need to estimate your monthly losses resulting from damage in the same fashion as losses from theft. Sometimes you can discount the item and sell it "as is", other times you have to throw it away. Anyone planning on opening any retail business has to pony up some cash up front. My friend networks a lot with other hobby shop owners. He estimates that a well stocked store will require an initial inventory (at cost) of about $200,000, plus or minus $50,000. High value locomotives, cfaftman building kits, air brushes, compressors, Dremel tools, tons of small detail parts, racks full of paints, tools, screws and the like. A single empty paint rack costs about $200.00 Three paint racks full of paint will cost about $8,000. Signage can vary from $500 to $5,000. How much you spend sort of depends on how badly you want to be noticed. A simple lit box sign measuring about 8' long x 2' high x 1' deep will be about $3,000 from most commercial sign makers. My friend cut letters out of 2" insulation foam board, painted it, and used Liquid Nails to glue it to the front of his store. It is important to note that some mall landlords may insist on specific signage that may cost more than $3,000 Fixtures run the gamut from $5,000 to $25,000. A 6' long glass counter display case will cost about $1,000 to $1,500. A 1,500 square foot store will probably require 5 cases at a minumum of $5,000. Shelving units made of steel with steel shelves and wooden pegboard panels can cost as much as $300 or more per 4' wide unit. You can make wooden shelving units yourself, but you will discover that wood isn't cheap either. Most retail stores have one or two computers, one for a cash register and one for preparing and transmitting orders to suppliers. Most hobby stores have web sites and have email addresses. Plan on spending at leat $1,000 for computers (w/printers, etc.) and another $500 for software. A credit card terminal and credit card printer will probably cost about $400 to $500 if you can buy it, or about $25.00 per month if you lease it. Credit card service companies will be happy to lease you a terminal. When you rent a store space you end up with everything the last renter left behind, so you get to pay for cleanup, fix up and paint up costs. Here is where having a large family and lots of friends helps out a lot. There are a lot of miscelaneous items to purchase before you can open the doors to your store. Usually cities will not issue a business license until the fire department inspects and approves of your store. Better buy a good fire extinguisher. Business licenses must be renewed each year, so you fire extinguisher will have to be tested/inspected once a year. Costs about $10 to $20 for certification. In order to figure out how much money your $200,000 investment will make, you have to get some idea of how much you are going to have to sell. This is a little tricky, because your potential competitors may not be very interested in helping. You may want to find comparable communities and talk to the store owner to get and estimate of his monthly sales. Another approach would be to work backwards by using our costs to calculate what your sales must be in order to be profitable. Most folks use, as a "rule of thumb", 65% as an average cost of goods. In other words you pay $65 to your suppliers for every $100 you sell to a customer. Most hobbiests think that for every $100 full retail they should pay only $65. You will be "overpriced" if you fail to meet their expectations. There has to be a compromise in there somewhere for any hobby shop to make a profit. Remember, the $35 out of $100 in sales represents "gross" profits before we pay for all of the expenses we listed above. If we estimated gross sales to be $20,000 per month then we are left with $7,000 per month to pay for all of our expenses. You can play with the spreadsheet numbers to see just how much you have to sell in order to realize a profit. (Don't forget, if you borrow any money you have to add in the monthly payments in order to determine how much cash you will have left at the end of the month.) Anyone that wants a reality check can use the information above, make adjustments for their particular situation, and see just what it will take to start up a profitable retail business. I was surprised to see what all was involved. Everytime I suggest to my friend that maybe he should consider lowering his prices, his face gets red. If you don't understand how to do all of this number crunching, then you already have a handicap to overcome. It's all part of doing your homework before you put your savings at risk.
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