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May 2, 2016

Many a retailer huddled with their staff has said one or more of the following things:

• “We have to grow.”
• “We need to invest in people, real estate and equipment if we’re going to grow.”
• “We need capital to invest in people, real estate and equipment—not to mention aggressive marketing—if we’re going to grow. Because we have to grow.”
• “Our growth will give us the return we need to pay off any debt we incur and capitalize on these investments.”

Some of the retailers who said all of these things also did them all successfully. They had a plan, sensed a market need, executed the plan extremely well and came away better off than before they first mused, “We need to grow!”

I am certainly not saying it can’t be done. It can, and often is. But far too many retailers get themselves in trouble because they don’t recognize the distinction between growth and prosperity. You can grow to the size you wanted but find that your operating overhead has also grown so much that your sales barely cover that—let alone debt service. And profit? That sounds theoretically fantastic.

Do You Need to Grow?

So how do you avoid the financial straits that come from investing everything in the mad dash to grow, only to discover that growth doesn’t necessarily bring you the rewards you expected?
Here are a few places to start:

The next time you or someone else says, “We have to grow,” respond with a question: Why?

If you’re an independent pet retailer, what absolutely requires you to grow? I’m sure you want to earn as much as you can, and five successful stores will make you more than one. But that’s not the same thing as needing to grow or die. There’s something to be said for growth in that it gives you volume leverage when purchasing, in marketing and in lots of other areas. Without a doubt, a larger organization has more economic power than a smaller one, all things being equal.

But that doesn’t mean it always makes sense to get bigger by any means necessary, nor does it mean you can’t do quite well at your current size. The point here is not to say there are no benefits to growth—of course there are. Rather, it’s to make clear the kinds of financial issues you can face if you risk too much at the wrong time because you’ve got yourself convinced you’ve just got to get bigger.

Overhead Overload

Let’s look especially at the question of overhead. A retailer who wants to grow has to add capacity.

That means people. It means property. It means inventory. It means technology.

The trick, though, is adding these things at the right pace so you don’t end up desperately needing growth in order to pay for the overhead you hung around your own neck by going out and getting all that added capacity.

That’s not where you want to be. So how do you stay out of that mess? I do not claim to have all the answers, but here are a few ideas to consider:

Be very careful of long-term equipment leases. They can be attractive when you’re first going into we-must-grow-now mode because often the upfront costs are minor. But those leases can be hard to break. If you later regret that you took on the monthly cost because you really aren’t getting enough value out of the machine, it could be one of these costs you sit there and stare at on your expense sheet.

You could be stuck with the cost no matter how much you wish you could get rid of it.

Don’t invest in added capacity in response to a short-term sales spike, even if it’s a really big one. I know this is a tricky one because you want to keep those new customers happy, and if you’re understaffed there’s a risk you could lose some of them with poor customer service. But you’re better off, at least when the spike is still in its infancy, finding better ways to deploy the resources you have if you possibly can.

That allows you to do two things that will help you down the road.

Firstly, bank those newfound profits rather than turning right around and re-investing (or some might say “blowing”) them. If you really want to grow, stronger cash reserves can only help.

Secondly, make sure the spike is sustainable. If the spike in business occurs because more people are coming in to buy staples like dog food and cat litter, either because they responded to effective marketing or word-of-mouth referrals from other customers, you’re probably in good shape.

But sometimes a momentary growth spurt is illusory. Maybe there’s a particular item you carry that’s become the fad of the moment and everyone has to have it right now. If you’re riding that wave until it crashes, sure, enjoy the ride. But don’t build five new stores because of it.

You can grow incrementally and organically, adding capacity a little at a time as growth proves itself sustainable, and still do very well over the long term. Just watch your overhead and make sure it never increases to the point where you have to chase down growth just to cover it. Because that’s a financial trap from which many retailers never recover.

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