From a retailer's perspective

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Posted by Ken Kurtis on September 23, 2008 at 11:20:29:

In Reply to: Liburdi's in trouble, "Evil Empire" winning? posted by SoCaldiver on September 22, 2008 at 09:57:52:

Store A generally doesn't put store B out of business. It’s not that simple. And specifically, it's easy to put the blame on competition from Sport Chalet and overlook realities of the dive business and other economic factors.

Interestingly, I got a call the other night from someone after this thread was started and asked me my thoughts. (As part of our conversation, we called the phone number listed for Liburdi’s. There’s an AT&T recording that says the number has been disconnected.) Here are some of the things we discussed.

We (Reef Seekers) never felt it was a problem to compete with Sport Chalet. If anything, they actually helped us when they opened up in the Beverly Connection (now closed - I think that was a strategic mistake on their part) as they brought into the area people who weren’t coming in before and once at Sport Chalet, many of them would go, “Reef Seekers is just down the street so we should go visit them.”

And we actually maintained a pretty good relationship with the SC Bev Conn managers over the years to where if they didn't have something for a customer, they'd usually send them down to us and give us a call to let them know about it.

You can certainly compete with them on price since the lines they carry are somewhat limited (which means you can easily stock things Sport Chalet doesn't carry) and there are price controls in place from the manufacturers that limit the discounts Sport Chalet (or anyone) can offer.

And there’s an old retailing adage: Live by price, die by price. Besides, if you’re strictly drawing people in through price (and this is the Achilles Heel of Sport Chalet) you’ve got a customer base that will leave you in a heartbeat for a better price and who will not show much loyalty to your operation. Now business ever really made money by being the cheapest guy around. (Use the early incarnation of Amazon.com as an example.) Your costs don’t change and you’ve got to make back the lost profit somehow. Anytime you discount, all you’re doing is giving away the profits and if you don’t have all your other business plan bases covered, you’re digging a hole you’ll never get out of. (In fact, look at the number of scuba departments Sport Chalet has closed recently.)

The scuba retailing landscape in SoCal is cluttered with too many stores for the number of divers we have. Some of them are run by former employees of a store who thinks they can do it better than their former boss. Westside Aquatics, Pacific School of Scuba, City Scuba, Blue Cheer II, and even the venerable Blue Cheer are stores just on LA’s Westside who have come and gone over the last few years.

I still talk to a lot of retailers and I don’t know of anyone who’s really raking in the dough. One owner I talked to over the weekend, when I asked him how the summer was, said, “We worked harder than we ever did before. And we were pretty much even with last year. We consider that a victory.” And don’t lose sight of the fact that the means the same income as last year but - most likely - increased expenses. That translates into an overall operating loss where last year you might have had a small profit.

In our particular case, the loss of our lease was the deciding factor. We had lost money the last two years but as an overall percentage of our operating income, it was a small percentage - probably less than 2% - so it may have been manageable. (And keep in mind that our fixed overhead - no merchandise - was in the neighborhood of $250K/year.)

But we were looking at a situation where we were paying $5000 for a space (2500sf) that we truly loved. Good visibility, quirky/unique building, good parking, decent access, and it worked for us. But given the storefront rental market in the fall of 2006, to find something comparable in terms of space and parking (and not necessarily in Beverly Hills) would have run about $20,000/month.

Let’s assume we could have found a “sweetheart” deal and gotten something good for $15,000/month. That’s still annual increase in expenses of $120,000. And that money has to come out of the profit generated. That means, assuming a 40% margin, that your gross income needs to increase by $300,000 annually just to stay even. (Even at a 60% margin - which no one gets on an overall basis - it’s a $200K increase in income that’s needed. And if your margins are closer to 30%, you’ll need $400K.)

Keep in mind that very few shops in SoCal gross over $1 million annually. Most of the “smaller” operations are probably doing $300-500K. Bigger stores may be doing $600-900K. The national average for a scuba store in $350K/year, according to DEMA.

I would assume (and this is speculation, based on what I know about the business and some things I’ve heard) that Liburdi’s faced similar issues. My understanding is that in their old place they were paying around $5000/month and the rent in the new place was $15,000/month. I think the concept of The Camp is brilliant but if it doesn’t generate new customers and extra income, you’re right in that hole I mentioned from which you cannot escape. Eventually, you have to throw in the towel.

So back to the original premise, Sport Chalet - or any other store - doesn’t put another store out of business. However, if you’ve got a customer base that you’re not serving as well as you think you are, you may find you lose a few here or there. Add in a couple of other stores, and it’s like being nibbled to death by ducks. Throw in the economic realties of leasing, add in a splash of an industry that generates a low overall margin, plus a customer base (that would be all of you) that can be sometimes fickle and seems to be convinced that the retailers are charging too much and making too much, and then add in a screwed-up national economy, and you’ve got a recipe for stores closing.

And it’s not just Liburdi’s. We’ve re-tooled (quite successfully, BTW) to be a travel/dive-only operation. A couple of stores in Arizona has disappeared overnight. We’ve already discussed stores in this area who has come and gone. And there are rumors swirling of two or three other operations that are on the verge of closing.

It’s a tough business. Those of us in it love it. But it’s not easy. There are market forces at play that we simply can’t control. You simply do the best you can and let the chips fall where they may. And sometimes, you have to cash those chips out.

Ken Kurtis
Owner, Reef Seekers Dive Co.
Beverly Hills, CA

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