t’s early 1997. The retail fashion business (leather & fur fashion) I’m part of is doing very well. So well that our premises are fast becoming too small and need to be rebuilt, expanded and updated. On top of this we read that it’s the government’s intention to carry out major roadworks on both crossroads around our premises. The same type of roadworks that have taken more than 3 years a few kilometres down the road and have forced many retailers to shut down their shops there, after seeing their turnover dwindle by about 70%.
But we would prefer not to leave the road we’re located on. It’s a major access road to the city which brings huge awareness of our location and lots of visibility. One evening, on our way home, we see a ‘for rent’ sign going up in frond of a brand new building that has just been constructed.
“Good judgment comes from experience, and experience comes from bad judgment.”
The next day we get in touch with the real estate agency mentioned on the for rent sign. After a visit to the empty premises 2 options lie in front of us. Either rent the entire building of about 1.500 square meters, either rent half of it i.e. 750 square meters. The price to pay is exactly proportional to the floor size we would rent.
Shall we bet on growth or risk missing it?
In reality we need neither 750, nor 1.500 square meters, but approximately 1.000 according to our best estimations. Renting half the premises would mean having to build a partial first floor for the offices and the workshop. Renting the entire building would give us a huge visibility and make quite a statement.
We make lots calculations and in the end we decide to go for the full 1.500 square meters at a cost of (1997) 120.000 euro per year. The one-time cost of the setup comes to about 500.000 euro. Once we open in November 1997 everyone – business relations, clients, suppliers – is very impressed. It looks great and totally up to date.
The first season is OK, but not more than that. Which means profit goes down. And then factors start turning against us. The next 10 out of 12 winter periods show significantly milder temperatures than normal (the other aren’t especially cold, but about normal). This puts huge pressure on the sales volume of winter coats. On top of this the animal rights movement turns it’s attention to fur and starts having an impact. At first most people tend to laugh it of, but over time we notice that demand for ‘affordable fur garments’ (jackets priced around 500 to 1.000 euro) gradually dries up entirely.
10 years later, 2007 which is one year before the financial crisis, we manage to adjust by transferring our business to half the building, which reduced our rent by 50%.
How is this a loss of 1 million euro?
10 years of rent at 120.000 euro instead of 60.000 euro = 600.000 euro
Setup cost of 300.000 euro (for half the premises + small first floor) instead of 500.000 euro = 200.000 euro
Cost of maintenance, lighting, temperature control, cleaning etc. @ 20.000 euro per year = 200.000 euro
Total: a loss of 1.000.000 euro over a period of 10 years, because with hindsight I’m convinced that we wouldn’t have sold a garment less if we would have moved from our old premises (620 m2) to only half the building + small first floor (950 m2) in total.
- When you make a decision mainly based on figures from the past and assume trends will continue in a linear manner, your prone to make wrong decisions.
- It’s better to be strained by too little space than to be facing too much space and costs that are too high if you’re not in a strongly growing market
- Don’t let prestige play a role in your business decisions
Should we have known that the turnover could drop? Maybe yes, maybe no. But for sure we should have assumed that it would most probably not grow strongly enough in order to justify the extra million in costs.