Hi Everyone. This is a question for all of you that have started your own chocolate shop.
I am the owner of Forte Chocolates in WA. Currently, we do about 50/50 wholesale to retail and make 200-250k a year. Retail comes from various shows and farmer's markets. All of our chocolates are hand made (including hand tempering) in our production kitchen (nearby in town) and we have won many national and even some international awards. We go through about 5 tons of chocolate per year. Things are good :-D
Demand has required me to think about opening a retail storefront of my own. Our production kitchen is very hard to find (in a commercial park with only a small sign) and yet people still find a way. We turned a small 14x18 room into a "showroom" space and we are did about $2k per month in retail walk-in's last year. These are people that spent 20 to 30 mins finding us and become repeat clients. We also do a few impromptu "tours" of our kitchen. But this is making production harder as timing of making sensitive products can be spoiled when someone walks in. There are only 3 of us producing. For this reason, I am looking to open a retail only location selling our hand made luxury chocolates, hot chocolate, and a few of my favorite bean to bar makers. We would also sell a few chocolate specific books and tools. We plan to also teach chocolate tasting classes on weeknights. This new location would be downtown with great foot-traffic, tourist interest, and on the main strip.
The spot I found was previously a coffee shop so it already is plumbed and has lots of outlets and power. We have met with a contractor and the estimate is reasonable to finish the space. We have a good following and the rent is also reasonable (under $1k per month). I have met with the chamber of commerce and I am also involved with the local economic development council, but this would be the first and only artisan chocolate shop in the area so they have not been of much help.
The problem is I don't want to ruin the good thing that I have now. We are making a profit, have positive cash flow, and revenue is growing significantly each year. This new expansion would take most of my reserves and could risk my current business.
I am ok with the risk if I could get some revenue numbers to base a plan off of. But I can't seem to find out is how much revenue a small (400 sft) retail location would do (or any size for that matter). I would have to make about $4k a month to break even with 1 full time and 1 part time employee (or 3 part timers). I also don't know what I should expect in terms of hours and seasonal ups and downs other than from my showroom.
I would be grateful if any of you shop owners could tell me what your approx revenues were the first year. Was this above or below your plan and what did you base your numbers off of when deciding to open a retail store. Also what problems did you encounter that you can warn me about. We can do this privately too if you are more comfortable.
Thanks in advance for any help you can give me! Cheers ~Karen
Net numbers / Balance Sheets are arbitrary and are a function of accounting principles and tax mitigation practices. Statements of Cashflow are the best numbers to look at. What goes in and what goes out every month tells you how viable the business is.
I think looking at a balance sheet is a bit too simplified when considering the question. What comes in and out tells you how viable a business is that is up and running but it gives no indication or how viable a new business might be.
I am pretty familiar with various business models and I asked about her net numbers because she needs to think about how much cash she has on hand. I should have also asked questions like did she already pay herself before accounting for her net profits or were her net profits her salary (yes, some people do this)? In addition to looking at her projections for this potential new retail space she needs to consider not only what she might do in business based on her current sales but what the worst case scenario might be. No one wants to consider what the failure scenario might look like and how that will affect the overall business. How long can she sustain a retail location if sales are not as projected? How much debt is she comfortable carrying? How badly will it affect her current business and how long will it take to recover if the retail space doesn't work out as projected. Will the wholesale side even survive if the retail side fails?
All of that said, I am impressed with her sales and with her initiative. There is something to be said for taking a risk, but it should be a calculated risk with all potential outcomes considered and not just a breakeven scenario.
I hope she keeps us posted on her decision!
We are new to the business and have attended at least one event where your products were on display. While we plan on working the "shows" for awhile longer we do get inquiries about wholesaling from time to time. The profit margins are very close as it is, not so much with the ingredients but the labor involved, and discounting seems to be a problem. We extended an offer of 25% to one store and it wasn't accepted well. I was wondering what kind of discounts producers are offering to retailers.
While probably a discussion for it's own post I can tell you what we've found.
You need to offer a 50% discount on your retail price, and your total cost of production should be 50% of your wholesale price.
Unless you're a well known brand this tends to be the kind of mark-up retail stores need to sell your product.
Given that I've been seriously considering how I am going to continue expanding my business, I've looked into franchising, dealerships, joint ventures, and strict corporately owned stores. As such, I've explored many different pricing models and arrangements, and have talked to a lot of colleagues who move literally truckloads of product out their doors and into large chain stores every week.
The industry standard in the food business here in Canada seems to be 60 cents on the dollar for wholesale pricing. If the retailer sells the product for $10 in their store, they are typically buying it it for $6. That structure is for product which is already packaged and needs nothing done to it.
A 50/50 arrangement is only if the product still needs some kind of handling prior to selling - such as a bin of jellybeans that needs to be divided out and into bags with ribbon, etc. In this case, the retailer pays for their own packaging.
In both cases - whether a partially or fully assembled product, the price is always FOB the wholesaler's back door. The purchaser always procures adn pays for their own shipping.
It may be different elsewhere, but that's pretty common here in Canada.
Sorry Sue, there is no easy answer for this one...
Pricing can be all over the board so I recommend knowing what margins you can afford to give reasonably and knowing what you want your product to be sold at. Only after that you can begin to set your wholesale prices. I have found that everyone has their own way of doing business, but there are a few trends I have noticed (though the following is very loose and are not recommendations of any sort). Keep in mind that this is the ask/want of the company buying from you at wholesale, and not necessarily what you should give them.
** Grocery stores want (generally) a 40 to 50% discount off of retail. Then they sell the product with a 30-35% markup. This can result in a grocery store selling your product less than you sell it retail. Not a issue at all if they move tons of product and you are not selling in that area (or not in the retail space).
** Mom and Pop/boutique type of stores want a straight 50% discount and then they sell it for benchmark (double of what they paid for it.) But sometimes, they can mark it up higher especially if they are in a tourist area because they know they can get it.
** Distributers want a 15 to 35% discount off of your standard wholesale price so that they can sell it to wholesalers at the same price you are (sometimes lower then you). The advantage is that they can move through a ton of product, but you may not have any idea of who they are selling it too. This can hurt your brand if they are not in tune with who your end client (user) is. Distributers are notorious for taking samples and charging it back to you, charging marketing fees, and promising things you don't do like free fills (giving a major retailer the first order free to see how it sells… yep you just paid the store to sell your product!)
** Gift basket companies and some odd ball types tend to have all sorts of crazy pricing schemes and want 30 or even 90 nets (meaning they can take 3 months to pay you). They also tend to have maxed out credit cards so getting your payment can turn into a huge hassle.
** Corporate, B2B, or custom clients have a range as well, but generally ask for a discount of 25 to 50%, but they will give you longer lead times. Every one of these clients will have different needs and expectations.
The bottom line is that pricing strategies are different for everyone (both sides of the equation) and may even change over time. Also you may decide to have different pricing strategies for different services or products. I know that I made some costly mistakes when I first started, (especially since I was happy that someone wanted to have my product in their store), instead of being worried about the effect (both long and short term) on my bottom line. I also tried to used a magic formula (like benchmarking or 50% off) for every product. This often led to me taking a loss. You have the power to say no to terms that don't work for you, and you can do so with out being apologetic. Don't be lured into selling your product at terms that don't work for you (even in the disguise of a "great marketing/exposure opportunity"). After all, one big account landed does not mean anything if you can't pay your expenses or handle the growth.
My strategy for wholesale is three fold:
1. To grow/establish strategic partnerships (some at break-even, but never at a loss)
2. Gain some economies of scale
3. Help reduce the seasonality of the business (keep positive cash flow) as wholesale and retail have offset seasons
So basically, wholesale keeps my staff employed and allows me to continue to play with chocolate XD, while retail makes me a little bit of profit. Hope that helps.
That was an AWESOME summary. Thanks for also sharing the pitfalls you've run into. I've had gift basket companies try the same thing with me, but we have a firm policy in place which mandates the invoice be paid in full prior to my staff starting to work on it. It weeds out the small businesses who seem to feel they can use you as a bank to cashflow part of their business - businesses who always over promise and under deliver and are no good anyway.
Cheers and thanks again for sharing!
Thank you all for the replies there's a lot of information there. With a lot of hard work I'm hoping I will be as successful in my chocolate business.
Thank you again
50/50 is the start of a distributor relationship, beware as heading that route with broker fees can get to 70% in heartbeats. We offer up to 30% and if a retailer wants more we explain that they can upcharge to finish off their margin requirements. They aren't coming to your store so it should be a premium and this is accepted with large brands to small. In our city you can find our products at a serious wide range of prices (sometimes I am astonished that our product can be sold for as much as some places do.)
Every case is going to be different but respect your time and your product and don't be quick to grow those discounts unless you can get the volume and ROI to make it worth your while.
I am certainly not in the same league as you guys, having just started an infinitesimal small home based business in a tiny country town south of Sydney, Australia... but I have been awed at the most informative, generous, intelligent and useful material in this discussion. Its the type of advice one would usually pay a lot for, IF one could find it.
My admiration and gratitude, alas, is all that I can contribute at this stage! Again, thank you heaps!