Source: 36Kr (ID: wow36kr), Author: Chen Shuya, Editor: Yuan Ling, Yang Xuan
Young people, don't think about opening a store unless you have to.
"Why not open a small shop?" At some point of being tired of the workplace, many people have this thought.
The reasons for opening a shop are varied—it's one of the lower-cost ways to start a business, a side investment for many office workers, and a yearning for a certain lifestyle for the artistic youth. However, few people clearly know that only a very small number of shops actually make money. Although there are no accurate statistics, many practitioners told 36Kr that this number is probably only between 5-10%.
"Most people think they can make money, but it's an illusion. It sounds like opening a shop isn't costly, but the more you do, the more you invest. Indecisive people will only lose more." Shiwu told 36Kr.
In 2018, he opened a milk tea shop in Beijing's Chaowai SOHO, and the location changed hands three times in one year: it originally operated a Gong Cha franchise, which closed within six months. After he took over, he renovated and changed to another milk tea brand; a few months later, it couldn't sustain, and was transferred to a lawyer and a high-level employee from a well-known internet company; finally, it still failed, and the location was taken over by the e-cigarette brand RELX, which opened a direct-sale store there.
Many people underestimate the difficulty of opening a store. In fact, it's a low-barrier but low-success-rate endeavor. Data from the commercial property trading platform Lepu in Beijing shows that among newly opened small shops each year, about 70% close down within the same year—this does not include those that are losing money but still holding on.
Why is it so hard to open a store? It's a fiercely competitive red ocean, with high customer acquisition difficulty, high operating costs, rapid market changes, and information asymmetry. For those who choose franchising, they might easily become a "green leek" (a slang for being exploited). Exaggeratedly speaking, you need to go through 81 tribulations to finally get the business scripture of making money.
Today, 36Kr will analyze the pitfalls in the process of opening a store from three aspects: branding, location selection, and operational management, as well as the new changes happening in this field, hoping to bring you some inspiration. The core points are as follows:
1. Identifying quick-franchise scams: How to avoid being a leek? 2. Why doesn't franchising a star brand necessarily make money? 3. How to view location selection? Is big data location selection reliable? 4. What issues should be noted in store management? How to calculate accounts?
-01- Quick Franchise: Franchise or Leek?
Speaking of franchising, it's a 20-year history of blood and tears.
The essence of franchising is the resource complementarity between the brand and regional franchisees—the brand outputs mature operational methodologies, provides supply chain and system support; while the franchisee enjoys brand dividends, utilizing their social and commercial resources in the region, and both parties cooperate to scale the business.
If it develops smoothly, the momentum brought by franchising is enormous: taking Zhengxin Chicken Steak as an example, it opened 1,000 stores in the first decade with a direct-sale model, and after opening franchising in 2013, it now has over 20,000 stores nationwide.
Many novices also prioritize franchising when opening a store, because the products of chain brands have been somewhat validated by the market and have certain competitiveness; moreover, franchising saves effort and worry, providing one-stop support from brand, location, decoration, training to supply chain.
The problem appears in the business model of franchising—brands charge franchisees a one-time franchise fee and deposit, and later earn a margin by providing the supply chain. Since franchise fees come in too quickly, generally priced from 50,000 to over a million, with short cycles and high profits, many people see the opportunity to "make quick money," and soon after the franchise model emerged, the notorious quick-franchise became mainstream.
What is quick-franchise? It's when they don't provide products and services, but only profit by packaging brands, counterfeiting brands, or even creating a large number of shell brands, charging franchisees franchise fees through false advertising. In the past 20 years, with severe market information asymmetry, these quick-franchise companies easily amassed great wealth, and countless franchisees were deceived.
By the time franchisees want to sue, the quick-franchise companies have already run away with the money; even if they file a lawsuit, it's difficult to defend their rights. Franchisees didn't pay attention to the terms when signing the contract, many agreements are only verbal promises, and when disputes arise, the quick-franchise companies can claim that the franchisee's poor operation is the cause, leaving legal gray areas.
The essence of quick-franchise is actually a sales activity, with the biggest cost being massive market investment through local newspapers, TV ads, search rankings, etc. Zhang Kailiang, co-founder of Canyin Qingbao, told 36Kr that generally, quick-franchise companies' advertising costs account for 30% of franchise fee income, and after deducting telemarketing and other labor costs, the remaining 50% is almost pure profit.
For brands that do legitimate franchise operations, due to the involvement of later products and services, they have high operating costs and cannot afford to spend so much on marketing. Therefore, this is a market where bad money drives out good, and brands also suffer—many excellent brands that develop well in a region, before even leaving a city, have their brand dividends taken by various counterfeit brands, the most typical being Lu Jiao Xiang (Deer Park).
Cha Yan Yue Se, a star brand from Changsha, Hunan, is one of the must-visit foods for young people traveling there. Although the brand insists on not opening franchising and hasn't expanded elsewhere, there are at least a thousand counterfeit stores outside Changsha. Now, searching for keywords on Baidu, the first results are still franchise ads for counterfeit brands like "Cha l Yan l Yue Se" and "Cha Yan i Yue Se".
Previously, there were two large quick-franchise companies in Qinhuangdao, which at their peak could spend over a billion yuan on advertising annually, but they have now transformed; and Tonglu Kuaijian in Shanghai, which operated nearly 5,000 brands cumulatively with a team of up to 2,000 people, has recently gone bankrupt and liquidated.
The decline of this traditional model is because the way to find "leeks" has been disrupted. Dai Zheming, founder of Xiang Kaidian, told 36Kr that the decline of quick-franchise is related to Baidu's decline in the mobile internet era. During the PC internet period, Tonglu Kuaijian mainly bought traffic through Baidu search rankings, with an annual budget of 200-300 million yuan. Due to its large volume, it could sign framework agreements, and a lead cost only a few yuan.
In the mobile internet era, the cost structure for quick-franchise companies to buy traffic in bulk changed. The mobile internet doesn't have a dominant platform like Baidu; traffic is divided among WeChat, Weibo, ByteDance, and other platforms. Quick-franchise companies couldn't adapt to the new advertising rules and could no longer "invest blindly."
Dai Zheming introduced that now a lead on Douyin is priced between 100-150 yuan, depending on the keyword. Across the industry, teams that are good at investment promotion can control a lead at 40-80 yuan.
More importantly, with the faster flow of information, more people who want to open stores are young people who know how to find information, making franchise scams hard to sustain, and they can't easily cut leeks like before. Franchisees have many ways to understand the real situation of a brand, and on Zhihu and Douyin, you can often see content like "how to identify franchise scams."
If you want to franchise a brand, you need to do thorough due diligence, including business registration information, number and distribution of stores, delivery situation, feedback from other franchisees, and whether there are franchise complaints. Note that you must carefully verify whether the brand really opens franchising and whether the staff you contact are from the brand.
Branding is still a trend, and seeing new franchise opportunities, many platforms have emerged in the industry specifically to provide transparent information and education and training for franchisees, such as Canyin Qingbao, Dabai Kaidian, Shangji Qu Nar, Jiamengjia, Danjie Chuangye, Hailuo Canshen, etc. Franchisees can also fully use these platforms to gain knowledge and information.
-02- Can Franchising a Star Brand Definitely Make Money?
However, even if you carefully avoid the pitfalls of quick-franchise and choose to franchise a star brand that has been recognized by the market, what awaits franchisees may still be a pit.
Luckin Coffee, once extremely popular, with the halo of the fastest US-listed company, launched Xiaolu Tea with open franchising in July 2019. However, within less than a year, the company exposed financial fraud, and now faces delisting, with an uncertain future. The sophisticated scam triggered reflection among many primary and secondary investors, but for franchisees who just want to honestly open a store, it's a bit too much to judge the financial situation of the company behind a brand.
Even more, many franchisees haven't realized the upcoming difficulties—
"I don't think the company will go bankrupt; the brand is actually good. That's your media's subjective opinion." Zhao Lin, a franchisee of Xiaolu Tea, told 36Kr.
Zhao Lin franchised Xiaolu Tea in November last year. He said that he chose Xiaolu Tea because he valued Luckin's marketing ability and popularity, thinking "Luckin Coffee's ads are well done, it has a big name, and the listed company has strong capital."
His store is in a shopping mall in a small northern county town, with an initial investment of 200,000 yuan for deposit, decoration, and equipment. Before the pandemic, the monthly rent was 6,000 yuan, and with 4 employees, the monthly labor cost was about 10,000 yuan. Business was mediocre, breaking even, and the payback period was far off.
In Zhao Lin's view, the bigger impact of the Luckin incident is on marketing and publicity. "The Xiaolu Tea brand is too new; in fourth- and fifth-tier cities, its popularity is not as high as Luckin Coffee. The celebrity promotions and national team sponsorship promised when joining are now gone. Customers don't recognize it, the app hasn't been promoted, and we can't do delivery. Many franchisees are disappointed about this."
Miniso is also a company facing great controversy. Since its development in 2013, Miniso has over 4,000 stores, with revenue of about 20 billion yuan, becoming the representative brand of China's "10-yuan stores."
Can Miniso franchisees make money? E-commerce Online once reported that franchisees need to pay Miniso three sums: 80,000 yuan franchise fee, 750,000 yuan goods deposit, and at least 560,000 yuan decoration prepayment. All store expenses are borne by the franchisee, but they don't need to manage the store; only 38% of turnover (33% for food) belongs to the franchisee.
Adding rent and labor costs, the investment cost for franchising Miniso is very high, and the payback period is long. As the number of similar stores increases, market competition becomes more intense. In 2019, Miniso experienced a wave of store closures, with media reporting over 850 closures, accounting for nearly one-third of the stores at that time.
What many people don't know is that to cope with competition, Miniso has also incubated many new brands: for example, "NOME" which is almost identical to "NOMI NOME," and the two have even launched a battle over the trademark "NOME"; to counter "Shenghuo Wuyou," Miniso created "Shenghuo Youpin" with a similar style and name to specifically target the lower-tier market.
Although the pandemic this year has greatly impacted offline entities, Miniso has no plans to slow down, even doubling its 2020 store opening target to 1,200. It can be said that in the process of brand competition and expansion, franchisees help bear most of the risks.
In fact, brands also have a dividend period. After experiencing rapid development, choosing to franchise a star brand later may not be a wise decision.
Taking 1 Dian Dian as an example, after years of development, although the brand and products still maintain certain competitiveness, the problem is that business districts are almost fully occupied, making it difficult to find a suitable location for franchising.
A certain industry practitioner told 36Kr that the pure franchise fee for 1 Dian Dian in the suburbs of Ningbo is 600,000-700,000 yuan, requiring 2-3 years to recoup the investment, and the annual return on investment is "similar to depositing money in the bank."
1 Dian Dian also sets a high threshold. Zhao Lin considered 1 Dian Dian before franchising Xiaolu Tea, but gave up because they required franchisees to open 15 stores within 3 years, which he found difficult.
In addition, be cautious with internet-famous brands. Generally, the life cycle of brands is not long, and the ceiling for certain categories is obvious. For example, soufflé pancakes were very popular a few years ago, with many internet-famous brands around this category, but now they have almost disappeared.
Don't be overly superstitious about star brands. When choosing to franchise, the growth space of the brand and category is a more important consideration.
-03- Location: The Key to Making Money
To succeed in opening a store, the core elements can be roughly summarized as brand/product, location, and management. Among them, location is the most critical factor determining success, accounting for more than 50% of importance, no less than choosing a track for entrepreneurship.
"Location selection is a deep knowledge, but many people are too hasty, just take a look around and leave. If you step on a mine in location, no matter how hard you try later, it's useless." Dai Zheming suggests that when actually selecting a location, you should at least visit three times: weekday noon, weekday evening, and weekend all day, because the three periods have completely different foot traffic, and the store models calculated are also very different.
If you choose franchising, many brands will intervene in the location selection process. They have their own set of location standards, but some brands have loose standards, some strict, and in practice, it may not be guaranteed. The problem is that the specific personnel operations are uncontrollable, and experience-based location selection has great limitations.
Jie Ge works in the location selection department of a well-known Japanese convenience store, responsible for evaluating storefronts. He told 36Kr that the convenience store brand has half direct-sale and half franchise stores. For the latter, franchisees usually find a storefront and ask them to evaluate it on-site. Evaluation indicators include foot traffic, surrounding residential areas, business districts, business types, etc. After the evaluation, it needs to be presented in PPT form at a fixed time each week, and the leader decides whether the storefront passes the review.
However, in this process, the personnel responsible for evaluation may have their own thoughts. Due to KPI pressure, some employees may exaggerate the storefront's performance, patting franchisees on the chest and saying they will definitely make money; or for profit, after the storefront found by the franchisee is rejected, employees may privately recommend a "more suitable" location, taking the opportunity to earn a storefront transfer fee.
In addition, the landlord is also a variable. Not all landlords are kind, and friction in transactions is inevitable. If the store operates well, the landlord may also covet your business.
Kushita Burger had a franchisee in a third-tier city. After opening, business was booming. The landlord was a real estate developer who claimed that the salesperson had stolen the company seal to sign the contract on their own, saying the contract was invalid and they wanted to take back the storefront. Soon after, the brand received a call from the developer proposing to franchise, but the brand ultimately refused.
Besides the "human" factor, a big problem that the industry finds hard to solve is experience-based location selection. For individual small merchants, location selection often relies on feeling and gut instinct; after years of operation, brands at least have their own location logic, which can help avoid some obvious pitfalls, but how accurate it can be is also questionable.
In the past, some entrepreneurial projects emerged in the industry, hoping to use big data to improve location selection efficiency. Platforms cooperate with various databases to capture information around the store source, including total population within a one-kilometer radius, sources of customer gathering such as residential areas, subway stations, banks, schools, surrounding housing prices, average per capita consumption in restaurants, proportion of surrounding business types, etc., forming a detailed analysis report to help merchants make scientific and rapid location decisions.
Ideally, merchants only need to inform the opening area, rent, area, and other elements to get help in finding a store. With a large amount of data accumulated, platforms can also build different location models for different industries, such as catering, retail, parent-child education, beauty salons, etc., combining business characteristics and store models to scientifically find stores.
However, the reality is that this direction has not yet produced a mature company.
"The biggest problem with this is that it cannot complete a closed loop." Zhang Jiapeng, founder of Lepu, told 36Kr, big data location selection can only essentially play an advisory role, because whether a store succeeds depends 50% on location, but the other 50% is uncontrollable. It's like using big data for blind dates; if the couple divorces, it's hard to attribute the reason to the inaccuracy of big data.
Lepu spent 5 years integrating multi-dimensional data from AutoNavi, JD.com, etc., but it was more about improving transaction efficiency at the storefront matching level. But even so, it's already an extremely difficult task: the process is like "reclaiming wasteland," with no industry standards; data is extremely non-standard, and the "freshness" of store source status is also a challenge; the original industry was very dishonest, and transactions had great friction.
In summary, there is very little stock data related to stores, and the methods of collecting offline data are also very limited. This leads to the industry only being able to provide location recommendations within a certain range, but not precise to a specific location. In reality, even different storefronts on the same street can have monthly rents differing by tens of thousands, leading to vastly different payback periods.
In fact, some unexpected situations are hard for big data to predict—Shiwu's milk tea shop in Chaowai SOHO was next to a pancake shop that was once very busy. Unexpectedly, the office building was mostly occupied by P2P companies, and after the thunderstorm and clearance, people left, and the staff had to struggle to run outside and peddle.
There are many such situations, such as big data also finding it hard to know when the road in front of your store will be under construction.
Finally, in essence, location selection is still a resource-heavy matter. Jie Ge told 36Kr that franchisees with quality storefront resources will be the stronger party when negotiating profit-sharing ratios with brands, such as storefronts near hospitals, schools, subway entrances, and stations, because these are scarce resources, most of which have been taken by second landlords, and often brands find it hard to obtain them.
"We suggest that people who want to open a store first determine the location, then choose the category. Because rent accounts for 30% of total costs, with the same foot traffic, if you have resources to get a location 2,000 yuan cheaper, the survival pressure will be much less." Zhang Kailiang said.
-04- Management: Can You Calculate Accounts?
If you choose a brand or category with relatively large dividends and find a good storefront, then the next step is to focus on management and operations. But first, you must understand that it's unrealistic to be an absentee owner from the start—unless you're very lucky, because the pitfalls in this process must be experienced personally by the boss to fully understand.
Liu Qiangdong shared in "My Entrepreneurial History" the story of when he opened a restaurant in college, he was sincere but was hurt by employees colluding. The restaurant kept losing money, and Liu Qiangdong, who thought he "knew a bit about management," couldn't find where the account problem was. Finally, an employee couldn't bear it and told him that the cashier and the cook had become a couple and were colluding to cheat money, the person buying vegetables doubled the reports, and the chef brought a dozen people to drink the most expensive wine in the restaurant every night at ten...
Jing Yi, founder of Tuyou Convenience Store, once told 36Kr that convenience stores are an industry with a serious problem of internal theft by employees, especially in stores that still use manual bookkeeping and auditing. Convenience stores have more than a dozen suppliers delivering goods daily, and larger supermarkets can have hundreds of suppliers coming and going. With high-frequency inventory flow, it's hard to prevent internal theft without an inventory system.
There are many similar news stories: In Hunan, a female cashier at a small supermarket stole over 200 yuan a day, and over 7 years, she stole 520,000 yuan in operating funds; at a Yonghui supermarket in Nanning, a cashier took 60,000 yuan in half a year and was finally criminally detained.
These are situations that novices opening their first store are very likely to encounter. In fact, employee management is not simple, and operating a store also requires good risk control. If the boss cannot be at the store personally, they must hire a very reliable store manager.
In addition to personnel management, the most important thing in opening a store is to calculate accounts clearly, but there are many people who don't know how to calculate.
To open a store, the initial one-time investment includes franchise fees, deposits, equipment costs, store transfer fees, decoration costs, hidden costs for permits, etc. Monthly operating costs include rent, labor costs, utilities, marketing expenses, etc.
When calculating the monthly break-even point, many people overlook the depreciation of decoration and equipment.
Century-old stores are rare; generally, small shops have a short life cycle, the market changes quickly, and consumers often like the new and dislike the old, so the investment payback period is very important.
"In the early stage of rapid brand development, the payback period is relatively short, with excellent ones at 3-5 months, normal ones at 8-10 months, and large stores like hotpot generally at 10-15 months." Zhang Kailiang of Canyin Qingbao believes that it's best to recoup the investment within a year, and then earn for half a year or a year before it's about time.
Hu Zhong, founder of Dabai Kaidian, said that except for very lucky situations, the payback period for opening a store now is generally 7-12 months. Brands that claim to recoup in 1 month are basically liars—if it's that easy, why wouldn't the brand make the money itself?
Dabai Kaidian now targets first-time store-opening novices, providing online introductory education services and third-party independent evaluation and consulting services before franchising. For many novice users, they suggest controlling the initial investment intention because the failure rate for the first store is high. For example, with a budget of 800,000 yuan, first open a small store costing 200,000-300,000 yuan; if it fails, there's a second chance.
Moreover, from the cases the platform has seen, investments of 150,000-200,000 yuan are more likely to succeed, while investments above 500,000 yuan have a higher failure rate, because many of them want to be absentee owners, thinking they can hire a store manager and wait to share profits.
In summary, to succeed in opening a store, the core is to increase revenue and reduce costs: on one hand, try to improve traffic, conversion rate, and average transaction value; on the other hand, without affecting product and service quality, find better solutions at every cost point.
As mentioned earlier, among the stores open in the market, only a few make money. However, many people don't open stores entirely to make money, but to gain something else through the store, which is another way of calculating accounts.
A certain entrepreneur runs a coffee shop in Shanghai, losing about 20,000 yuan per month—this is also the operating status of most coffee shops. But he also uses the store as an office space, so it's not a loss when calculated that way.
He said that in real life, there are many people with similar ideas: a young man from Zhengzhou was going abroad to study, and to stabilize the relationship, he gave his own storefront to his girlfriend to open a shop, not caring about losing money, the key being to give her something to do; for business owners, the monthly budget for treating guests to meals is enough to support a loss-making restaurant, and it also "shows strength" in front of partners.
-05- Don't Have Illusions
Now looking at small shops on the street or in malls, you can clearly feel the upgrade in store image. Not only better products and services, but also better visual effects, higher artistic level, and improved spatial experience. In the words of Zhang Jiapeng of Lepu, "the emotional component is increasing."
Why? On one hand, it's driven by demand; the mainstream consumer group, post-90s and post-00s, has higher requirements for offline consumption experience. On the other hand, supply has also changed; now young people generally have some money available for investment, and they can open a store for their interests, with many personalized ideas in actual operation.
At the same time, with the slogan "make it easy to open a small shop," many startups are also working to reduce the difficulty of opening a store. From early franchising, location selection, decoration, to later operations, supply chain, delivery, and marketing, you can find corresponding services and products in almost every link, in addition to various store-opening and entrepreneurship education platforms providing "soft services."
However, these can only be auxiliary, because choosing a service that "helps you avoid pitfalls" itself may also be a new pit. Before deciding to leave the workplace to open a store, you still need to consider carefully.
The pandemic at the beginning of 2020 inevitably brought a wave of store closures, but these stores will soon be taken over by others. Every year, millions of stores close, and millions of new stores open. In a cycle of waves, offline commerce is constantly updated and full of vitality.
But for the individuals involved, how many will have a good ending?