b.xox - The Curse of Expansion

xox - The City of Rats

No matter how good is your product, you can never stand alone and hope to make large sums of money; you will always be required to deal with big retail chains. They are your essential channels. Internet is only a good proxy and not fully capable of replacing physical brick-and-mortar.

Dealing with them is unfortunately very bad for health, you therefore need to arm yourself correctly when playing their game.

The following example is a typical one and the numbers are simplified to illustrate its principles.

Typical Example
A typical retail chain can have say, 10 branches. Its turnover for the year is $100 or $10 per branch. The retail chain unfortunately is rather stupid in decision-making. Why? Simple. As a retail chain, it is very pride-oriented. It always seeks to expand. When the retail chain tries to expand, it always makes very poor branch location decisions. Why? Again you asked. The said retail chain is never stupid, in fact, the retail chain is super cunning. But, the retail chain is always at the mercy with the landlords. If the retail chain finds a good branch location, so does the landlord, the landlord will exact very high rental, even if the landlord doesn't yet know, it will soon know within the next 5 years. The asshole landlord will raise rental of branch location once the retail chain starts to "sink-in" to the location and has built localized brand loyalty. When the rental is super high, there is no profit, may even be losses. The retail chain will always get stuck real quickly. The cycle is vicious. Due to this reason, no matter how clever the retail chain is in seeking out good branch location, the good decision will soon turn bad. This is the pre-condition for the retail chain's failure.

Turnover
Because of the above issue with the landlord and/or manpower costs, the retail chain will find itself having to pay, say $105 for the year's operations, i.e., 5% more than the sale turnover. The retail chain simply has to find this extra $5 ($105(expenses)-$100(sales)) to make ends meet.

Expansion
So the retail chain has to think of a clever method to solve this mis-step (usually caused by rental increases from the landlords or increased labour costs). Typically the suppliers of products to the retail chain give a discount of say 40% to the retail chain. Usually the retail chain will pay up after 6 months of sale. So in the example above, the suppliers would be owed about $60 out of the $100 sales turnover, i.e., 60% of $100. The retail chain would have made 40% of $100 = $40 gross. But, the retail chain year's expenses is say $45. There is therefore a shortfall of $5, i.e., $40(income)-$45(expenses).

The cunning retail chain then has no choice but to think of a way to con the suppliers and screw their asses. The retail chain then anyhow chooses a new branch location and does business. Now there are 11 branches in the retail chain. The suppliers are told to stock-up the new branch, but never get paid because of the super-delayed payment cycle. The new sales turnover is $110, i.e., $10x11 and the increased number of branches will need an increased expenses of say, $55. But, the retail chain don't have to pay the suppliers for another 6 months to a year. So the retail chain will only pay the older debts like $60. Thus, leaving $50 for expenses, i.e., $110(new turnover)-$60(old debts). But, the original expenses is only $45. So the retail chain still have $5 left, i.e., $50-$45, which the retail chain wrongly declared as profits. The retail chain is flush with cold, hard cash from sale over the next 6 months. The retail chain don't even bother to pay any suppliers just yet.

The Next Year
To keep up the charade, the retail chain will need to expand by another branch or two by the following year. As long as the retail chain keeps expanding (approximately 10% a year), the old debts are being honoured by the increased turnover. The retail chain will show no weakness.

No Such Thing as Free Lunch
There is always a physical limit to every market, one simply can't expand forever. There will come a day when the retail chain can't expand anymore without cannibalizing on older branches' revenue. When that time comes, the retail chain would be fucked good. So be careful and read their annual reports to find hints of slowing down. The retail chain will shut down given time (30-50 years). That's why there are no retail chains that survived 400 years. Just chew over this.

Fucken Little Island
Notice the similarity with a certain little island policy on population growth. It is no-different. In time, this cutey island will sink big time. So you better don't follow a sinking ship. They can declare all their needs, but, the failure follows just as sure as the sun rises from the east.

Solution

1. When the retail chain grows and asking for more inventory to be placed at new stores, supply only what you can supply. Don't borrow from bank to increase the supply. Spread the inventory thinner if needed.
2. With increased branches, the turnover will be bigger and faster. Use the additional income to pay for new inventory in cash terms.
3. Diversify to other product range or another market.
4. Vary the payment terms.
5. Never try to be the biggest in the supply chain, the retail chain will first fuck you up good.
6. Procure alternative income source.
7. Invest in retail chain's enemy.
8. Expand only in cash terms. 

A little exercise:
If we know that the retail chain is an asshole when it comes to repaying old supply invoices and the retail chain is not growing anymore, how do we overcome this short-coming?