The Grocery Store

Credit to R. Nelson Nash, Author of Becoming Your Own Banker; Unlock the Infinite Banking Concept, 5th Edition,2008

“I would like you to examine the process of getting into a business in which you are both a consumer and a seller of the same thing. (There is a very significant reason for this exercise, so bear with me). A grocery store will easily meet these qualifications — everyone consumes groceries, and someone has to perform the distribution function. You have an unlimited market. Everyone is a potential customer — as well as you and your family and maybe some other “captive customers.”

You start it all by studying what the grocery business is all about, all the things that are necessary to be successful as an entrepreneur in this field. This is going to take some time and expense. When you feel competent to start the venture you must now find a good location for the business. The real estate folks say there are three important things about real estate — location, location, location. For such a property you are going to pay dearly. This is not  an overnight activity either. You are going to have to spend some time locating the right location.

Then you must construct a very nice looking building on the property. It must have a well-arranged interior with attractive equipment and fixtures and display cases. All this is necessary because your competition has been hard at work for years in attracting customers. Customers are going to do business with stores that are convenient, that look good, and have quality merchandise — and low prices! This means that the building, etc., is going to cost you a lot of money.

Now you must stock the store with groceries. The merchandise must be of good quality, attractively displayed, and have competitive prices. Your employees must be attentive to customer needs, courteous, and neat. This is going to cost you a lot of money, too. You open the front door for the customers — they come in and load their carts with groceries and take them to the cashier who collects their money at the front of the store. This is going to leave empty spaces in the display of goods. Your “hired help” is busy cruising the aisles, noticing where goods have been sold and quickly going to the storeroom at the back of the store to get more things to fill up those spaces. It is imperative that the store appears “fully stocked” at any given time. The customers demand it! Have you ever been to a grocery store that was only “partially stocked”? Did you continue to patronize the store — or did you take your business to another store that was more conscious of this quality?

All this means that you are going to have to restock the storeroom at other intervals to ensure you have immediate access to a bountiful supply of goods. The objective of the business is to provide your with income to build a business that you will eventually sell to someone else to provide you with retirement income.

Once you get this all set up and in operation, the difference between the “back door” and the “front door” is a very good living — if you can turn the inventory enough times per year.

If you sell a can of peas for $.60 at the front door, you have to replace it at the back door at a cost of $.57. (I have found this to be a shocking revelation to most everyone.) Grocery stores operate on a very small margin on such items. The can of peas sitting on the shelf for sale represents inventory. You must turn the inventory 15 times to just break even! There is all that interest you must pay on the hug sums of money you have borrowed to buy the land, the building , the signs, advertising, payroll, and fringe benefits, utilities, legal fees, accounting, etc., to name a few. Turn it 17 ties and you will be profitable. If you can turn the inventory 20 times per year you can retire early! Something dramatic happens once you get over the hump.

It all reminds me of a phenomenon in physics — take a pail of water to the seaside (I want you to be at sea level) and heat it to 210 degrees Fahrenheit and all you will have is very hot water. But if you heat it up to 212 degrees Fahrenheit you will have live steam with unbelievable power. The steam engine changed the world! But that does not happen until you get past 212 degrees. Lots of heat goes into the process up to the boiling point but the dramatic power comes suddenly.

Thus far the business looks pretty simple. But now, we complicate the picture. Assuming you are a male, married, with children, where is your wife going to shop for groceries — your store, or somewhere else? Further assuming that she chooses correctly — your store — she comes into  the front door and fills her cart with groceries. Here comes the complicated part. Please pay close attention! This point is critical and requires scrupulous honesty. Out of which door is she likely to take the groceries, front or back?

When delivering lectures, I ask this questions and wait for answers. An amazing number will readily admit that, “In all probability, she wants to go out the back door, avoiding the cashier at the front door.”

This is a very polite description of theft! Probably more businesses have been destroyed or severely limited by this sort of behavior than anything else. It is a feeling among owners and those related to them that , “This is our business and we can do anything we want to!” Unless this misunderstanding is curbed, the business is doomed. Consider this — over an extended period of time, can she go out the back door with her groceries without the “hired help” witnessing her act? I think not. So, what will the “hired help” do as a result. They are going to steal groceries, too. You can predict it with certainty.

If you are unaware of the prevalence of theft in retail business, do yourself a favor and make friends with someone who owns or manages a retail business. Then ask about how common is theft by employees. The answer will probably shock you. Question — who pays for all this theft? The customers who go to the cashier with their goods and pay for them, that’s who! It can’t come from anywhere else. Theft is devastating. Just consider, if your wife steals one can of peas, you have to sell 20 to make up for it.

There is one other thing that makes owners and their family members want to go out the back door. Every business in the United States has a “silent partner” — the Internal Revenue Service. If your wife goes out the front door and pays retail for her groceries just like everyone else, then your store makes more money than if she went out the back door. And the IRS posture is “the more you make — the more we take.”

But, suppose we could have a situation where the profits from our groceries are not subject to income taxes. Now we have eliminate one of the incentives to go out the back door with the goods. The only problem that remains is the human instinct to want to use the back door privilege. This urge must be overcome. Your business is at stake.

However, you and your family (plus maybe some others) are captive customers for your store. You are not going somewhere else to buy groceries. By now, you should realize that if you charge these captive customers wholesale prices, you have defeated the purpose of the business — to provide income for you and to build a business that you will eventually sell and use the proceeds for retirement income. If you charge them retail prices, you are going in the right direction. But, these are your captive customers. Why not charge these folks $.62 for a can of peas? The extra two cents will go directly to additional capital to buy more cans of peas to sell to the other customers! Hopefully, you can see what continued use of this practice can do to the profitability of your business. Do this over a long number of years and your record books will show a superior profitability picture.

When you sell your business some years later, you are in competition with someone else who has not obeyed these principles. He and his family members took their groceries out the back door, etc. The record books of this man’s business will never look as good as yours. That is, if he is still in business! In all probability he has gone out of business long ago. But, even if he is still around, can you guess which business will bring the better price? Yours! And this makes it possible for you to “clip larger coupons” at retirement time. I hope that you have learned this lesson well.”

 


TAKE AWAYS:

  • You want your business to be profitable.
  • Do not steal from yourself by taking your groceries out the back door.
  • Charge captive customers a little more will make your business grow and become more solid.
  • Businesses that do not follow these rules do not stand up in comparison to your business.