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How to Open a Convenience Store

How to Open a Convenience Store

From streaming media content to curbside pickup, we are living in the age of instant gratification. Consumers value merchants who meet needs immediately, something successful convenience stores accomplish expertly. These stores promise speedy transactions for busy patrons purchasing food, beverages, toiletries, tobacco goods, and more. With medium barriers to entry, an aspiring entrepreneur who is well-versed in all aspects of the industry can find success as a convenience store owner. This guide will cover relevant trends, financial considerations, and strategies to help budding business owners pursue convenience store ownership.

Industry Summary

Each day, bodegas, corner stores, and mom & pop shops serve 160 million customers – the equivalent of half the U.S. population. According to the National Association of Convenience Stores (NACS), the country’s 153,000-plus convenience stores bring in nearly 11% of retail and food-service revenue. Fuel is sold by nearly 80% of all convenience stores. Likewise, about 80% of all U.S. fuel is purchased from these stores.

IBIS World projects that by 2023, industry revenue will grow to $29.9 billion. This is due, in part, to lower unemployment and higher income levels. Although the industry is growing, the rise is relatively slow. The industry’s contribution to GDP is predicted to grow 1.7% over 10 years to 2023. Compared to the projected GDP growth rate of 2.2%, the convenience store industry is lagging. Also, proprietors must be prepared for the challenges of a particularly competitive market due to moderate barriers to entry, industry saturation, and market fragmentation.

Single-store operators rule the convenience store domain. The top two chains hold less than 40% of the market share, as indicated by IBIS World. In fact, mom & pop small business operations employing fewer than five people account for 68.1% of total stores. Independent owners operate at low profit margins of around 2%, as detailed in a CNBC report. However, wise shop owners recognize that high-margin packaged and prepared meals account for over 21.7% of industry sales and focus on sales of these items. Moreover, busy patrons will pay a premium for convenience. Therefore, even the most modest corner store can buck the trend through sharp inventory management and clever pricing.

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Industry Trends

The technological era in which we live has stoked consumers’ sense of urgency. Expedited service models have placed goods and services at customers’ fingertips. In other words: consumers want their needs met now. The most enterprising convenience store owners know how to capitalize on this instant gratification mindset to profit.

An investigative report by CNBC revealed that the average convenience store visit lasts under four minutes, and 65% of items sold are consumed immediately. A staggering 83% are devoured within an hour.  Location, product selection, and store design are lures that can hook today’s on-demand shoppers.

Merchandise should also reflect area demographics. For example, stores located near business complexes would want to consider stocking premium coffee and hot food items. Higher-priced items should be placed at premium shelf locations at eye-level. The nation’s high employment rate and increased spending have led to more impulse purchases. Indulgences, such as candy and magazines, should be placed near the cash register to stimulate impulse buys.

Tobacco products are a major driver of convenience store sales. With a greater emphasis on health, the number of smokers – and the demand for cigarettes – is anticipated to drop and could impact store earnings. Conversely, the demand for healthier grab-and-go food options is on the rise. Shrewd business owners will keep a close eye on market trends, demographics, and other factors to customize inventory for primary clientele.

Target Market

Convenience store patrons are not characterized by their loyalty. Thus, proprietors must offer products and services that exceed expectations to attract customers and earn repeat business. Product availability and speed of service are paramount for the typical corner shop consumer. In this arena, convenience trumps price.

Millennials are prime customers for shops that stock high-margin pre-made and packaged meals and common household goods. As reported by the USDA, Millennials keep fewer items in the fridge and prefer convenient pre-cooked meals. In fact, patrons from ages 25 to 44 – including Millennials, busy families, and young professionals with some discretionary income – are reported to account for almost 40% of revenue.

An owner with a deep understanding of the target market and area demographics can tailor their corner store to the locale. Consistent staples, distinctive offerings, and hometown favorites should be stocked regularly to effectively meet consumer demand.

Checklist for Starting a Convenience Store

If you’re thinking about starting a convenience store, it’s important to do your research first. Here is a checklist to help you get started.

Step 1: Write a Business Plan

Before opening a convenience store business, set the stage for success by creating a business plan and gaining a keen understanding of the market.  Not only will a bank require you to have a business plan in order to get funding, but multiple studies have shown that a business plan helps increase the odds of starting a successful business. A well thought out convenience store plan will serve the entrepreneur as the road map for their business, helping them achieve their business goals.

Related: How to write a business plan

Step 2: Form a Business Entity

A business entity (also referred to as a business structure) refers to how a business is legally organized to operate. There are four primary business structures to choose from, which include the sole proprietorship, partnership, corporation, and Limited Liability Company (LLC). Each type of entity has its own pros and cons, such as liability exposure, costs, and administrative requirements.

When deciding on which business entity is best for a convenience store, it normally comes down to the sole proprietorship and Limited Liability Company.

A partnership opens the owners up to unnecessary personal liability because if a partner does something to get the business sued, or runs off with cash from the business, the other partners are personally liable to repay.
 
The corporation can be a good choice to minimize liability risk because it separates the business assets from the owner’s assets. If the corporation is sued or certain business debts can’t be paid back, the owners aren’t personally responsible to repay them. The downside to the corporation is that it is more complicated than all the other entities and requires more administration than the LLC. If you plan on raising a lot of investment though, the corporation is usually the better choice.

That leaves the sole proprietorship and LLC.

The sole proprietorship is the least expensive and easiest entity to start which is appealing. The downside is that the owner is personally liable should anything happen to the business, which is an important consideration. The LLC offers the ability to operate as a sole proprietorship with the liability protection of a corporation. Depending on the state, the cost to form an LLC runs from $40 – $500, which is pretty inexpensive for protecting the owners from business-related lawsuits and certain debts.

Related: Guide to forming your LLC
 

Forming an LLC sounds complicated and expensive, but using an entity formation service guides you through the process so you know it was done right.


Some popular LLC formation services include:


IncFile - $0 plus state fees & free registered agent for 1 year!

IncAuthority - $0 plus state fees & free registered agent the first year!

ZenBusiness - $49 plus state fees & free registered agent for 1 year!

Step 3: Name the Business

Finding the perfect business name can be challenging. Not only does the name have to resonate with your customers, but it also has to be available to use.

Related: Tips and ideas for naming a convenience store

Step 4: Select your Location

With a solid business plan in-hand, it is time to choose the ideal location with maximum traffic and minimal competition. Convenience stores should be located in high-traffic, visible areas in which there are no nearby grocery stores. These shops will be attractive to customers who desire to complete quick purchases without making longer trips to large chain stores.

A store will need to be located in higher-traffic locations, which typically equates to high rent or purchase price.

Related: Choosing a business location

Step 5: Register for Business Licenses and Permits

Most notably, vendors selling regulated items such as tobacco and alcoholic beverages will need to register federally with the Alcohol and Tobacco Tax and Trade Bureau (TTB), along with licensing from the state and local municipality. Sales of lottery tickets and fuel will also need additional state licenses. Independent corner stores are held to many of the same regulations as major grocers. Reach out to The Occupational Safety and Health Administration for help with navigating complexities associated with convenience store ownership.

Additionally, there are general business registrations that may be needed, such as a business license, sales tax permit, Employer Identification Number (EIN), and Occupancy Permit, among others.

Related: Common business licenses, permits, and registrations by state

Step 6: Secure Funding

Coming up with a good business idea and having the skills to run it are one thing, but getting the funding to start a convenience store is another.  The cost to start a convenience store can be very high, with most of the costs going towards remodeling, fixtures, security system, signage, and inventory.  Funding for a new start-up can be difficult as banks are typically going to want the borrower to have good credit and personally invest 15-25% towards the total startup costs.

Related: Finding the money to start a business

Step 7: Open a Business Bank Account

Keeping your small business and personal finances in separate bank accounts is important to track the income and expenses of your business and identify trends.
 
Many banks offer free business checking accounts, so be sure to find a cost-effective option for your business.

Step 8: Get your Advertising Ready

Now that you are getting close to opening, it’s time to get marketing materials planned and created. It’s important to understand your market and what media they consume so you can effectively reach out and let them know you’re open.

Related: Low-cost ideas to market a new business

Every business is going to need a logo. Make a professional logo in no time with the free logo makers from BrandCrowd and Canva.

Step 9: Hire Employees

Finding good employees for a convenience store will be challenging, and the owner will either need a flexible schedule or management staff to cover employees who don’t show up for their shifts.  It’s important to constantly be looking for reliable employees to staff the store in addition to running background checks and random drug testing.

Convenience stores suffer from high turnover rates. Costs associated with training new personnel, coupled with climbing wages, can cause profits to dip. Brainstorm tactics to retain staff and offset expenses.

Related: Hiring your first employee

Step 10: Get Business Insurance

There are several types of insurance to consider when starting a convenience store. A few of these include:
– General liability insurance offers coverage if a customer is injured onsite, such as slipping and injuring themselves on a wet floor
– Commercial property insurance covers the cost of equipment that could be lost or damaged in a fire or another event.
– Worker’s compensation insurance covers expenses like lost wages or medical bills if an employee is ever injured while working.

The cost to insure a convenience store will vary based on the business’ location, the value of its equipment, and even the number of employees on staff. To get the best idea of what insurance will cost, request quotes from multiple insurance providers. Compare the quotes, paying attention to factors like premiums, deductibles, and coverage limits and exclusions.

Related: What types of insurance does a convenience store need?

Step 11: Set up an Accounting System

Setting up an accounting system is critical to the long-term success of your business.

Staying on top of taxes not only keeps the business out of trouble with the government, but the numbers can be used to track and monitor trends and cash flow in the business and maximize profits.

Related: Setting up the accounting for your business

The thought of accounting can be intimidating for a lot of new entrepreneurs. There are a number of ways of handling bookkeeping, from DIY to hiring a bookkeeper. These include:

- Pen and paper - Low expense, but difficult to track.
- Spreadsheet - Low expense, but easy to make errors.
- Accounting software - Medium expense, but owner typically inputs expenses. Some great accounting software programs include Freshbooks or Wave Accounting.
- Hire a bookkeeper - Higher expense, though very affordable at $100-$200 per month in most cases. A dedicated bookkeeper will probably save money because, in addition to handling all of the bookkeeping (so you can focus on the business), they also provide personalized tax advice and ensure the business is in compliance.

Find bookkeepers in your local area or use a service like 800Accountant.

How much does it cost to start a convenience store?

Startup costs for a convenience store vary depending upon size, location, and product selection. The initial investment can range from $10,000 to $1 million, according to Entrepreneur.com. Most aspiring proprietors will find it necessary to obtain financing or seek investors.

Some common startup costs for a convenience store include:
– Equipment and supplies
– Building renovations
– Furniture and fixtures such as checkout counters, refrigerators, freezers, shelving, registers, surveillance cameras to deter theft, etc.
– Inventory
– Inventory software
– Point of sale software
– Licenses and permits
– Franchise fees, if applicable
– Working capital

How much can a convenience store owner make?

In 2017, $1 of every $30.90 spent in the U.S. was pocketed by a convenience store, and revenue is creeping upward, according to Convenience.org. This could mean higher incomes for owners. Additionally, according to NACS, 1991 was the last time the convenience store industry reported a net loss. This is positive news for blossoming bodegas and fresh franchises.

Business structure, location, and other factors determine an owner’s take-home pay. According to  Indeed.com, the average store owner earns about $66,000 per year

Are there grants to start a convenience store?

It’s extremely rare to find a grant to start a convenience store. If you search for business grants, you will come across a lot of scams and misinformation. Occasionally an organization will offer grants to start a business, however, be skeptical and don’t provide any sensitive personal information or pay money to get more information.

Legitimate federal grants can be found at Grants.gov, and you can check on your state’s economic development office to see if they have any grants available.

What is the NAICS code for a convenience store?

The NAICS code for a convenience store is 311811.

The NAICS code (North American Industry Classification System) is a federal system to classify different types of businesses for the collection and reporting of statistical data.

Related: What is a NAICS code?

Resources:
National Association of Convenience Stores
American Petroleum and Convenience Store Association
Association of Convenience Store Retailers

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