If you want to open a grocery store but are unsure where to start, you have come to the right place. Below you will find a comprehensive guide of the steps that need to be taken to start a grocery store.
Getting your finances in order is the most crucial step, as grocery stores can cost several million dollars to open. There are many types of financial assistance available to grocery store owners, including loans and credit lines. These businesses also tend to be set-up as LLCs.
The importance of limited liability in the industry will become more apparent throughout this article, as you will learn why profit margins tend to be so thin and how you can ensure that your store will get off on the right foot.
How Do You Open A Grocery Store?
Before you even get started, you need to develop a business plan. It is critical to have a realistic strategy in place. What kind of store do you envision yourself operating? Do you want it to be a general grocery store that competes with local chains, or do you want to create a specific type of store that caters to a niche?
Think About Your Target Niche
The current trend for small business owners is to either cater to a specific niche or operate a store in an urban area or neighborhood where residents do not currently have easy access to a supermarket. There are many food deserts strewn across the urban United States, to the extent that it is a very real problem. You are encouraged to visit the USDA Food Access Research Atlas to see just how much of a problem this is in your area.
In terms of specific niches to consider: you might be looking into operating a store that sells only certified organic products or locally-sourced foods. This is all food for thought as you continue to mull over your plans for the store and determine precisely who your consumer base is.
Decision Time: Franchise or Independent
If you’re hoping to simply operate a general grocery store and not necessarily target a specific niche, then becoming part of a franchise may be the best option for you. Franchises do offer less freedom, but they take a lot of weight off your shoulders if you don’t have a lot of experience running your own business.
Here is how a store franchise works:
- You pay a fee to operate under a brand name and sell the products they select.
- Many responsibilities will still be yours, including hiring employees.
- Royalties are sent to the franchisor.
- You are guided through the process of how to operate the store.
The massive drawback to this is the fact that you will be put on a short leash creatively. If you are getting into the business because you feel that you have some solid ideas of your own, then it may be best to go the independent route. If you are looking more so for an investment opportunity, then a reputable franchise may be the answer you’re looking for.
Form A Legal Business
You will first need to familiarize yourself with some business terminology before legally forming a business.
Sole Proprietorship and General Partnership
A sole proprietorship is generally a small business with few employees owned by a single individual, while a general partnership requires a group of two or more to agree on ownership percentages. These ownership types are not typically utilized in grocery retail due to reasons discussed in further detail below.
What Is an LLC? Business Structure Types
You can operate your grocery store under a sole proprietorship, but you will not be able to enjoy the protections that an LLC will offer. Due to the potential liabilities associated with operating a grocery store, most lawyers encourage small business owners, in general, to operate under the protection of a limited liability company (LLC). This is a business organization type that offers its members both the limited liability of a corporation and a partnership’s tax perks.
The term “limited liability” refers to the fact that the business owner will generally not be held personally liable for debts incurred by the business or business-related lawsuits. An LLC is considered the most accessible type of business entity to form and operate. There are also no limits on the number of owners, minimum or maximum.
To form an LLC, you will file a document called the articles of organization with a local government official, often the Secretary of State’s office for your state. The downside is that you will have to pay annual fees to keep your status as an LLC.
Permits: How Are Grocery Stores Regulated?
Governments regulate retail food establishments via a permitting process. Before you become fully established, you will need to ensure that you have all your permits squared away.
You can anticipate spending at least several hundreds of dollars per year on health department permitting, typically regulated by local governments.
In general, here are some things to consider during the permitting process:
- Will you be operating a deli? There are generally stricter health code requirements for grocery stores that prepare food on-site.
- Source of food items: Regulatory agencies require that the companies you are buying groceries from are also properly licensed.
- Will you sell alcohol? This will require you to purchase an additional license.
Insurance
Just like any other business, grocery stores also need to sign up for insurance to manage risk. You are encouraged to get quotes from a few different providers before deciding what works best for you.
A grocery store insurance policy may cover the following:
- Property
- Liability
- Loss of Income
- Computer Equipment
- Food Spoilage
- Equipment Breakdowns
- Theft
How Do You Finance A Grocery Store?
Your next step involves securing the necessary funding to open the store. A startup comes with tremendous upfront costs. You will likely need a little help beyond the collective savings of the store’s ownership.
You have a myriad of financing options available to you throughout your ownership:
Seed Capital
To jump-start the financing process, you will need to draw funding from a variety of small sources, examples of which include personal savings, family, and friends. You may also consider gaining support via crowdfunding. The pre-seed stage is technically defined as funding remaining under $15,000.
Angel Investor Funding
This stage of the process requires you to have an established business plan already. Perhaps you have already started a small store and are looking to expand. Regardless of the details of your operation (i.e., how long you’ve been opened, daily sales numbers, etc.), you will need to develop a sales pitch.
You are essentially approaching a wealthy individual who is willing to invest in your business in hopes that they will be able to generate some income for themselves. A partnership certainly has the opportunity to become mutually-beneficial. They may even request to have a role in business operations.
You are by no means required to approach angel investors at any point. However, angel investors are estimated to contribute a total of $24 billion to 64,000 startups in the U.S every year.
If you want to learn more about angel investors, you are encouraged to visit this article from the Kellogg School of Management at Northwestern University.
Loans for Grocery Stores
Seed capital alone will not carry you very far when you are trying to start your grocery store. Here are the types of loans that are available to grocery stores and supermarkets:
| Loan Type | Financing Rates | Term Length |
| Conventional Term Loan | 5-10% | Up to 25 years |
| SBA Loans | 6-8% | Up to 25 years |
| Mid-prime Loans | 8-20% | Up to 5 years |
| Line of Credit | 5-15% | Up to 3 years |
Source: GUD Capital
Knowing how to navigate basic loan terminology will serve you well. Term loans may be challenging for startups to qualify for, as you will need to be able to defend your credit. If this is your first time going into business, you may be considered too much of a risk for the lender. SBA loans are easier to qualify for because they are backed by the U.S government.
A line of credit is a type of loan that will allow you to draw a limited amount of money to help finance short-term business expenses. It is similar to a credit card in that you will have to pay interest on the amount borrowed. This comes in handy for grocery stores because there will be fewer constraints than a standard loan.
Cash Advances
A cash advance is another quick way to get money for short-term projects. Here’s how it works: you have presented a lump sum of cash from a lender that you will then gradually pay off via a fixed percentage that is applied to bank or credit card deposits. The factor rates usually vary from 1.15-1.55, and the term tends to last 4-24 months.
In summary: It’s best to operate under a diversity of financing strategies. The more seed capital you secure, the less you have to borrow from a lender to whom you will have to pay the principal plus interest.
How Much Does It Cost To Start A Grocery Store?
You’ll understand why financing is so necessary after seeing how much it costs to start a grocery store. It would be good to preface this section by offering a disclaimer that operating costs vary widely by region. You can anticipate the startup costs to be significantly higher in New York City than in a small town in the Midwest.
A 7,000 square foot grocery store in Baltimore costs $2.2 million to set-up, so you can begin to understand just how important it may be to start there. From that point, your profit margins will be affected by your operating costs, which are divided up as shown below:
Average Supermarket Costs as a Percentage of Sales
| Category | Estimated Cost %* |
| Total Payroll | 11.2 |
| Employee Benefits | 3.6 |
| Property rentals | 1.8 |
| Depreciation & Amortization | 1.4 |
| Utilities | 1.4 |
| Supplies | 1 |
| Maintenance & Repairs | 0.7 |
| Taxes & Licenses | 0.4 |
| Insurance | 0.3 |
| Other Expenses | 4.3 |
| Total Operating Expenses | 26.3 |
| COGS | 70.7 |
| Profit | 1.9 |
*Source: Agnese 2010 via Food Industry Association (FMI)
COGS stands for “Cost Of Goods Sold,” basically the cost of doing business. This all-encompassing parameter accounts for the expenses associated with purchasing goods and paying for the labor needed to get the end product in your customer’s hands. You can see that this category takes up a significant percentage of the total cost of running a grocery store.
How Much Does A Grocery Store Space Cost To Buy?
A startup business owner is encouraged to look into operating from an existing building rather than building from the ground up. Start by going to realty websites and scanning the available commercial properties.
In addition to ensuring that the listing details and pricing are acceptable, you should also scan the area for potential competitors. Be sure to read through the details of a leasing agreement before signing onto anything. It is not uncommon for the owners of startups to consult with an attorney so that they can make sense of their rights and responsibilities under the agreement.
If you are interested in purchasing a store space, you can anticipate paying anywhere from $100,000 for a neighborhood market to upwards of $1 million for a full-service grocery store.
Costs will vary widely from city to city, with the average retail rental rate in Dallas being $16.80 per square foot. Renting may be a good option for startups since this will help keep your up-front costs down. You may be able to take advantage of a lease-to-own contract if you desire more freedom later on down the road.
Remodeling
Your grocery store will likely require some degree of both interior and exterior remodeling. The next time you visit your local grocery store, think about the amount of infrastructure inside and imagine having to build everything from the ground up. Even in small grocery stores, this undertaking may well require you to hire private contractors to spruce things up a bit.
- Shelving units
- Refrigerator/Freezer Section
- Walls/Painting
- Storefront
- Restrooms
- Floor Tiles
A grocery store can cost $10,000-$25,000 to remodel. This is something to consider if you are thinking about going with a fixer-upper to save a little money. It also speaks to the merits of signing onto a commercial lease if this is your first time operating your own business.
How to Save Money on Overhead
The margin for error is pretty thin when it comes to turning a profit. Grocery stores are notorious for having low-profit margins, averaging about 1.3%. Being able to turn a profit in this industry often requires some type of innovation. It also wouldn’t be a bad idea to research some ways to keep your costs low before setting up shop. In the section below, you will find a variety of solutions for cutting operating expenses.
Shop Around For a Wholesale Distributor
Supermarkets typically enter into formal agreements with wholesale vendors who supply the goods to be sold in the store. You can save yourself money by shopping around for potential wholesalers. If you’ve never done anything like this before, it’s good to know what to look for in a vendor agreement with a wholesaler.
Here are some things to look for:
- Terms of the contract
- Pricing
- Brand names the wholesaler carries
- Discounts for retailers who buy in bulk
The relationship between a grocery store and its wholesaler(s) is instrumental. If you make the wrong choice here, you may end up stocking your shelves with an inferior product. To some degree, a grocery store is at the mercy of a wholesaler, who may abruptly stop offering a specific product if they disagree with the manufacturer.
Purchase Second-Hand Equipment
You might consider looking into second-hand equipment for your store. This is one possible way to save money and not put yourself too far in the hole before making the first sale. You can easily upgrade to better equipment later on once you have turned in a little bit of a profit.
Regarding which type of equipment to buy second hand, think primarily about items that the customers do not regularly see, such as your office space. When it comes to items like cash registers and the store’s infrastructure, you might consider worrying a little bit more about having the latest and greatest technology.
This may be especially true at the checkout line, where modern cash registers can offer a wide range of services that older machines don’t.
Accounting: Tracking Finances
There exist many worthwhile programs and tools for tracking your grocery store’s finances and inventory. It’s a good idea to invest in some software to track all this data since it will cycle through fairly quickly once you get up and running. Just think about the amount of inventory that enters and leaves a grocery store within a given day. If you fall behind on the count early, it will be difficult for you to claw your way back.
First of all, it wouldn’t be a bad idea to enlist the help of an accountant, even if you’re operating a small store. They will help navigate you through the complex finances associated with operating a grocery store. Another significant benefit of outsourcing your accounting service: you will have more time to make daily business decisions.
This is so common that accounting firms advertise services specifically tailored for retailers. There are likely to be multiple accounting firms in your city. You are encouraged to shop around a little bit to determine which company will best take care of your needs.
Best Tracking Systems for Grocery Stores: POS Systems
A POS (point of sale) system is a must for the retail industry. This type of software will keep track of all sales, including online sales and self-checkout aisles, and interactive displays for customers to choose a payment option. As you would probably imagine, these programs also come with a cost.
Below, you will be introduced to one of the popular point-of-sale systems for grocery stores so that you get a picture of what type of features to look for:
Revel Systems
This is an iPad-based POS system that is compatible with various payment options, including contactless chip readers, mobile wallets, and cash. It can also take care of the online ordering.
Other notable features include:
- A customers reward program for recurring customers (optional)
- Delivery service management
- Daily sales reports
- Detailed inventory updates
- Employee scheduling
Pricing: Onboarding costs start at $674, monthly fees start at $99 per month for each terminal in the store.
Stocking: How Do You Stock A Grocery Store?
The next time you walk through your local grocery store, pay close attention to their stocking methods. Supermarkets have to be purposeful with their product placement.
What Is First In, First Out?
Grocery stores use the FIFO (first-in, first-out) method to stock foods on their shelves. This is the best way to ensure that groceries do not become expired or spoiled before they are sold. Everybody has gone through the ordeal of having food in their cupboard becoming spoiled. Imagine how bad it would be if much of the dairy section were to become expired while awaiting purchase.
First of all, it would be a safety concern because expired food is a breeding ground for illness. It would also disappoint customers who expect groceries of the utmost quality. Every single store should be stocking with the FIFO method.
Here is how the First In, First Out method is implemented:
- Ensure that every food item has either a USE BY or EXPIRATION DATE; otherwise workers should apply a tag showing date received.
- Items are organized according to these dates.
- The newest food is placed in the back, older food in the front.
- Items need to be rearranged and organized consistently every time new items arrive.
The Psychology of Product Placement
Product placement has a significant impact on the success of your business. You want to stock your shelves in a way that directs customers through the entire store. Numerous studies have revealed which methods consistently drum up the highest number of sales:
- Place essential items towards the back of the store.
- Place the priciest items near the entrance of the store.
- Keep premium groceries at eye-level.
- Complementary groceries should be side-by-side.
- Customers spend more time browsing items if the aisles are wide enough for them not to feel squeezed in.
How Can I Get More Customers To Come To My New Store?
Now comes the challenging part: attracting customers to your brand-new store. This can be particularly challenging if your business is not located along the main thoroughfare or is hidden among a myriad of other grocery options.
Online Sales
One way to quickly boost your sales numbers would be to participate in e-commerce. Groceries are one of the fastest-growing retail categories for e-commerce. Recent events have allowed people to become aware of just how much can be done through the internet.
Delivery Service
There are many ways to implement online sales: one way would be to integrate it with some sort of a grocery delivery system. Grocery deliveries are becoming more popular anyways. Stores that participate in these systems restrict deliveries to locations within a set mileage range. You don’t even have to necessarily buy your delivery vehicle, as there are numerous third-party delivery services currently taking advantage of increasing demands for grocery delivery.
Advertising
Start your advertising campaign before you even open your doors. Many business owners accomplish this by scheduling an opening day special. The gist is this: during the first day or so that the store is opened, customers will have access to deals that they otherwise wouldn’t be able to enjoy. This gets customers through the doors right off the bat.
One way to get the word out is to mail a flyer out to local customers. Compared to other methods, this is undoubtedly one of the more affordable options.
- Display Screens: LED word signs like this one are a common sight out in front of grocery stores for a reason. You can direct customers to your store by displaying current sales or promotions.
- Ad space in local newspapers or news websites
- Radio campaigns: Local radio advertising starts at approximately $200 per week, although you may encounter more affordable stations.
Conclusion
The main things to take into consideration when opening a grocery store are:
- Determine which type of grocery store you want to operate. Who is your target customer base?
- Get your finances in order. What kinds of loans would you qualify for? Do you need to approach investors?
- Consider all costs. Grocery stores come with high operating costs.
- Hire an accountant to keep your balance sheets in order.
- Make your job easier with modernized point-of-sale software.
- Start with an opening day promotion to attract customers.