Low Profit Margin Business is a tricky affair for any entrepreneur. The key attraction for Low Profit Margin Business is HIGH VOLUME. For a startup, it is always a dilemma. It is quite enticing to venture into Low Profit Margin Business. Prima facie it appears risk-free. The same business can be either a high-profit margin or low-profit margin. The best example is Food Business. The profit margin can improve if you can command premium pricing. Premium pricing, in turn, depends on the positioning. I discussed the same in my post, High Profit Margin Business ideas for Premium Pricing. In highly competitive business it is next to impossible to command premium pricing.
Before i proceed, i would like to clarify that i am not at all suggesting that Low Profit Margin Business is BAD. It is HIGH RISK business. The reason being there is a very thin line between profit and loss. A slight increase in cost can wipe out your profit margins. Secondly, the dependency is on the committed volumes. Even a small shift in volumes may impact business profitability. Normally the economies of scale play a crucial role in Low Profit Margin Business. It is applicable on both demand and supply side of the business. Lastly, as i shared the major risk is VERY HIGH COMPETITION in such businesses. It might not be that easy to survive. I have personally observed fall of some big titans like a pack of cards. In other words, the margin of error in Low Profit Margin Business is almost NIL. An entrepreneur cannot afford to commit a small mistake in Low Profit Margin Business.
Low Profit Margin Business – 5 Business You Should Avoid
1. Food Business:
Trust me out of 10 budding entrepreneurs, 8 would like to start the food business. It is one of most competitive businesses in India. Every entrepreneur is trying to create a niche for themselves. The worst part is the success is not guaranteed. For every city, i have a list of 5-6 restaurants where i would love to dine. These restaurants are one of the best in the city depending on price segment and always remain crowded.
Last month, i was in a Navi Mumbai for a business trip. I visited this place after 5 years. Obvious my list was 5 years old. I visited all the 5 restaurants on my list. You will not believe that out of 5, two were closed. Another two were 1/5th of their earlier sitting capacity. Only one of them upgraded from mid-priced to premium. Why i took the example of Navi Mumbai because i visited this place after a long time. In other cities, i keep revising the list of favorite restaurants at regular intervals. Based on my experience, i can say that probability of survival is just 20%.
The key to success in Food Business is to control the food wastage and repeat business. In my post, Small Business Ideas i shared that probability of failure is low in case of the small-scale food business. Another important factor is know-how of the business. In some businesses, basic to advance knowledge of nitty gritty of the business is important. The food business is one such business. It’s not like that if i sing well then i should become a singer.
One of the weirdest reasons i have heard to start a food business is that “I Cook Well“. Another killer reason is “I am a Foodie“. My suggestion to all such future entrepreneurs is to please go and visit any 10 restaurants of your choice. Check out how many restaurant owners are cooking in the kitchen. The answer is zero as three of my friends undertook this exercise in past :).
2. Grocery:
Sometime back suddenly the startup blogs were flooded with posts related to the potential of the online grocery business. To face the competition from e-commerce players, offline players like D Mart offer fixed 6% discount on MRP. As i shared earlier that competition is very high in Low Profit Margin Business. In last one year, most of the online grocery players have shut their shop. The well-funded players have cut down on discounts and offers.
At one point, i used to get 10% discount on a bill of Rs 1000 from one of the leading online grocery stores. Now it is reduced to 4% on a bill of Rs 1500. The online grocery store failed to understand that in India “convenience” is not a deciding factor. Moreover, online grocery stores also failed to scale up their operations. It further deteriorated customer experience thus customer is again shifting back to traditional retail. Lastly, online grocery stores missed an imp point that traditional retail store need not worry about last mile logistics. It is a major pain for the online grocery store.
Based on my personal experience, non-delivery and quality are two biggest challenges. Every time i order grocery online, 2-3 items are always missing and another few are of bad quality. I gave up following up with the customer care. I ordered online grocery to save time but it was always followed by a half-hearted trip to the nearest supermarket.
It’s a fact that it takes almost same time whether you buy 5 items or 15 items from the supermarket after discounting the time spent on online shopping. Therefore, from last month onward half-hearted is now full-hearted grocery shopping from one of the biggest supermarkets. Though i am the biggest fan of e-commerce but i expect that online grocery store will pass some benefit of cost savings to me as a customer. Once this benefit stopped, i decided to move to traditional retail.
Now the choice is limited to next door Kirana Store or Supermarket like D Mart, Hypercity etc. The choice is obviously supermarkets as they offer good discounts. Being a value conscious customer and high spender, i expect a minimum discount of 5% on my grocery bill. Overall it’s all about economies of scale. The scale of operation makes grocery a profitable Business. The key to the success of some of biggest grocery chains is centralized procurement. Therefore, they can offer committed discounts to customers.
3. Clothing/Boutique Business:
It was one of the most promising business a few years back but due to low entry barrier, it is KILLED. Another Low Profit Margin Business with cut throat competition. If i am not wrong the million of ladies have opened a boutique in their houses. Besides competition, the customer behavior is also responsible for the double whammy for this business.
Recently in one of the comedy show, the stand-up comedian cracked a joke that in his childhood he used to wear same clothes for 10 years. Though it is exaggerated but it is fact. The alteration was a big business for tailors in 80s and 90s. Nowadays the shelf life of a cloth is just 2-3 wash or dry clean. Therefore, no one spends much on clothing.
Even the online retailers realized that it is very difficult to survive in Rs 1000+ segment. If you are value conscious buyer then you know that you can get lot many options in sub-1000 Rs segment. I can share my personal experience. Sometime back i bought a dress for my kid for Rs 1500 from nearby kids store. Co-incidentally, i found same dress for Rs 900 in an online store. The biggest shock was when i found same dress in a roadside market near Mumbai CST station for Rs 500. Being a typical Indian customer, i thought quality must be different but i decided to confront the store executive. To prove my point, i bought the same dress from the roadside market.
I removed the label from both the dresses and showed both the dresses to store executive. I told him to identify the one i bought from him. Trust me he was not able to recognize. He admitted that original cost of the dress is Rs 375. The roadside shopkeeper is selling for a margin of Rs 125. He told me that he spend Rs 1.5L per month to operate his retail store. He sells average 5-7 dress per day thus approx 210 per month. Thus Rs 714 is added to the cost of the dress. Moreover, he is providing a buying experience to the customer like AC showroom, educated sale staff, online payment facility etc. He also included the interest on capital employed in business thus his total cost was Rs 1250+. Now his margin is also approx Rs 250. He told me that may be a roadside vendor is earning more than him. That might be true.
4. Stationery and Office Supply:
There is not much action in this space. Besides being a Low Profit Margin Business, it is a low-value business. Some brave heart entrepreneurs ventured into this business but found it a tough nut to crack. The key to survival is enterprise clients. The corporate contracts are awarded only through references and links :). The offline business model is highly competitive. On the other hand, there is NO Business case for the online business model. The reason being, people hardly buy stationery worth more than Rs 200 in one go. The logistics cost is high for low-value dispatch.
Many times i decided to buy stationery online but found the delivery cost more than product cost in some cases. You should venture into this business only if you have assurance/commitment on corporate contacts. The flip side of corporate contracts is that once the contract is over the business is also over. Due to competition, there are very few vendors with 5-6 big corporate contracts. As it is Low Profit Margin Business, therefore, high volumes are possible only in case if you have enterprise clients.
5. Gifting:
The biggest problem with Indian startup culture is a lack of original ideas. What works abroad may not work in India. It is important to understand the behavior of Indian consumer. We are quite gung-ho about the Indian startup story. Here i am sorry to say but 99% concepts are copied from silicon valley. The so-called Indian entrepreneurs copied the concept from abroad and gifting is one such example.
Sometime back i saw an ad wherein a gift was circulated to one family to another. Finally, it landed back to the same family that started this gift cycle. It might sound funny but it is the reality of Indian household. The ad makers don’t bring any idea from their end. They just observe the behavior and create a wonderful Ad idea. The traditional form of gifting i.e. Cash is still most popular in India.
If someone gift any product/item then the 1st thought in the mind of the recipient is that someone might have gifted the same to the donor. The perceived value also play an imp role. For example, a coffee mug with name & pic embossed on the same cost up to Rs 750. The perceived value is just the utility of the mug i.e. Rs 150. Therefore, gifting is more of perceived value rather tangible value. Because of this Gifting as a business is not successful in India. It is Low Profit Margin Business because of initial cost and low volumes.
Some entrepreneurs ventured into corporate gifting but in India corporate gifting is only a once or twice a year affair. Normally corporates buy gifts at the time of Diwali or New Year. Therefore, it is not a big business in India.
Summary:
Each business has its own unique trait. For example, i shared a list of recession free business. It is important for an entrepreneur to calculate perceived risk. It is high in case of Low Profit Margin Business. At the same time, it is important to understand the customer behavior. In a nutshell, Low Profit Margin Business is profitable only if the volumes are huge. An estimate of average order size, daily orders, and profit margin can help to take a decision.
The plan B should be in place in case of startup failure. The best example of Plan B in Indian scenario is of Snapdeal. It started as a daily deals platform but quickly changed gears to become one of the largest online marketplaces in India. Therefore, it is critical to have plan B in place before its too late.
The world economy is not doing well. Large no of jobs are in danger and will go extinct. The startup space will be flooded with entrepreneurs not by choice but by chance. In my opinion, there will be a lot of action in Low Profit Margin Business because of low entry barrier. Therefore, it is critical to play your cards well to survive. To conclude, it is imp to have Corporate or Enterprise clients in some of the Low Profit Margin Business. The survival will also depend on how the business gels well with new platforms and channels like e-commerce and mobile apps.
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