How Does a LHS Owner Make Money

Model Railroader General Discussion (Model Railroader)
1

There are several threads currently running that speak to the issue, either directly or indirectly, of LHS revenue and profit.

I have always wondered about this issue.

To those who actually have experience with running a LHS, I ask, how does a LHS owner make money?

If the owner of the shop operates a small storefront and pays rent and utilities, maintains an inventory, and dscounts prices, how does he even make a living, let alone a profit.

It seems to me that it becomes a “nickel and dime” operation with a few bucks per day in actual profit after expenses.

Rich

2

Rich,

you have given the answer already in your post - they simply don´t. That´s why so many shops close. It´s all been said before, so let´s not repeat that, please.

3

Ulrich, I am not merely trying to repeat an old thread.

It is just that in my experience as a customer, there is not enough foot traffic and not enough physical purchases in a typical LHS.

I just don’t see the volume of sales necessary to stay open.

Rich

4

Rich,

I just want to give this thread another direction, so folks answering don´t repeat what has been said umpteen times before.

5

Fair enough. Let me restate my premise a little.

I am trying to address the issue of volume of sales, or lack thereof.

I visited a LHS yesterday, and there was no one else in the store.

As I drove home, I observed other small shops, non-hobby related, that were dead, no foot traffic.

I just cannot imagine opening and stocking a LHS and then just sitting there all day without any customers. I cannot fathom how the owner even supports himself.

I got to thinking about that more after I read the Hobby Shop Consignment thread and the various replies talking about the absence of revenue and profit.

Profit is one thing, revenue is another. I have to imagine that days on end go by with little or no sales.

Rich

6

Rich,

I managed a train department in a full line hobby shop back in the 80’s. Yes, there were days when business was very slow, other days very busy.

Even with the selling of model airplanes and R/C cars, we did more than half our yearly volume in the months of Sept thru January, and during those months the store was always busy.

We did not discount much, and as I have explained in other threads on this subject, unless a shop is buying at least some products direct at better discounts, it is almost impossible to stay in business and discount your prices.

We could see then the changes comming to the market and knew that the future would be buying direct, discounting, selling mail order as well as over the counter and having a bigger inventory to meet customer demands.

The shops that have prospered did everything I listed above - MB Klein, Train World, Star Hobby, Caboose Hobbies, etc.

The hobby business has never depended on traditional “foot traffic”. Very little of our business was “random” shoppers. They came to our store specificly, and left the shopping center without going to any other store there.

As Ullirch suggests, this topic has been well covered, and my conversations about industry discounts are not always welcomed by some on here. I suggest you look up some of the old threads or send me a PM if you would like to understand the numbers a little better.

Sheldon

7

I was in a LHS one day and bought a magazine. The owner was talking to who-knows-who and said “see I sell a mag and I make about a buck.” They make most of their money at the Christmas season when people buy lots of Lionel sets for under that tree and other scales for Xmas gifts. They have to pace themselves throughout the year to cover salaries and expenses. That season and the subsequent sales deterimines their “volume”.

I also know a small tropical fish dealer who said, when the first of the recession hit, that “nothing I have is a need, it is all wants”, and so “people will cut out fish products and tanks when money is tight”. “It is more of a hobby for them”. He makes money when people come in and “just have to have X fish”.

Many people who are out of work now and can’t find a job in this market take their life savings {Or borrow on credit and credit cards} to start their own business. Whether they make money or profit is a whole 'nuther matter. They dream of the day they can rake in dough enough to pay themselves a bigger salary or open other stores. The unfortinate thing is, somehting like 75% of small businesses fold due to lack of sales or too thin margins for markup.

It was said years ago in my economics class, that the BEST business to be in that MAY be recession-proof or depression-proof is somehting to do with FOOD. Everybody needs FOOD so the food purveyors will make some money. Now people will cut out the expensive corner bakery sweets, mind you, but will still buy bread if it is reasonable {basic bread, not fancy artisan breads}. Grocery stores always have the store brands or other discount brands on which to gain sales and profits. The volume they sell will bring in the profits.

It can also be said for entertainment. People will get bored and even during the Great Recession went to the motion picture shows. SO some form of entertainment may somehow be found inthe budget.

No other store, hobby or n

8

Hi!

Seriously good question, and the answers are fairly obvious (as mentioned above).

When I worked for a living, I was a business analyst - which basically determines not only the profitability of a business segment, but where the monies came from and went to in a specific time period. Now that I’m retired, I find myself doing an “in my head” analysis of many of the places of business I enter.

Looking at my two local hobby shops specifically, I just can’t imagine that they even make enough money to stay afloat. The local strip center rents alone are enough to negate any real profit potential, not to mention utilities and insurance costs.

One of the stores is a one man operation, which is a “catch 22” situation at best. He can’t efficiently run the store and check out customers by himself, but if he hires help, that would dramatically add to his costs. I used to be a regular here, but the wait for service/check out got to be too much.

The other LHS caters to trains/planes/cars and is pretty large. There is typically 3 or 4 employees on the premises, as well as a number of “hangers on”. IMHO, the customers seem more intent on getting “small stuff” and asking questions, rather than spending “big bucks”. I’ve been in there a lot, and frankly have never witnessed anyone making a major purchase.

Both of these stores are pretty much “retail price” establishments, and have been around for 20-30 years. They may be doing on line business (I doubt it), but given the traffic flow they have I do believe they are on borrowed time.

Of course the reasons for this (fewer customers) has been discussed at length here, and there is no denying (IMHO) that internet sales have dented the big dollar sales, the economy is nowhere near where it was in the '90s, and youngsters today are more inclined to play with electronic toys as opposed to mo

9

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10

Do I need to state the obvious? Sell enough to make a profit and enough to make a living is what comes next. Volume is the obvious answer - but that is the trick.

11

The LHS owner needs to have a spouse with a good paying job and benefits , because the LHS is a break-even proposition at best nowadays.

12

At least one LHS that I patronize – not enough I am sure in their view – makes quite a bit of their money through internet dealing. I think it can be fairly said that the internet profits subsidize the brick and mortar, or perhaps both are necessary to make a go of it. Even an internet dealer needs to put the stuff somewhere after all. This particuar shop specializes in trains. And it is run by younger guys who perhaps feel more comfortable with internet dealing than geezers of my age would.

So perhaps it might be that the problem is not the hobby, not the fate of the LHS, but is a generational thing. And maybe also we are still in a period where if you can sell a complete DCC system to a veteran modeler who is changing over to DCC, that there is some serious money to be made from a single visit to the LHS. I think we are still in the “switching over to DCC era.”

When visiting their prior location I once mentioned that they had an entire wall devoted to Maerklin stuff and yet I never saw anybody there buying Maerklin. When i suggested to them that the space might be better devoted to (ahem!) Chicago & North Western stuff they looked at me with surprise – all it took was a couple of dedicated Maerklin collector/operators to provide a considerable % of their revenue. And yet at their new location there is much less Maerklin. Maybe that is what they sell over the internet.

They told a friend of mine something else interesting just recently – that they have concluded that the “Thomas” craze has either ended, or was perhaps overestimated as a source of revenue and traffic generation, and that the Thomas kids were not really joining the hobby but that they did see an uptick in teens who are into the hobby, maybe because of the high tech aspect, who did not come over from Thomas to their knowledge.

Dave Nelson

13

The answer that I see is Lionel in a an affluent market.

Northern Virginia has the highest median income counties in the nation, so folks have the money to pay list. But apparently they don’t build much because the hobby stores all seem to have lots of RTR - planes, trains, cars, etc. For those few remaining hobby stores that have trains, their train department is lots of Lionel/MTH with maybe HO and N on the side again mostly or all RTR. Built up structures also dominate. If you are lucky they might have a few scratchbuilding supplies such as paint and strip wood - although one owner told me a couple of years ago that he was selling off his paint because the demand for it was so low.

The last hobby shop that had lots of stuff to build - kits, parts, supplies - closed it’s doors, must be 10 years ago.

What appears to be the case these days is a large number of dealers are train show and/or internet only. I suspect they mostly operate out of their home to keep costs down and offer a discount.

Personally, I rarely visit hobby shops any more. I do most of my buying at train shows and on the internet - about 50/50. For in store shopping, I actually have bought more train stuff at antique shops this year than hobby shops.

Enjoy

Paul

14

In the case of my LHS, the owner is a Authorized Lionel Repair Shop, I believe he makes the most money out of the repairs he does. Also, when there is no one in the store he can work on repairs and that pays him for being there.

He does not have much stock, so most everything I want is special ordered. Although he does have a lot of N scale as he sponsers a N scale modular club.

It was the same when I lived in Loveland, CO the LHS did a lot of custom building and painting to keep the doors open.

Rick J[2c]

15

We have two hobby shops in Denver, that are dedicated to trains only.

The first one is Mizzell Trains. Every time I walk in there, no matter week day or weekend, there are people there shopping.

The second one is Caboose. This place is a madhouse on the weekends. I’ll be lucky to find a parking spot in front. They are always packed with people.

Both of these shops are great with customers. Very friendly, helpful, and will return items no questions asked.

I think these LHS need to know how to treat customers, that is a huge thing to keep people coming back.

If these shops here, were rude, I would never go back, and just shop online.

I’ve purchased things of other stores around the country, and a few of them treat customers badly, have no idea how to talk to their customers. And of course thats that last time I’ve spent my money there also.

16

I work part time for an HO and N-Gauge only hobby shop. It’s an average size store in a middle to upper middle class area residentially and commercially. It is well stocked and likely has in excess to $250K in inventory.

The majority of items, excluding periodicals, are discounted. Special orders are welcome and priced at the distributors’ current price - e.g. Walthers monthly flyer price if applicable The top line sales GPM is 40% - and I have no idea of the bottom line sales and final PM.

Costs are well managed as all employes are part time and only one of us works with the owner on any given day. Empirical data was used to set the store hours and staffing. The store has been in business for over 10 years with the current owner.

It is rare when there is no customer in the store even during the summer months where 110 plus is the usual.

17

This is the kind of reply that is helpful, thanks. I have ran, owned bought, sold and started various businesses, but not in retail. I have an idea of what the numbers could and should be and where the problems can take a bite out of profit. Many of us have also seen LHSs start from scratch and become very successful and successful ones sell to a new owner and maintain to grow as well as of course seen those that have died. And some of these successes have occurred in the last several years.

So, from that perspective it seems that desire, overall business capability, product knowledge, and marketing knowledge are key. Businesses can make money with 30% GM. It would be interesting to know what % of sales and GM is from instore vs online for such places as Blue Ridge Hobbies, Caboose Hobbies and MB Klein. I know

18

Let´s do a bit of math here:

What are the costs a LHS owner faces?

  • Rent
  • Utility bills
  • Insurances
  • Cost of Inventory
  • Other (accounting etc…)
  • Staff

Assuming he/she has to pay a rent to the tune of 2,000 $ a month, runs up a utility bill of 300 $ a month, pays 6,000 $ for insurances, pays interest on inventory to the tune of 24,000 $ a year and has a part time employee at 1,000 $ a month. Including those “Other cost”, he runs up a bill of 72,000 $ a year. At a margin averaging not more than 25 %, he has to make sales to the tune of $ 288,000 a year to recover the cost. He/she needs to sell a lot more to make a living. On that cost basis, a shop has to have revenues of over half a million $ to pay the owner a decent living.

Quite a lot …

19

My guess is that in the pre-Internet days, the LHS could generate the numbers that Ulrich calculates in his reply. When I entered the HO scale side of the hobby in January, 2003, I began by driving to our LHS. Back then, the owner had a lot of business. I personally spent a small fortune there. But as I became aware of the on line hobby shops, and the substantial discounts, I started to shop on line as well. Before our LHS closed in 2008, the amount of foot traffic dwindled year by year. As I look back, and mourn the closing of three LHS in my immediate area, I become more convinced that I had witnessed the end of an era when I began model railroading in early 2003.

Rich

20

I just read on another forums that Mizzell just closed or is closing, so I guess thats down to one hobby shop in Denver?

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