Thomas M. Bragg on Business Risk Management

“How does somebody develop a passion for business risk management?”, one might ask. Well, let’s just say that I  learned its importance the hard (read “expensive”) way.

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My partner, Phil, and I started a retail liquor store in our hometown – a small town in eastern Iowa. We did our research. There was a  limited local supply – only the town’s grocery store offered a very sparse selection of liqour, beer and wine with zero customer service. Our interviews with competitors, potential customers and suppliers all indicated that there was a solid market for the business as long as the prices were reasonable. We wrote a kick-ass business plan (”Best I’ve ever read”, said the banker), got our financing, set up our space and opened the business.

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The initial response was pretty encouraging. We had a great location and put together a nice marketing campaign to generate interest. The business was cash-flowing and life was good. But after about six months, we noticed sales starting to drop off. At first we attributed the drop to the end of the honeymoon every new retail business experiences, but the sales kept dropping off. Phil and I tried a lot of responses – increased marketing, special promotions, PR events, added services, expanded selection – but nothing seemed to stop the bleeding. We finally resorted to what we should have done in the first place…we started asking questions.  Our friends and former customers told us that the convenience of picking up their liquor, wine and beer while they were grocery shopping was more important to them than a better selection, better service and cool setting. Phil and I had assumed that a reasonably priced better selection with better service would win customers over. We assumed wrong.

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After about three years it was apparent that the business was never going to hit our target returns unless we made some major investments, and even then the returns would be questionable. We elected to close the business down and take the financial hit instead of throwing good money after bad.

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As we did a post-mortem on the good idea that didn’t work, it was clear that the bad assumption contributed to the loss. But the real cause of our loss was that we were not prepared when a key assumption didn’t pan out. As I’ve written before, assumptions are risks. We could have avoided the financial loss if we had managed our risks up front.

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We learned our lesson. Can you think of a similar situation? I’d love to hear about it.