How Clothes Mentor’s Business Model Creates High Margins
Considering investing in a clothing franchise? Don’t get tricked or hung up focusing on revenues and revenue growth potential. You need to focus on margins! Unlike other brands, we at Clothes Mentor are very transparent about our margins (65% +) This in the FDD because they are amazing compared to other businesses, especially those in the retail space.
What Do We Mean by Margins?
Margin (or more specifically Gross Margin) is the difference between what price a product sells for and what it costs to make or acquire it. More specifically, it is Net Sales less Cost of Goods Sold — before considering such items as overhead, payroll, general operating expenses, taxes, interest expense, etc. That amount is then divided by the total dollar value of sales to get to a company’s Gross Margin percent i.e. (Net Sales – COGS)/Net Sales = GM%.
For example, at Clothes Mentor, the margin we make on a dress is the price we sell a dress at less the cost of what we paid a customer to take in that gently-used dress. To figure out our overall Gross Margin, we take this margin on all the clothes/items we sell and then divide it by the total dollar value of sales.
Gross Margin gets right to the heart of the profit potential of a given product or service. It can’t be manipulated or influenced by much — including aggressive or risky operating strategies or financial engineering. Basically, if you start with a weak Gross Margin selling a product; it’s hard to improve it that much. Similarly, if you start with a strong Gross Margin; it’s typically difficult to mess up the profit potential. Sounds straightforward, right?
65 Percent Plus
We at NTY Franchise Company know how important Gross Margin is to the success of a brand from our own early experience when we purchased the franchise rights to Clothes Mentor in December 2006. At that time there were only two locations.
NTY Franchise Company purchased the franchise rights to Clothes Mentor after seeing first-hand the highly-attractive 65+% gross margins being generated at the two existing locations. This level compared well with typical 30–35 percent for traditional specialty retailers. Shortly thereafter, in early 2007, we began marketing and selling the franchise rights to Clothes Mentor; and since then franchisees have been able to replicate these margins.
Impressive Growth; Stunning Consistency
You’re likely wondering to what degree the 65%+ Gross Margin level is replicable; particularly at scale? Well, consider that in just over eleven years since we purchased the franchise rights (when there were only two units), Clothes Mentor is now that largest women’s upscale resale franchise company in America; with 145 stores today and plans to reach over 200 within the next five years.
Beyond impressive franchise store unit growth, in a recently concluded analysis of 135 Clothes Mentor stores that provided 2017 data — the average Gross Margin in EACH quartile of the group (split up into four, by level of sales) was 65 percent. Yes, each of the four quartiles averaged 65 percent versus the 30–35 percent industry average. This stunning consistency speaks bibles toward the effectiveness of the business model and power of the Clothes Mentor brand.
Why are Clothes Mentor’s Gross Margins so Strong?
The key reason why Clothes Mentor’s Gross Margins are so strong (and well ahead of industry averages) is the unique way in which it acquires and sells product. “We pay cash upfront and on the spot when we acquire product from customers — unlike most other resellers or consignment stores that wait for the merchandise to sell on the floor and then typically often only offer store credit or pay the customer when the product is sold,” notes Chad Olson, Chief Operations Officer of NTY Franchise Company. “Through paying cash upfront we take on the Inventory Risk and as such are rewarded with a much lower average cost of merchandise,” he says.
Remember from the earlier definition of Gross Margin — one of the two required components to strong returns is low cost to make or acquire a product. By taking on the Inventory Risk in this cash upfront manner, Clothes Mentor is able to pay much less for the merchandise it acquires from sellers.
How Does Clothes Mentor Effectively Assume Inventory Risk?
When you franchise a Clothes Mentor you tap into a wealth of experience in upscale resale. Rest assured, this isn’t a “Mom & Pop” operation where people behind the counter randomly decide “Hey, I think this would sell,” or “Nah, we don’t need any of these.” There is actually a decent amount of science behind it.
You might be wondering, “What type of science?” Well, it’s based on continuously-updated Price Matrix software that assists the franchisee in deciding what brands, styles, sizes, etc. to buy; what not to buy, and very importantly — how to price them. Every item that comes into the store for potential purchase by the franchisee is run through this Price Matrix system by a “Certified Buyer” who is properly trained on how to use the system.
Amazingly, the software also lets you track the buying performance of each Certified Buyer within your store. In other words, it tracks how effective the buyers are at using the platform to make purchase/pricing decisions based on the ultimate sales data of those items they specifically purchased. Through regular comparison of this data, the franchisee can see if any further training or adjustments are needed. That’s a heck of a way to run a tight ship!
As if the Price Matrix software and Certified Buyer strategy weren’t enough, there is also a Continuing Buyer Training Program where regional managers assist franchisees in staying current on local style/demand trends and overall best buying/operating practices. These individuals help you adjust, tweak and maximize your business quarterly.
Clothes Mentor’s success is built on smart product inventory acquisition. Buying smart brands, styles and sizes with a high likelihood of selling (and selling quickly) means a higher volume of sales and higher Inventory Turnover in which to make the attractive 65%+ margins. This is done over and over again, in a classic wash, rinse, repeat cycle that yields impressive returns for the franchisee.
Build It and They Will Come — For the Cash!
You may be wondering if it’s challenging for Clothes Mentor to establish and maintain a big enough inventory from which to leverage into strong Gross Margins? This is a very common question asked by potential franchisees. The simple answer is it is not difficult at all and the dynamic of “Build it and they will come for cash,” is truly front and center here.
“Cash is king, and I can assure you we have no trouble acquiring inventory with that very unique message,” preaches James Wollman, Vice President of Franchising for NTY. “We live in busy times right now, so the idea of selling in an online auction or sending it to someone else who’s paying cash online is not convenient because of the cost and time involved with shipping and transportation. People can come right in our front door, and we’ll pay cash on the spot, right over the counter, for that merchandise,” he notes. This is truly a win/win for the franchisee (and the customer) and Clothes Mentor’s high Gross Margins prove it.
Appearance Counts Too
Beyond effectively acquiring the right merchandise at very favorable prices, what also allows Clothes Mentor to realize such strong Gross Margins is the ability to price the merchandise higher than they otherwise would by providing an inviting, efficient shopping experience. Unlike stereotypical consignment shops or private reseller stores, Clothes Mentor stores are bright, clean and fresh-aired. They have well-planned shopping layouts with smart, organized shelving and racks. Merchandise is organized by size and color, making the shopping experience pleasurable and easy. And we all know — with how busy everyone is nowadays — there is a premium placed on clarity and ease when shopping. Clothes Mentor fully leverages this dynamic to achieve higher pricing and ultimately — Yes, those strong Gross Margins!
More Information on Franchise Opportunities
To learn more about Clothes Mentor’s strong Gross Margins, about the business, or about franchising a Clothes Mentor for yourself, please visit our franchising website or feel free to just give us a call (866)-261-2030.
NTY Franchise Company at a Glance
Founded in 2006 and Located in Minnetonka, Minnesota, NTY Franchise Company is a pioneering and highly-experienced force in the rapidly growing category of upscale resale retailing. It is the umbrella organization for three proven national resale clothing franchise brands: Clothes Mentor (women’s designer clothing franchise); Children’s Orchard (kids’ clothing franchise); and NTY Clothing Exchange (teens’ and young adults’ clothing franchise).
NTY specializes in working with entrepreneurs at every stage of establishing one of these five successful upscale resale branded concepts including: Research & Discovery; Business Planning; Store Location & Leasing; Financing; Design & Build-Out; Point of Service Software & Systems; Coaching & Managing; and Marketing.
To learn more about NTY Franchise Company please visit our main page or give us a call (866)-261-2030.