Critical increase in the transition to profitability

But now it has become much more difficult. Compared with five years ago, the time taken to become profitable has lengthened considerably in almost every sector. For example, it takes a clothing store three to five years to become profitable. Whereas, five years ago, one year was enough. The period has now increased to three years for a furniture store and four years for a newly opened school. The reason for the longer time that it take to become profitable is the growing competition that intensifies by the day... Moreover, experts say that in the future the time required to become profitable will continue to increase. Five years ago everything was very different. A newly opened white goods retailer would become profitable within two months.

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It would be one year at most before a shopping mall would bring an investor a profit. For a successful hospital in the right location, 18 months would be enough to bring a profit. But for many sectors these “swift profit” stories have now been left in the past. Today these periods have at least doubled in almost every field. There are even sectors where the period has increased by five- or sixfold.

The most important reason for the lengthening of the time taken to make a profit is intense competition. Another factor is excessive supply, namely an increase in the number of players. There are a large number of players in many areas, from technology retailing to clothing, furniture and the private hospital sector. This situation has resulted in competition shifting to price, which has meant abandoning profit margins and a lengthening in the time it takes to become profitable. Other dynamics affecting the length of time it takes to become profitable are the high rents in shopping malls, sectoral risks and regional differences.

THE LATEST SITUATION REGARDING THE TIME PERIODS
When one looks at the data for the last five years, it can be seen that there has been a dramatic increase in the time taken to become profitable in all sectors. Otokog General Manager Görgün Özdemir says: “The length of time varies according to factors such as the location of the distributor, the brand you represent and the size of the outlet. But we can say that the period is definitely increasing every year.” The situation is no different in furniture. In recent years, the length of time taken to become profitable has doubled.

SECTORAL PROFIT ANALYSES
So compared with five years ago, which are the sectors where there has been the greatest increase in the time it takes to become profitable? White goods rank first. A white goods distributor which took three months to become profitable five years ago cannot now see a profit in less than twelve months. In fact, for some brands it takes up to three years.~
“Some white goods distributors are now struggling to survive,” says one sectoral expert, adding: “Because a large proportion of sales have shifted to technology markets. Distributor profit margins have not changed compared with five years ago but the period of time taken to become profitable is very long.”

In the private health sector the length of time taken to become profitable has increased to three years. Medical Park CFO Levent Özdemir says: “The aim is to get to EBITDA in one year. It is rising to one to three years. But, depending on location and competition, it is possible to become profitable in one year.”

RISING COMPETITION HAS AN IMPACT
The most important factor, regardless of the sector, increasing the length of time required to become profitable is increasing competition.

Kılınç Orhan Erdemir, marketing manager at Gold, which is one of the most important players in technology retailing, says: “Under normal conditions, it is difficult to post a profit in less than 24 months. Five years ago, it would have taken 18 months.” He explains the reasons as follows: “Because competition is much fiercer than five years ago. Profit rates and returns in the sector have declined and been cut to 5-10 per cent.” It is possible to see this impact in private education and the private hospital sector. Memorial Health Group General Manager Uğur Genç says: “The main changes over the last five years have been the intensification in competition, the uncontrolled rise in personnel costs, the increase in investment costs and the growth in the impact of the state on the sector.”

THOSE WHO FIND IT MOST DIFFICULT TO BECOME PROFITABLE
There are some sectors where, because of their structures and own internal dynamics, it takes longer to become profitable. The basic reason for this is size. It is possible to see this very clearly in areas such as shopping malls, private hospitals and private schools.

For example, compared with other sectors, it takes significantly longer for a return on investments in private schools, which entail high costs. Five years ago, it took three years, whereas today it has increased to five years. Hüseyin Yücel, the chair of the board of directors of Bahçeşehir College, says: “A newly opened school can post a profit from its fourth year. In any case, the first three years are required for the return of the investment costs. After four to six years, it begins to make a profit.”

FIVE CRITICAL FACTORS THAT EFFECT PROFITS
LOCATION
Jival Board Chair Naim Gençoğlu says: “The most important factor is having a store in the right location. Being somewhere which can be reached easily has a positive impact on sales.”~
PRODUCT RANGE MASKO
Board Chair Hasan Karcı says: “The range of products which are going to be sold in stores must match the demands of the target market. Product range has a significant impact on profitability.”
RENTAL COSTS
Another factor is high rents. MOSDER President Ahmet Güleç says: “The per meter costs for stores in shopping malls or on high streets are very high. This has a negative impact both on profit margins and on the time it takes to become profitable.”
COSTS:
Gold Marketing Manager Kılınç Orhan Erdemir says that calculations of cost are critically important: “It is something which has an impact on long-term profitability.”
ACCURATE FEASIBILITY STUDY
Mendo’s Board Chair Vedat Stamati stresses the importance of an accurate feasibility study. “You need to determine your profitability strategy very well. If you make a mistake, it can result in the closure of the store.”