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November 15, 2008

Arthur De Gennaro##### Arthur De Gennaro

*Determining the optimal size for an optical dispensary will allow the practice to obtain the highest return on investment and return on assets. The optimal size can be calculated in one of two ways. The first is to determine the number of dollars each square foot of space can generate. The second method is to calculate the percentage of total practice revenues the dispensary represents. Whichever method is used, remember the general rule for dispensary size: "bigger is better."*

Tke a walk through any mall and you will see scores of retail stores. As you pass the various retailers, ask yourself this question: "How did management decide what size the store needed to be?" This is a serious question for a couple of reasons:

All of those statements are true for an optical dispensary as well.

So how do retailers determine how large a particular retail space should be? Any given area can accommodate only so much merchandise, work space, back office space, and can hold a certain number of employees and customer traffic at one time. Determining the optimal store/department size allows management to obtain the highest return on its investment and return on assets.

The current size for a typical optical superstore is 2,500 square feet. You may find it interesting that the original superstores were 10,000 square feet. Over the years, however, optical chain managers found those stores to be too large; wasting precious profits. During my career, I have watched them become smaller and smaller. Optical chain executives consider the 2,500-square-foot size optimal because it has proven to be the most efficient financially. Stores of that size are expected to generate revenues of at least $1 million-which works out to a minimum of $400 per square foot. In addition, at one time, Wal-Mart considered this $400 figure to be a hurdle for vendors who leased space within their stores.

Using the $400-per-square-foot revenue figure, a dispensary expected to generate $300,000 per year within an ophthalmology practice would need 750 square feet of space, far larger than nearly every ophthalmology practice dispensary I'm familiar with. Table 1 shows dollars-per-square-foot sales for dispensaries of various sizes with annual revenues of $300,000 and $500,000.

**Ratio of revenues**

Another way to determine what size an optical dispensary should be is to determine the percentage of total practice revenues the dispensary represents. (For new dispensaries, projected revenues are used.) Using this model, the higher the percentage of dispensary sales, the larger the dispensary would be as a percentage of the practice's overall square footage. Let's consider an example of this from the commercial optical world.

A look at the floor plan of any optical superstore chain will reveal that those companies allocate a lot more square footage to the dispensary than to the professional area. In chains, the ratio of dispensary sales to professional fees is roughly 65/35-and the space executives allocate to those areas roughly reflects that ratio.

In the ophthalmology world, the ratio of dispensary sales to professional fees is roughly 25/75. (If the dispensary also sells contact lenses, the ratio increases to 30/70.) Unfortunately, the amount of square footage ophthalmology practices set aside for their optical dispensaries is almost universally below the ratio of their dispensary's sales.

My point is not to advocate "$400 per square foot" or a "25/75 ratio" of dispensary-to-practice square footage as benchmarks for dispensing ophthalmology practices. Instead, I'm trying to highlight an almost universal problem in the dispensing ophthalmology world, and it is one of the reasons why ophthalmology dispensaries underperform their counterparts in other parts of the optical world. The rule for dispensary size, at least for now, should be, "bigger is better."