I have had the good fortune to get a close-up view of many chain retail store operators in action over the past 20 years. It’s amazing to see the wide variety of approaches used to find, open, relocate and sometimes close stores. There are many different organizational charts and reporting structures that place the real estate function directly below the CEO, while in other cases that group reports to the CFO or vice president of marketing. There are real estate research directors who have large staffs and tight controls over deal approval, as well as companies who give the dealmakers responsibility for research.
It is impossible to create a “one size fits all” approach that will work for every chain store company. However, there are recurring themes in real estate planning and site selection practices among the most successful chain operators. These elements can be used to as diagnostic tools to perform a “health check” on the practices of any company and are offered here as a “vision” for a holistic approach to maximizing the profitability of chain stores based on real estate investment decisions.
Developing a profitable fleet of chain stores requires the ability to plan and execute at different geographic scales using an integrated and iterative approach, whether the stores are owned or franchised.
The four geographic scales are country, market, trade area and site. Here’s a quick overview of the process:
- Country Ranking and Selection – look at the globe and identify the countries that will be considered based on the firm’s capacity. For many firms this will be “the U.S.” or “the continental U.S.”
- Market Ranking and Selection – each country will have one or more discrete markets that have a homogeneous economic base and/or distinct geographic identity. The attributes of these markets are quantified and prioritized resulting in a short-list of primary targets.
- Trade Area Layout – each primary target market is further analyzed to determine the number and location of trade areas that are capable of supporting a store.
- Site – within each trade area, one or more sites are evaluated to determine the best location for serving the trade area within the economic constraints of the business (sales, rent).
The decisions at each geographic scale require different people, processes and tools. They must be integrated to ensure consistency in the source data and assumptions about factors beyond the control of the enterprise (e.g. general and regional economic trends). The real estate planning process must also be coordinated with the directors of other distribution channels including online and catalog to maximize the customer experience, capture additional data sources and avoid duplication of resources.
The process is dynamic and requires constant review for updates based on store performance and reconciliation of the game plan to actual market conditions. A dynamic process must be:
1. Iterative – the insights gained at each level of analysis can lead to rethinking the previous level of analysis. For example:
- A market that has been identified as a primary target at the “Market” level might not have a sufficient number of trade areas to justify the fixed costs of entering the market (human resources, distribution, advertising) and it might be removed from the primary target list.
- The difficulty of finding suitable sites for a trade area identified during the “Trade Area Layout” process might require a new trade area layout (e.g. consolidate two adjacent trade areas into one or three into two).
2. Proactive/Opportunistic – In the normal course of business, opportunities may arise for a country, market, trade area or site that were not in the “game plan.” Firms must be careful not to let every “opportunity” become a distraction from the game plan, but many profitable situations originate outside of our formal processes. The culture and decision processes must be flexible and adaptive to respond to good opportunities and make changes to the game plan as new information is gained from customer and macroeconomic trends, sales performance, competitor behavior and the firm’s strategic priorities.
With this framework in mind, what are the vital signs of a healthy development organization?
People: Executive team, VP real estate, director of research, local market contacts (brokers, peers)
Processes: Identify key criteria such as minimum unit potential and current store performance and rank markets.
Tools: Compile data for each market under consideration including store performance, revenue by channel, economic base, competition, economies of scale (advertising, distribution, management) and high level market capacity estimate.
Market Planning (Optimization)
People: CFO, VP real estate, director of research, local market contacts
Processes: Develop game plan for each market with required capital including new store development, remodels, relocations and closures. Target trade areas for all new openings are identified and dealmakers (and their brokers) proactively seek sites in these trade areas.
Tools: Maps showing areas with sufficient density and demographic profiles to support a store, reports summarizing expected revenue growth and impact of new development or relocations on existing units
People: Investment committee, VP real estate, director of research, analysts, dealmakers, brokers
Processes: Checklist review of site requirements, create site package including maps, area profile, analogs, deal economics including sales forecast, risk analysis, investment committee meetings
Tools: Interactive mapping and trade area reporting systems for use in screening and investment committee meetings, analytical tools including predictive models, analog retrieval system, surveys and checklists for field research
Most chain store operators who have been around for a while have at least the basics of this vision in place. To use a tennis analogy, they might be able to hit the ball over the net and return a serve. However, the companies that want to be the best in the world need to refine all of their strokes and know how to change their game to adapt to the different styles of their opponents.
Ed. note: This article originally appeared on Jim Stone's blog, realanalogies.