GHQ Cover Story 09/05 – Space Quest
By George Anderson
Location is still the name of the game in retail. As anyone in the business can tell you, finding
the right location to build a store can be as critical to the success of the location as what you put in it.
Rich Savner, director of public affairs for Pathmark, told Grocery Headquarters his company does its homework assessing local demographics, density counts, competitors, vehicular and mass transit access to the site and other factors.
Mr. Savner said many factors are taken into account. “We look at things like, is it going to be a limited trading area because of barriers like a river, or would we be cut off
because we were on a divided highway without a jug handle or traffic light?”
Shelly Sponholz, senior vice president of real estate development and asset management at Giant Eagle, said the Pittsburgh-based grocery chain looks for locations that “include a strong demographic profile, ease of access and the opportunity to construct a prototypical store with fuel and pharmacy drive-through capabilities. When selecting a shopping center location, we prefer the co-tenancy of other non-competing anchors such as Kohl’s, Home Depot or Lowe’s.”
John Connolly, president of the commercial developer MGM Realty, said other factors are also considered by retailers in choosing sites to put up stores. “A retailer can be a pioneer and go out and look at the outskirts of areas under tremendous growth, like Chester, Berks or Montgomery counties [outside Philadelphia]. I’m watching Giant-Carlisle make some moves to keep Acme from taking its market share by putting two stores within a mile and a half of each other,” he said, adding, “It’s better to cannibalize yourself than to let some competitor do it.”
The hunt for prime real estate is often complicated by cost and other factors, such as a chain’s reputation in the market and its relationship with companies that develop and own shopping centers.
“We always prefer to be with the market leaders. It just provides greater stability,” said Terry Brown, CEO of Edens & Avant, an owner, operator and developer of strip shopping centers.
Cost for real estate, according to sources who spoke with GHQ, is increasing by more than 10 percent a year. The high ticket of acquiring space has forced many operators to look for other areas where costs can be reduced.
Peter Tlumacki, president of Northeast Store Development, said some retailers make a proposal “to go in with a base rent, a lower rent… if sales increase by a certain percentage, the rent would increase by a percentage. The landlord would benefit by the store doing well and having more interest in keeping the shopping center up.”
MGM Realty’s Connolly said, “Often it makes sense to jump into an existing facility, retrofit it yourself and get that store open to block out the competition. A new store takes at least nine to 12 months, whereas by recycling an existing store, the doors can be open in as little as 90 days.”
Moderator’s Comment: Which companies in retail do the best job of assessing real estate? What are the challenges faced by retail real estate development
departments and how are they coping? –
George Anderson – Moderator
Location, location, location it is. So, which retailers have any idea of the relative value of the real estate INSIDE the store? And just as with outside the store, you can’t value the real estate based on what YOU are going to do with it. The real estate itself has an intrinsic value that it brings to the party.
It reminds me of several years ago when someone was trying to sell me their business and they kept pointing out all the things I could do with it. I told them that yes, I expected that I could add a lot of value, but I’m not paying them for the value I’m adding, but for the intrinsic value of the business, based on what THEY had done with it.
I’ve been assessing real estate and doing site location analysis for about 25 years in the grocery industry. Most of us use pretty much the same technology and methodology. Some better than others. When you are a successful competitor such as Wegmans, HEB, Publix, etc., finding good sites is easy. One of the simplest ways is to just go across the street from one of the higher volume or higher sales per sq. ft vanilla chain stores like Winn Dixie, A&P, Safeway, Ahold or Albertsons. Then beat up on them. It’s important to have accurate inside sales information on your competitors at all times. Weak companies guess at this and smart companies pay good money to get reliable information. When new stores are built on bad information, it not only hurts the company that built the store but the competitors around it as well. Nothing is worse that a company that builds stores from bad information or emotion.
Bad real estate decisions are typically made by store development executives who are too confident in their own chain’s abilities. They want to assume that every new store will be operated at the same high level as their best stores when in reality they rarely are. They are desperate to find sites for fear of being fired. Forcing some new sites buys them time on the job until the poor sales reports start coming in. Albertsons and A&P are good examples. Winn Dixie made huge mistakes by buying low volume locations of competitors that went out of business such as Delchamps. If you are a low volume operator, what makes you think you can do any better?
Some companies do a poor job of assessing demographics. I know of one major chain that refuses to factor in race in calculating per capita expenditure levels for political correctness reasons. This only comes back to bite them later when they realize that the potential that is available is significantly less than originally estimated. Whole Foods does an excellent job in evaluating demographics. There are only a select few spots you can put a Whole Foods – high incomes, high education levels, Blue State politics, successful upscale competitors nearby, small household sizes, high population density, and preferably a prestigious university nearby. So knowing where you hit your best stride is very important.
Location has to genuinely work for customers, not just work in the ways that retailers want it to. You cannot continue, forevermore, to make customers go where you want them to. Their choices are just occasionally influenced by where they want to go, regardless of whether it is near or far, convenient for cars or accessible by public transport, across the road from its biggest competitor or in the middle of a strip mall surrounded by other stores selling things that will meet the rest of their needs. Retailers in the UK who choose the locations they prefer are sometimes “encouraged” to entice shoppers by providing little extra community facilities. You really have to recognise some element of demand when deciding what you want to supply.
Sage site selection is a key component of a retailer’s success. But store locations are only worth what you make them worth.
Location is extremely important, and making a bad decision on location can be the difference in whether or not a retail site succeeds. A great way for a retailer to avoid a bad decision is to understand what their unique success criteria are for a good site (target demographics, traffic patterns, natural and man-made barriers, malls, freeway exits, drive-time, land cost, etc.). Leveraging this data in a computer-simulated environment that is integrated with a retailer’s financial composites, can allow even a small multi-unit retailer to run cost effective “what if” scenarios on potential locations before a risky real estate purchase is made. Also, be proactive. A retailer should do the homework to decide ahead of time where the best sites are rather than letting the real estate availability trigger the site research.
The biggest challenge in real estate development departments has to be corruption. Just about every site analyst has experienced a situation where an executive will do just about anything to get the analyst to come up with a higher sales projection. Other times, painfully obvious bad sites are not only approved but also at a very high rent. Later we find out that one of the executives suddenly has a new condo in Bonita Springs, Florida. A recipe for disaster is when the real estate developer or landlord is a close friend or relative to a senior real estate officer. This often happens in publicly held supermarket chains where the executives are playing with someone else’s money and not their own.
This is a tough one to answer fairly because it’s hard to know what sort of deals for prime real estate are offered to the market leaders. Landlords with blue chip sites are tripping over themselves with offers for Whole Foods. So when Whole Foods gets great sites, does that make them geniuses? Maybe, and maybe not. Hard to tell. But I’d have to guess that Whole Foods does a great job. Having said all that, I think Publix and Costco are also among those doing a great job.
Since the dawn of time, the joke goes, the three keys to retailing have been “location, location, location.” Even if it’s an oversimplification, inappropriate locations are millstones. Years ago, when the Conran’s chain went bust, Barnes & Noble bought the company from the bankruptcy trustee to get the locations. This is a great way to get multiple locations quickly. The continuing flow of retail bankruptcies and restructurings keeps this method alive and well. Ikea has a long term strategy in the US: they buy the land years in advance and build the store when its time has come.