Renovate or Relocate? Six Things to Consider
Retailers and food operators are finding it harder to find new locations with strong growth potential, as much of the population growth is happening in congested urban centres, and the majority of great locations are already occupied. This phenomena is not limited to North America, as many countries have too many stores, and are seeing a rapid movement towards urban centers. With more than 95 million Millennials now representing 30 percent of the population, this cohort group is having a significant impact on the future definition of bricks and mortar.
With suburban sprawl momentum slowing due to a trend towards Millennials moving to urban centers, finding that great triple A location as part of a retailer’s expansion program is becoming harder and more complex. This, combined with the growth of dollar stores, and discount retailers, stores are competing for the best locations, which can make expanding challenging. Not to say that opportunities exist exclusively in non-urban markets, but the ease and abundance of urban locations is a thing of the past. Most industry forecasts suggestthat US retail growth over the next five years is debunking many “retail-mageddon” predictions, with average 3 to 4 percent growth annually— but well below the 5 to 7 percent yearly growth seen in the decade prior to the recession.
As exiting chains and new start-ups consider their expansion strategy, we have identified six key factors when making a decision to renovate versus seeking a new location.
Factor One: Trading area lifespan
The most commonly stated factor for the success of a retailer is “location, location and location.” This reflects the importance of identifying the right trading area for a new store, or the driving factor in relocating an existing store. It is also one of the key reasons retailers consider store relocations as the current trading area demographics, and traffic patterns have shifted to new areas.
The decision to open a new store should take into consideration the lifespan of the community. Namely: Is it on the growth curve? Does it attract your target consumer? Has the trading area seen a decline in population with the increase of store closures?
We have also seen the potential risk of entering a market well before it gains enough critical mass to sustain a store location leading to underperformance and a drag on total store sales. However, entering a market as the trading area matures puts the retailer at risk of having the latter part of their lease period deliver lower performance results, while coupled with the risk of paying too much for what was once a great location.
Factor Two: Catering to the right customers
Identifying the trading area demographics, defining the community, and the density of potential customers most likely to shop at a given retailers, are just a few of the pivotal factors in selecting a store site. This, combined with the vehicular traffic flow and numbers of competitors are important factors in the decision to open a new store or to invest in renovating an existing location. Apparently, 70 percent of companiessay it’s cheaper to retain a customer than acquire one and 49 percent saythat, pound for pound, they achieve better ROI by investing in relationship marketing over acquisition marketing. However, when keeping existing customers becomes a challenge due to changes in community dynamics, the decision to move becomes acute for retailers wanting to continue to grow. It’s important for retailers to continue to monitor existing store location customer demographics, leveraging the latest in web-based mapping programs providing powerful location analysis/site analysis with demographic data filtersto ensure stores are in locations with your target audience.
Factor Three: Cost to build versus renovate
The typical retailer renovates their stores nearing the end of their lease, or franchise commitment, as part of a renewal process. Since renovations or building a new store is the largest capital expenditure a retailer will make, it’s important to factor the potential ROI of such investment. This analysis will often identify that it’s less costly to relocate a store than to renovate to newer ADA compliant standards —or where the infrastructure requires significant investment (new HVAC, equipment, plumbing, electrical) as new equipment is being contemplated. Building costs also vary by market; markets with the largest communities cost the most to build or renovate. Retailers should evaluate the cost to build versus renovate based on a clearly defined ROI calculation taking into consideration the cost of capital, the potential loss of revenue during renovation and the lifespan of the market of the current or future store.
Factor Four: Rightsizing the location
There is a significant movement to right-size the store format with retailers such as Walmart, Kroger, Staples, and banks as they rethink what defines the right store size. We recently worked with a major office supply retailerhelping them navigate a new store format that included both a reduced retail footprint and product mix. The retailer realized that their twenty to twenty-five thousand square foot stores were underperforming due to customers shift to online shopping, in addition to the rising cost of labour and rent. Other retailers have explored a hub and spoke approach creating flagship larger stores who are supported by smaller locally focused community facilities that offer a curated range of services and products.
Factor Five: Access to parking and pedestrian traffic
A key predictor for the success of many types of retailers is customer access to inexpensive parking or high pedestrian foot traffic. Our work with Mapco Mart clearly indicated the number of parking spots had a strong correlation to the sales performance with each parking spot representing approximately between $100,000 to $150,000 in sales pending the market. Not enough parking availability, or conversely, a lack of strong foot traffic, are clear indicators the given location is not ripe for a new store location; or the current location is not meeting its optimum performance. Parking becomes even more critical with large box retailers, as customers are purchasing full shopping carts, not conducive to carrying items home in shopping bags.
Factor Six: Strong curb visibility
The final factor that retailers need to consider is the ability of the given location to be visible to both pedestrian and vehicular traffic. In many categories such as fast food and petroleum, curb visibility is critical in driving sales as consumers tend most often make their final decision while driving. Sightline detractors such as trees or building to restrictive developer standards are important factors when determining if the new location is right–and may also be a key motivator for relocating the store. Ultimately, the building is a beacon helping customers find the given store, and without the strong visibility, the odds of that given location succeeding is highly questionable. Even destination type big box retailers have realized visibility is key in driving sales and awareness of their brand as the physical store presence is their most effective marketing vehicle.
The anxiety over the risk associated with the decision to either relocate or build new can be minimized through a review of the six factors outlined. They are no guarantee for success, however, and we caution any retailer to carefully conduct their assessment. A store’s location, supported by strong visibility and an inviting customer experience, are critical to a chain’s long term success.