(Editor: Anthony Colavolpe is managing principal in the New Haven, Ct. office of Citron Group LLC, an international real estate and advisory services group. This article is reprinted from Shopping Center Business, February 2010 © 2010 France Publications, Inc.)
Site selection has evolved over time. Today, metrics can help you better locate — or relocate — stores so they have optimum performance.
By Anthony Colavolpe
A developer, investor or real estate broker can influence where to locate a store by participating in an appropriate site selection methodology with a retailer. Typically, site selection methodologies include certain basic elements. These, at minimum, involve the delineation of a trade area, determining the sales potential for a given retailer or use category, and the creation of a concept site plan. With these items in hand either the retailer or the person submitting the property for consideration can assist in advancing the selection process. The more information the retailer has the better, particularly if it validates something positive about a site or location.
Trade areas vary from retailer to retailer. Drug stores, for example, may look hard at 1-mile demographics, whereas a grocery store might expand their analysis to 2 or 3 miles when defining a trade area. Home improvement stores, discount department stores or various category killers may take a more regional approach. Regardless of the end user, the retailer carefully determines the area from which 80 percent or more of its business will be derived. Often brokers and developers will simply draw 1-, 2- and 5-mile rings around a site, obtain a myriad of demographic information from a recognized data source and submit this as part of a package to the retailer. While this certainly provides relevant information, it does not replace the retailer’s requirement to determine for itself a location’s sales volume potential and desirability. The retailer also may have access to customer spottings and other data not available to the general public, which can impact the boundaries of a trade area. In the final analysis, the retailer’s trade area will be more like an amoeba than a simple ring or circle.
Some retailers retain the services of firms who specialize in forecasting sales volumes. Others utilize internal associates or require the real estate representative to compile the requisite information.
There are various accepted industry approaches to sales volume forecasting. One utilizes analogs or information gathered from the operation of existing stores. This approach is based upon the theory that stores in similar locations with similar demographics and pricing models should yield similar results. Others are more scientific and are based upon either a regression or gravity model. Simply put, these measure the retailer’s ability to draw over distance, as well as other factors, and require an advanced level of expertise to develop.
This article is not designed to endorse one approach over the other, or to go into specific details on how each is developed. Rather, it is focused on the compilation of information, regardless of the approach. For example, most retailers need to know the amount of dollar potential for their use, how many people reside in a trade area, as well as other demographic particulars. Income levels, age, education, and ethnic makeup are always important. This type of information is utilized not only for sales volume forecasting purposes, but also assists the store operators in the creation of an appropriate merchandising plan. Successful retailers will want to merchandise the store so it is reflective of the trade area composition and satisfies their customers’ needs for goods and services.
If a trade area is dominated by one or more strong competitors, retailers may not be as interested in a location unless there is a void in the marketplace. It is hard to pull business away from a good operator. The location of the retailer’s own sister stores may also work its way into the equation. This is often known as cannibalization. Therefore, the impact of opening a store in close proximity to another store operated by the same retailer may become problematical. Generally speaking, there needs to be enough incremental dollars available (volume above existing business) to support the development of another store by the same retailer in the trade area.
Within the trade area, it is common for each competitive store to be analyzed based upon store size or sales area, sales volume and overall position in the market. Knowing this, as well as any proposed competition, is often critical to the sales volume forecast. The competitive information is sometimes further supplemented by an inspection of each store and its environs.
The overall sales potential for a particular use category is easily attainable from most vendors selling demographic information. However, defining the trade area itself requires someone to drive the market and determine how far a customer will travel before deciding to go elsewhere. For example, most supermarket industry studies list convenience as the number one reason someone selects one store over another. Drive time and distances are more important in dense or urban locations than their rural counterparts. Natural barriers, traffic congestion, and the highway system also play a role in the delineation of the trade area. If someone is not versed in these matters, it would be prudent to obtain the assistance of someone who is.
A concept site plan should be created by a licensed professional engineer knowledgeable about local zoning ordinances and other applicable land use regulations. A seasoned developer, investor or real estate broker can provide valuable guidance, particularly related to ideal building sizes, configurations, parking layouts and overall placement of these components on a site. Ingress and egress also need a critical eye, as does general traffic circulation, both internal and external to a property. If a customer has trouble parking, cannot easily get in and out of a site or has difficulty in approaching a location, in all probability, they will find another place to shop.
If executed correctly, the site selection process will result in a visit to the location. Depending upon the end user, this could include a number of participants ranging from the CEO of a company to the local real estate representative. Regardless of the audience, the person responsible for submitting the site and location information should be thoroughly familiar with each aspect of the trade area and offer to conduct a site ride. Driving the trade area from every conceivable angle is crucial, especially the day before a scheduled site visit. The last thing someone wants to encounter is a construction site or some other impediment without knowing in advance how to avoid this conflict.
No one wants to lose a deal because they did not understand the dynamics of the marketplace or the retailer’s needs and objectives. Those who win at retail development are knowledgeable about every aspect of the location and trade area in which a site is situated. Retailers will continue to do business with people who save them time and make them look good.
Additional reading on the subject of forecasting sales volume and methodologies is available in the book entitled Site Selection authored by John S. Thompson or Market Research for Shopping Centers edited by Ruben A. Roca.
Anthony Colavolpe is managing principal in the New Haven, Connecticut, office of Citron Group, LLC, an international real estate development and advisory services group. He can be reached at firstname.lastname@example.org.