Forced to count every dollar, retailers re-evaluate site selection practices.
Amid all the not-so-great news reported during the dog days of summer — weak back-to-school sales, falling rental rates — there were signs the retail industry might be coming out of hibernation.
Men's apparel seller Jos A. Bank, for example, announced it would accelerate its store openings for the fiscal year 2010 to 30 or 40 new locations from 10 to 15. Electronics chain Best Buy revealed it was working on 22 new store openings in the third quarter, more than it opened in the first half of the year. Apple confirmed it planned to open its fourth New York City store on the Upper West Side of Manhattan, while rumors swirled that discount department store chain Kohl's was scouring sites near Herald Square. Even Starbucks decided to keep 30 stores open that it previously had planned to close.
These modest moves toward expansion show that even in the worst of times healthy retail operators continue to have some appetite for new real estate. In fact, discounters, warehouse clubs, drug stores, restaurants and wireless service providers are already actively looking for new stores, while retailers in other sectors are beginning to review their plans for 2010, says Devon Wolfe, managing director for Americas strategy and analytics with Pitney Bowes Business Insight, a Troy, N.Y.-based site selection firm. A recent report by RBC Capital Markets and Retail Lease Trac, a Dahlonega, Ga.-based real estate research firm, estimates retailers will open 64,926 new stores in the U.S. over the next two years. (And that doesn't count every retail firm. For example, neither Target nor Wal-Mart is included in the figure.)
Meanwhile, developers will deliver roughly 60 million square feet of new retail space to the market in 2010, according to Marcus & Millichap Real Estate Investment Services, an Encino, Calif.-based brokerage firm. Another 163.8 million square feet of retail space had been proposed for construction over the next four years, but not yet approved, reports the CoStar Group, a researcher based in Bethesda, Md.
“What we are seeing now is demand that's starting to pick back up after everything went south last year,” says Wolfe.
Although retailers might feel the worst of the downturn has passed, many firms don't have a lot of cash set aside and execs are worried about how long it might take for consumers to start spending again. So retailers have adopted more stringent return hurdles for new locations. If in 2006, a retailer might have decided to open a store based on a 9 percent expected rate of return, today the figure might be as high as 12 percent.
Now each new store is met with caution and must satisfy a wide set of criteria, including the presence of high-spending core customers, the availability of a competent workforce and attractive rental rates. For example, many chains now want to know what kinds of incentives they might be eligible to receive from state and municipal governments, something they wouldn't have necessarily looked at before, says Todd Caruso, senior managing director in the retail service group of brokerage CB Richard Ellis.
Time is money
The most important change that's taken place in retailers' site selection process is the emphasis on accurate, up-to-the-minute information. Historically, many companies relied on U.S. Census Bureau data on population figures, household income, employment levels and other demographic metrics. But that information is dated, having been last collected in 2000 and it doesn't reflect the seismic shifts that have occurred in the economy since 2007.
Today, retailers want quarterly, if not monthly, updates for any given area. “If you are a retailer trying to make a multi-million dollar investment decision, you can't rely on nine-month-old data,” notes Dean Stoecker, president and CEO of SRC, an Orange, Calif.-based site selection firm.
Furthermore, there has been a shift to looking at markets as they exist today rather than making assumptions about growing populations and incomes. Some of the most problematic retail projects today are the ones that were built to take advantage of residential communities built on suburban outskirts. Those projects, where they were not scrapped altogether, now sit mothballed.
To avoid making the same mistakes again, retailers are using multiple data sources to re-check their statistics, says Keith Peterson, general manager of ElementOne analytics program with TARGUSinfo, a Vienna, Va.-based site selection firm. Those who in the past worked with only one site selection services provider might now be working with several to enable them to compare and contrast market reports.
There has also been a shift in the kind of data that's considered relevant. Before, the focus was on demographics and psychographics, says Wolfe. When it came to macroeconomic data, the key metrics for retailers included population growth and housing construction. Today, retailers are supplementing that data with statistics on employment figures, GDP growth, retail sales and the number of bankruptcy filings, among other things. The need for this kind of supplementary data has gotten so great that in the first quarter of the year Pitney Bowes began offering a subscription to MarketPulse reports for its retailer clients, which track all those statistics on a quarterly basis. “I think the difference is that a few years ago, you didn't see the big market-by-market changes in economic health,” Wolfe says. “Now, it's driving decisions more than individual sites.”
Last year, for example, one prospective client Pitney Bowes was working with wanted to expand into Michigan, where it had no existing stores. But in late fall, after the economy took a turn for the worse and it appeared that Michigan would suffer disproportionately because of auto industry troubles, the retailer, which concentrates heavily on discretionary goods, struck Michigan off its list for the foreseeable future.
Your friends and neighbors
Sophisticated retail operators have always tried to capitalize on any existing synergies with other chains and avoided cannibalization by not opening stores in close proximity to direct competitors. But with some long-term players filing for bankruptcy and others closing hundreds of stores, the remaining retailers have had to re-think who they'd like to have as neighbors, says Peterson. Many tenants want to be located next to Wal-Mart these days, say brokers, because the discount store usually brings foot traffic. Supermarkets and grocery operators, which tend to do well in recessions, have also been in demand as neighbors.
“People are recalibrating their models in terms of their relationships in the market,” Peterson notes.
One preference that many retailers have now is the desire to go into older, established centers, adds Caruso. At the peak of the market, when retail development followed residential growth, many companies assumed that newly completed properties would fast reach 100 percent occupancy and provide steady demand from consumers, projections that proved to be wildly off the mark. Now tenants are targeting centers with minimal vacancies and proven levels of performance, Caruso says.
Meanwhile, the fierce level of competition among various players has brought to the forefront the importance of a qualified labor force, says Stoecker. When a customer walks into an electronics store like Best Buy and has a question about which product would better serve his needs, the employee has to possess the adequate technical knowledge and people skills to point the customer to the right product.
After all, the customer has plenty of other options. So retailers are now examining population characteristics for potential store personnel as well as potential customers. They want to see data on what kinds of arithmetic, social, technical and communications skills they can expect from the available workforce. Those who are embracing this model range from electronics sellers and wireless service providers to the drug store chain Walgreens.
“A great location that has a terrible work force results in poor profitability,” Stoecker says. “Yet a marginal site with a good workforce can often outperform [other stores].”
A longer version of this article appears at retailtrafficmag.com/features.