When retail location strategies turn from slow- or no-growth to hyper-growth, real estate departments must ramp up quickly. The shift to full speed may be due to the launch of a new concept, the revitalization of an old one or a decision to develop new markets. When this happens, it feels as if the real estate department is being asked to rev up from zero to sixty in one second.
Real estate managers in the field are often compensated based on quantity — either the number of locations opened per year or number of periods of operation. In a high growth situation, this results in the frequent adoption of the path of least resistance for new deals. The approval process gets clogged with a large number of deals, many of which are marginal at best, but are often the easiest ones to get done. When measurable operating results come in, usually a few years after execution, senior managers often find that the development strategy did not met expectations. The desired store-opening rate was not achieved, or locations didn't do as well as expected — or both. What happened?
In Ernst & Young's 2003 Retail Real Estate Survey, 48 percent of all respondents said that streamlining real estate processes was the most important change that they could make to their organizations. And 59 percent said that finding new markets, market saturation and accurate and timely analysis of markets and sites were their primary concerns in connection with store development.
When a company has one concept and is opening ten locations per year, senior executives usually become involved in every opening, visiting each market to evaluate individual site and to generate fairly accurate estimates of projected unit sales volume based on intuition and years of experience. Problems occur when concepts change or are added, growth goals explode and there is temptation to push an ever-increasing volume of deals through the system quickly.
We often see that the market planning process in retail real estate is broker or developer driven. The brokers/developers find out you are planning to develop in the market and send over a flood of potential deals telling you where you need to be. The seeds of destruction can be sown at this level. By not developing a sound market development strategy and managing the activities of the brokers/developers, real estate managers are opening themselves up to taking the path of least resistance — and substandard sites.
A sound market development strategy is based on an understanding of what drives the sales of a store. How far will various types of customers travel to your location? How do different customer segments view you vis-à-vis your competition? What types of retailers should you be near? What other traffic generators work for your concept? How much competition is too much? The goal of any market optimization analysis is to maximize the return on invested capital. The best market development strategies integrate consumer research and statistical analysis of sales histories, site features and geo-demographic variables into a tool that can be used to plan the optimal configuration of units in a market considering new locations as well as relocations, closures and remodels.
Once the right areas in the market are targeted, the next questions are: Is this a good site? What can we expect the sales volume to be? Senior executives who have been involved in many retail openings over the years often don't have the bandwidth to provide accurate forecasts of sales for the large volumes of sites under consideration.
Geo-demographic systems have allowed many retail companies to “get in the game” of site analysis. Real estate market research functions within these organizations use these tools to generate demographic reports or thematically shaded maps for sites under review. These demographic reports often only indicate what the population or income level is — not whether the demographics are right for your concept, or what the sales volume will be. In most cases, these tools don't generate a reliable sales estimate. Often they are not used to analyze the deal, but to pad the site package.
It is critical to give real estate managers field-deployed solutions that provide intelligence — not just data — to support their decision-making. Site evaluation and sales forecasting models based on customer behavior, competitive and retail dynamics and real world real estate characteristics can be strategically used to reduce the development cycle time while making better decisions. Other departments within the organization such as finance, marketing, merchandising and operations can also benefit from such research.
Once there are a significant number of deals in the pipeline, how efficient is the approval process? How do projected retail opening dates get communicated throughout the organization? How do you make sure that each region is on target to reach its development goals?
Projected store opening dates very quickly become some of the most important information, driving purchasing, human resources, training, marketing and finance. It's critical to have a clearly defined set of real estate processes from site selection to construction to lease administration and facilities management. Milestones need to be defined, tracked and communicated to all relevant parties so that the ball doesn't get dropped on the way to the goal line.
Today, Internet-based collaboration tools provide the “plumbing” for sharing real estate and construction information internally and for collaborating with outside vendors. A properly designed process supported by integrated systems reduces redundant data entry and allows each function working on real estate and construction activities to stay organized and proactive.
For example, real estate collaboration tools with on-line site package information can be integrated with and ultimately flow into the back-end lease administration and facilities management systems. Timely and accurate reporting from these tools can alert executives when a region or manager doesn't have enough deals in the pipeline to meet the year's opening goals.
By focusing on streamlining processes, prioritizing critical steps, deploying market and site analysis tools and automating workflow, retail real estate departments can achieve higher levels of efficiency.
JACK THOMPSON is a principal of Ernst & Young Real Estate Advisory Services. He may be reached at jack.thompson@ey.com. His views do not necessarily reflect those of Ernst & Young.