Chapter 9: Store Location

What You Will Learn
What Are You Trying To Do?
Selecting A Retail Location
Market Analysis
Trading Area Analysis
Site Analysis
Summary
Case Study: Store Location
Chapter 9 - Tips

What You Will Learn

• How to analyze a geographical area for sales potential.
• Advantages and disadvantages of different location options.
• How much you can pay for rent and still make a profit.
• Tips on negotiating a lease.
• Tips on renegotiating an existing lease.

The location of stores is a key concern to any retail organization ... whether it's your first store or your one hundredth. Spending time and money wisely in the process of site selection is critical.

Newcomers to retail often open shop in a location simply because it is the only vacant space within a stone's throw of their home or office. Knowledgeable retailers, on the other hand, will make a thorough examination of possible locations before signing on the dotted line. They know their investment will be large and they want as reasonable a prediction of success as possible before making a commitment.

What Are You Trying To Do?

How does one go about selecting a location for a store? The first step is to determine what you are trying to do.

What kind of store are you planning? What kind of merchandise will you be selling, at what prices and to whom? What is the store offering customers in price, service, and convenience? What are the company's financial capabilities?

Understanding your company's image and restraints will be helpful in limiting the number of site choices. Once you fully understand your store concept, you can better focus on only those locations that are consistent with that image.

Selecting A Retail Location

Developing the location plan requires a careful study of potential markets. Market assessment begins by examining all regions or metropolitan areas, then choosing the one that appears to offer the greatest potential. Such a process is known as market selection.

Choices must then be made within the selected region or city. An analysis of the different sub-areas, or trading areas, of a city is then conducted. Finally, separate site analyses and evaluations must be made. At this stage, management assesses the cost of land or rents, construction costs, traffic flow, etc. Note that each step in this process is a refinement of the previous one.

Market Analysis -> Trading Area Analysis -> Site Analysis

Market Analysis

During the process of market selection, management evaluates a variety of factors in the target regions. These include demographics, economic characteristics, the competitive environment, and the overall potential of the area.

1. Population Characteristics
• Total size
• Age and income distribution
• Growth trends
• Education levels
2. Labour Availability
• Availability of management candidates
• Wage levels
• Unions<,/li>
3. Media Mix Issues
• Type of media coverage
• Media overlap
• Costs
4. Economic Characteristics
• Number and types of industry
• Dominant industry
• Growth projections
• Financial base
5. Competitive Characteristics
• Saturation level
• Number and size of competition
• Competitive growth trends
6. Location Characteristics
• Number and type of locations
• Costs
• Access to customers
7. Regulation Characteristics
• Taxes
• Licensing
• Zoning restrictions

Index of Retail Saturation (IRS)

One of the more commonly used measures of market attractiveness is the Index of Retail Saturation (IRS). This index is based on the assumption that if a market has a low level of retail saturation, the likelihood of success is higher. In the following formula, a higher IRS indicates a lower level of saturation, thereby increasing the likelihood of retail success.

IRS = Number of consumers x Retail expenditures per consumer
          _______________________________________________
                  Square feet of retail selling space available

Census data, which is published every five years, can provide information on the number of potential customers in a trading area. Statistics Canada reports show expenditure data for households by product category and income level. The number of competitors can be found in the yellow pages or "Canadian Markets", an annual publication.

Trading Area Analysis

The trading area analysis takes place after management has selected a specific geographic region or section of a city as a possible retail location. "Trading area" refers to the local geography from which a store attracts the majority of its customers.

This territory is sometimes broken down into the "primary trading area", which includes the majority of customers living within a certain range of the store and having the highest per capita sales; and the "secondary trading area", which includes almost all of the customers situated outside the primary area. A typical shopping center may have a primary area that includes 75,000 customers within a five minute drive, and a secondary area housing 150,000 customers within 30 minutes.

License Plate Analysis

One of the most common methods of measuring a trading area with comparable stores is called auto license plate analysis. The license plate numbers of cars in the area under consideration are recorded and cross-referenced with public records to get their registration addresses. By plotting these addresses on a map, you can get a good feel for the general nature of the area.

Population Characteristics

Population characteristics are even more critical when evaluating a trading area. As in the larger market analysis, you must understand such features as the population profile, density and growth trends in the target area. Variables such as gender, occupation, education, age, family size and ethnic breakdown are also important. If you sell young children's clothes, you'll want to know the number of local preschoolers. A craft store, on the other hand, will want information about seniors.

A variety of sources can help in this analysis including Canada Post, Statistics Canada census data, "Canadian Markets" and city hall.

Potential Sales In A Trading Area

With the right data, you can forecast your potential sales in the trading area. Use this formula:

Number of households in the trading area X Dollars per household spent on your product category
= Total market size X Your % share of the market
= Your potential sales

Site Analysis

Site analysis and evaluation is the third and final step in the selection of a retail location. As a retailer, you have three basic choices for a site:

• Shopping centers/malls
• Downtown core
• Free-standing location

The following chart highlights the strengths and weaknesses of these sites.

Location Type

• Downtown

Potential Advantage

• Good transit
• Established market
• Independent focus
• Strong business audience

Potential Disadvantage

• Perceived parking problems
• Possibly in decline
• Usually poor evening traffic

Location Type

• Regional Mall

Potential Advantage

• High traffic
• Plenty of parking
• Established draw
• Professional image

Potential Disadvantage

• High rents
• Very competitive
• High building costs
• Controlled hours

Location Type

• Community Mall

Potential Advantage

• Trading area defined
• Good parking
• Community-driven

Potential Disadvantage

• Mixed images
• Limited market
• Limited traffic

Location Type

• Strip Mall

Potential Advantage

• Specialized tenant mix
• Visibility
• Convenient

Potential Disadvantage

• Limited draw
• Limited access/transit

Location Type

• Free Standing/Big Box

Potential Advantage

• Lower rents
• Value image
• Lower overheads

Potential Disadvantage

• Unit size (large)
• Exclusive to major tenants
• Harder to attract customers

Choosing A Shopping Center

1) Sales Per Square Foot

Most shopping centers require tenants to report monthly sales figures. This valuable data makes it easier to compare malls and their rents. It also allows you to make more accurate sales forecasts.

For example, let's say a mall's average sales for women's wear are $300 per square foot and you are contemplating renting a 1000 square foot location. If you perform to the average, you would expect to attain a sales level of $300,000 per year.

Statistics regarding Canadian mall sales are provided on the next page. You can use this data to develop some understanding of your potential sales in each of these venues. Remember, of course, that these are average figures, which may differ from the specific sites you are considering.

Canadian Mall Sales Per Square Foot Report

Copyright, 2003, International Council of Shopping Centers. Inc., New York, New York. Published in Monthly Canadian Mall Sales Report, Volume 7, Number 3, dated February, 2003. Reprinted with permission.

2) Total Rent

Traditionally, malls will charge a minimum rent per square foot or a percentage of sales (whichever is greatest), plus a pro-rated common area and maintenance charge (CAM) per square foot leased. CAM expenses are the developer's total cost of maintaining the mall divided by the total allowable space for rent. They usually include the mall's expenses for insurance, real estate taxes, snow removal, maintenance staff wages, garbage removal, promotions, etc.

Let's look at an example:

The landlord is asking $30 per square foot, or 6% of sales, plus CAM charges of $15 per square foot. Answer the following:

(a) What would the minimum rent be for a 1000 square foot store?

Rent Per Year = (Base rent + CAM Charges) x Sq. Feet
                           = ($30 + $15) x 1000
                           = $45,000

(b) What level of sales would you have to achieve before you start paying the 6% overage? This is known as the "break point".

Break point = Base rent x Square footage
                         ____________________
                            Overage percent

= $30.00 x 1000
   ______________
              6%

= $500,000

(c) As a percentage of sales, what is your occupancy cost for a store that does $300,000 in this example?

Occupancy % = Total Yearly Rent
                          ___________________
                               Total Yearly Sales

= $45,000
   _________
   $300,000

= 15%

How Much Rent Can You Afford To Pay?

How much rent a retailer can afford to pay is best described using the following table. Please note that rent payments should be directly related to expected gross margins. Occupancy costs are expressed as a percentage of total sales.

Based on the above table of occupancy cost, we see that a typical fashion store with an ending gross margin of 40% to 50% of sales should have a maximum rent threshold of 14%. This means that, with annual sales of $300,000, the most it should pay for rent is $42,000 per year ($300,000 x 14%). To stay within budget, management must therefore negotiate a base rent of $27 per sq. ft.

Base Rent = $42,000 - $15,000 CAM
                 _______________________
                              1000 sq. ft.
= $27 per sq. ft.

3) Cost Per Shopper Analysis

One approach to determining the true "cost" of a location is to calculate the "cost per shopper". The key here is to determine whether the traffic created at a particular site consists of your target customers or a more general customer base.

Example:

	Location "A"	Location "B"
Fixed rent per year	$17,000	$45,000+
Overhead	$ 1,000	$ 2,000+
Advertising	$ 9,000	$ 3,000
Total Costs	$27,000	$50,000
Traffic per Year	150,000	600,000
Cost per shopper	$0.18	$0.083

As you can see in this example, even though the rent at Location B is considerably higher than Location A, it is significantly more efficient.

4) Responsiveness of the Landlord

Directly related to the appearance of a retail location is the responsiveness of the landlord to the individual merchant's needs. Unfortunately, some landlords actually hinder the operation of their tenants' business by restricting the placement and size of signs, renting adjacent spaces to incompatible or directly competing stores, and forgoing maintenance and repairs. By these actions, landlords can cripple a retailer's attempts to increase business.

In addition to speaking to existing tenants, you should talk to previous tenants of the same location. Ask them if they would become tenants of this landlord again.

Renegotiating a Lease

When times are good and retailers are optimistic, they sometimes sign leases that come back to haunt them in later years. Renegotiating a lease once it has been signed is difficult to do, but attempts to do so must be made under certain circumstances. Prolonged downturns in the economy can result in a drastic drop in sales. This puts occupancy costs in the danger zone where it is no longer profitable to remain in business.

Before approaching the landlord for rent relief, you must be prepared with a list of actions you have taken to increase sales and reduce operating expenses. This may include such things as:

• Increased advertising.
• Reduction in wages and staff hours.
• Reduction in all other operating expenses.
• Revised merchandise mix to attract new customers.
• Current, professionally prepared financial statements indicating your losses.

Don't expect any concessions if the location is still turning a profit. Landlords are under no legal obligation to renegotiate, so they have to see the economics of such a deal from their own perspective. If you go out of business, how difficult will it be to rent the space? How many months will it take to rent? How much rent relief are you asking for?

A temporary reduction in rent is most common for a specific time period, say six months. Sometimes the landlord will not forgive this reduction. Instead, it may be added to the remainder of the lease.

Even with rent relief, your location may create an excessive drain on cash flow. In such a case, you must ask yourself if you're better off closing the store and paying only the rent. You will have to take into consideration all contributions this location is making to head office expenses before moving forward with this type of action. Depending on the lease, sub-letting may be an option. Bear in mind, however, that you will probably have to subsidize the tenant because market value rents are now lower.

Summary

It takes time to find the right location. Do your home work and remember to follow these key suggestions:

1. Calculate the level of competition and its location within the trading area you are considering.



2. Get professional help in dealing with landlords and complicated leases.



3. The less you pay for rent, the more you usually have to invest in advertising.



4. If you have a great location and you do not want to move, start your negotiations early.

Case Study: Store Location

Now let's get back to the challenges at Jackson's Department Store. In this segment, you will now focus on selecting a location for their new store.

Chapter 9: Store Location

It has been nine months now and we can see more light at the end of the tunnel. Susan has done a brilliant job in refocusing the operation. However, never a dull moment on this assignment, as David surprised us all this morning with the idea of opening a second location.

The leasing agent for Appelton Town Center, a strong community mall on the north end of town, wants a men's wear store for a 1,500 square foot vacancy. After throwing around the idea, they decided that, if anything, a women's wear store would be the concept to duplicate, since it is their strongest department. So they visited the mall on Saturday afternoon to get a better feel for it and they liked what they saw. Plenty of shoppers in their target age group carrying purchases, lots of parking and the empty store seemed to be in the center of activity.

You felt it was your role to caution everyone about expansion, even though you felt it was a good idea. It is not beneficial to have the entire group on the same side of an issue this important and you could easily see that Susan and her father were very serious about this mall. It was only prudent to have other locations on the table so they could make comparisons and come up with the best possible location. This would give them the best chance of success.

Appelton, as you may recall, is a city of half a million people with plenty of malls - including strip, community and regional -- plus a downtown. Each of them has their distinct advantages and disadvantages.

Susan has tentative plans to develop a women's wear chain. If that becomes part of her long range plan, then it is a good idea to locate this store in a shopping center environment. However, you are determined that they take all locations into consideration. Developing a proper location plan requires careful study of all potential markets. Within these markets are different trading areas that must be considered. Then, there are specific sites within each trading area that must be evaluated.

When compiling this type of research, one big advantage that shopping centers have is the extensive sales and demographic information they can supply potential tenants. This is available because most shopping center leases require tenants to report their sales and mall marketing departments are constantly analyzing demographics, traffic flow and shopping patterns. They also coordinate special events and promotions. This type of data, such as "sales per square foot", is very helpful in determining what sales levels might be attained if you operate to mall averages.

Now the ball was in your court to come up with some alternative locations. You started by taking out a map and drawing a 100-km circle around Swoonville, which would be about a one-hour drive to supervise. Besides Appleton, there were only two other towns. David eliminated one as way too small, but you found the other one to be quite similar to Swoonville, with a quaint main street and only one other woman's wear store.

Step two was to hit the phones to see what other malls in the big city had to offer. Within the week you had a good selection of alternatives. You picked the best three and presented the following report at the next management meeting.

From the above information calculate the following.

1. Total occupancy costs per location.



2. Total sales needed to break even per location. (Use a gross margin of 45% and no depreciation of fixed assets.)



3. At what sales level does the percentage rent kick in for the mall locations?



4. Which location has the best likelihood of attaining break even status? Why?

Answers:

1. Total occupancy costs per location.

	Location #1 Mall	Location #2 Mall	Location #3 Street
Size (sq. ft.)	1300	1500	1800
Base rent per sq. ft.	$24.00	$18.00	$11.00
Common area costs	$14.00	$10.00	Incl.
Total Rent paid to landlord	$49,400	$42,000	$19,800
Utilities	Incl.	Incl.	$3600
Real-estate Taxes	Inc.	Inc.	$4000
Advertising	$3,000	$3,000	$10,000
Total occupancy costs	$52,400	$45,600	$37,400

Note: Advertising is usually not included as an occupancy cost, but in this case where we are comparing a street location with enclosed malls it is appropriate because it will cost you more to draw customers.

2. Total sales needed to break even per location. (Use a gross margin of 45% and no depreciation of fixed assets.)

	Location #1 Mall	Location #2 Mall	Location #3 Street
Break Even Sales	$243,111	$228,000	$192,000
Cost of goods sold (55%)	$133,650	$125,400	$105,600
Gross Margin (45%)	$109,400	$102,600	$86,400
Operating Expenses:
Total occupancy costs (from above)	$52,400	$45,600	$37,400
Wages	$47,000	$47,000	$39,000
Other overhead	$10,000	$10,000	$10,000
Total operating costs	$109,400	$102,600	$86,400
Profit/(Loss )	$0	$0	$0

Note: The Quick formula for calculating break even sales is to divide total yearly operating expenses by expected gross margin percent.

3. At what sales level does the percentage rent kick in for the mall locations?

Location "A": Percent rent kicks in on sales over $540,000.

Location "B": Percent rent kicks in on sales over $450,000.

Note: The Quick formula for calculating the sales level that percentage rent kicks in is:

square footage x base rent ÷ by percentage rent factor.

One actually pays the base rent rate per square foot or percentage rent rate times total sales, whichever is greatest. If your sales are sufficient enough to be paying percentage rent, then you are more than likely generating above average profit for that location.

4. Which location has the best likelihood of attaining break even status? Why?

This is not an easy question to answer, as there are many factors to take into consideration. Looking at mall averages, if location "A" does $240,000, that represents 59% of the mall average of $403,000 for a store that size ($310 x 1300 sq. ft.). Location "B" at a break even of $228,000 is 62% of $367,500, which is the mall average for a store that size ($245 x 1500 sq. ft.).

Another consideration is saturation ratios. According to the telephone book, there are 61 women's wear stores in Appelton. That is one store per 8,200 people. The small town street location has only one store for a population of 8,000.

As well, you can see wages are higher in the mall locations because of the longer opening hours. Furthermore, the construction costs may not be accurate for the street location (too high). You can probably spend less, as landlords are generally not as strict. Store fronts can be re-used and the level of finish does not have to be as high because you are not competing with big national chains.

Chapter 9 - Tips