Bad real estate decisions

property, rental, lease, agreement, pen, dealIn my 20 or so years of experience in the shopping centre industry I’ve learned that retailers don’t like doing research very much.

I don’t mean that in an entirely negative way, since it reflects the cando, up by my own bootstraps spirit that typifies many retailers. Research seems to go against the grain of the entrepreneur who has had a measure of success already just by having a good product, a lot of self belief, and an ounce of luck.

When considering overseas expansion, the stakes rise though, and so do the risks of not doing homework properly.

The ability to succeed in an overseas market depends on a number of things, including product niche, service model, supply chain flexibility, and cultural compatibility. Another key factor determining success or failure is how the retailer makes real estate decisions.

If decisions relating to the stores themselves – where they are located, how large they will be and what product mix they will offer – are so vital, how do you as a retailer ensure you make the right ones?

Following is my checklist of eight steps that a retailer needs to take to ensure their real estate decisions are sound. Research plays a critical role in most of these steps.

  1. Be strategic.

Many perfectly good retailers founder in overseas markets because they choose opportunism over strategy. For example, it is common for retailers to gain access to an overseas market by buying up the leases of a retail chain that has gone belly up.

A high profile example is Target’s failed entry into Canada on the back of its purchase of 130 stores, many of them in B, C, or even D locations, vacated by a failed Canadian chain called Zellers. There are many other similar examples that go under the radar, where a retail owner convinces himself that someone else’s failure is all due to factors other than poor real estate.

  1. As Socrates said: “Know thyself”.

Know exactly what makes you tick as a retailer in your home market. Under which circumstances do you perform well and under which do you tend to struggle? Performance drivers will include the type of real estate (e.g. regional shopping centre, freestanding, CBD), the proximity of complementary cotenants, the demographic profile of the market.

You will also be looking for minimum performance standards, such as a threshold productivity level for a shopping centre or pedestrian traffic level for a main street.

  1. Study the characteristics of the overseas target market properly.

This may seem obvious, but it is amazing how many retailers don’t do it, or don’t do it thoroughly enough to understand the nuances that can make or break them.

A super regional shopping centre means something materially different in Australia, China, and the US. The performance profile differs accordingly.The heterogeneity of quality – variance around the mean – within each shopping centre class is vastly greater in North America and Asia than it is in Australia.

Don’t be seduced by the nomenclature into thinking they are the same thing just because they have same general name.

  1. Match your concept to the right property type.

Once you properly understand your own business and the structure of the target market, you can marry one to the other, i.e., you can narrow down the property types that are going to be compatible for your stores.

For example, the absence of supermarkets in US regional centres might rule out the transferability of an Australian regional centre-focused retail concept to that property type in the US.

  1. Create a hit list.

Once you’ve identified your target property types, make a list of potential locations. Rank them according to their performance profile. You may not be able to get space in all of them, but you can certainly set priorities. In the process you can gain a deeper understanding of your store rollout potential.

  1. Understand the industry ownership structure.

From your priority list you will be able to understand if the target properties are concentrated in the hands of a small number of owners or if ownership is fragmented.

Does it make sense to hitch yourself to one property owner and let him introduce you to the market, or do you have to work with multiple competitors? There are advantages to working with one owner (e.g. a potentially broad menu of location options), but some serious downside as well.

Unwary retailers can get shoved into second string centres as a quid pro quo for being offered space in a good one. (Or, worse, get shoved into weak centres without even the quid pro quo.)

  1. Analyse every location thoroughly.

This should be a no brainer. Whether or not a shopping centre or other location is on your hit list or not, it needs to be analysed in gruelling detail if you have a specific offer of space.

This means a comprehensive study of its competitive strengths and weaknesses, quantitative performance metrics, market characteristics, and future supply pipeline in the trade area.

  1. Finally,realistically evaluate the offer.

No matter how good a shopping centre is, it will have its dead spaces and spaces that are not compatible with your business model, for example, because they are not in an area with complementary tenants or are wrongly sized or configured.

A sales forecast is needed and the financial analysis comes at the end of this. At the end of the day, the occupancy cost package has to make sense within the context of your financial model

All in all, it’s a lot of work, but the cost of not doing it is likely to be far greater than the cost of carrying it out, as many retailers have found out  the hard way.

Michael Baker is principal of Baker Consulting and can be reached at michael@mbaker-retail.com and www.mbaker-retail.com.

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