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The Ultimate Guide to Retail Site Selection
From The Buxton Co
The retail site selection process has changed significantly over the last two decades. What was once considered an art is now a blend of art and science.
Whether you are new to the retail site selection process, or simply wish to refine your current technique, these insights can help you make the right real estate investments.
Three Important Steps in the Retail Site Selection Process
1. Identify and Prioritize the Specific Markets You Want to Enter
There are two fundamental ways to identify markets. You can look purely at macroeconomic factors such as population growth, employment rates (both overall and for retail specifically, an indicator of local retail industry's health), overall retail GLA, consumer spending, and other indicators of economic strength to identify markets with sufficient demand and acceptable levels of competition.
The alternative is to take a “bottoms up” approach by identifying all potential trade areas within a geography that meet your desired criteria and then rolling them up to the market level. In this approach, markets with the highest counts of good potential trade areas are likely to present your best opportunities.
The advantage to the bottoms-up technique is that it helps to streamline later steps in the site selection process, but it does require access to statistical modeling and computing technology capable of running the site selection algorithm on every possible combination of trade areas to identify the best groupings.
Regardless of the approach that you use, it’s important to consider these questions when evaluating potential markets:
Which markets have the right types of consumers for your business?
Where is there the right balance of competitive presence?
Where do you have the potential to build multiple units?
Can your existing supply chain structure be extended to support this market at an acceptable cost?
2. Within Each Market, Identify the Trade Areas That Offer the Best Growth Potential
When evaluating trade areas, you are looking for ones that meet criteria such as the following:
• Performance estimates, either in terms of a forecast or an index score, meet your minimum threshold
• Cannibalization estimates or trade area overlap percentages fall below your acceptable maximum
• The trade area has high concentrations of the right types of consumers (high likelihood to become customers)
• Competition in the trade area is at an acceptable level
If you are entering a new market farther away from your existing markets, pick your best trade area to concentrate on first. A successfully first location provides both the brand recognition and cash flow needed to fuel additional locations. If you are entering an adjacent market, consider approaching the market gradually to build brand recognition organically.
3. Within Each Trade Area, Identify the Optimal Site
• Right mix of cotenants or other area draw factors
• Steady traffic volumes and correct traffic flow direction (particularly for convenience-oriented businesses that take advantage of specific dayparts)
• Good visibility and ease of access
• Real estate type is a match if considering an existing building, or zoning requirements will allow new construction
• Site financials (cost of construction, cost of rent) meet your financial objectives
The Role of Retail Site Selection Models
Benefits of Retail Site Selection Models
Another advantage of site selection models is that they allow retailers to validate information received from the brokerage community. Brokers play an important role in the real estate process, but at the end of the day, they are paid to make transactions rather than to select the absolute best site for your brand.
Finally, retailers who are skilled at interpreting their site selection models know that models shouldn’t just be used to understand whether or not a site will be successful, but rather to understand what it will take to be successful in that trade area. For example, the overall site score may be positive but the underlying competition score may be quite high. A savvy site selector will understand that competition is a risk factor for that site that will need to be proactively managed.
Limitations of Retail Site Selection Models
Site selection models are limited by what can be quantified well, so it’s impossible to completely evaluate all performance drivers. Instead, the models compensate by look at proxies. For example, foot traffic is a common performance driver, but it can be difficult to measure completely. Cotenants and size of the shopping center are often used as proxies instead, based on the assumption that being next to a typically high-traffic cotenant or in a large shopping center will attract more foot traffic.
Ultimately, site selection models enhance the fundamentals of good site selection, but can’t replace them. Just as you would conduct an in-person interview with a job candidate who “looks good on paper,” you should still validate a site that scores well based on a model. For example, a model might give a high score to a site located next to a highway (based on the assumption that the highway will provide both good accessibility and visibility), but if the closest available site next to the highway actually has poor visibility or accessibility then it likely won’t live up the full potential indicated by the model.
The bottom line is that local market knowledge is key. Data can tell you what has happened, what is happening, and what is likely to happen in the future. Local insight can complete the picture by informing or confirming hypotheses on why those things happen.
Want to Streamline Your Retail Site Selection Process?
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