Winning At Retail Development
Understanding the retailer and its decision making process.
Anthony Colavolpe

Understanding the retailer and its decision making process is really the first step in retail development. Unfortunately, many people, both experienced and neophytes alike, fail to grasp this basic fact. The end result is a failed or non-viable project. In the era of runaway growth and “take no prisoners” expansion programs, retailers and developers paid less attention to some of the fundamental elements important to generating sustained profits and successful projects.

Since the quality and quantity of an income stream are an integral part of the valuation process for most commercial and investment properties, it is incumbent upon the developer, investor or real estate broker to understand the elements that drive a retailer’s decision making process. First and foremost is the volume of business a retailer can expect to do in a particular location. Factors affecting sales volume potential include, but are not necessarily limited to, the following:

(1) The amount of sales volume available in a particular trade area. The delineation of the trade area itself differs from retailer to retailer.

(2) The quantity and quality of direct competitors.

(3) How much volume is already being absorbed by competitors and, of that amount, how much business will the subject retailer be able to capture. If you can not be first or second in a market, why bother?

(4) The physical characteristics of the potential site and its environs. If a customer has difficulty getting to and from a site or has a bad shopping experience, you may lose the customer.

(5) The tenant mix, if any, being proposed for the potential site. Are their tenants who will enhance the subject retailer’s ability to generate sales? Some tenants and/or uses work better or are more compatible than others. Conversely, the opposite may also be true. Instead of helping a retailer, the co-tenant may be an impediment. For example, uses that tie up parking for long periods of time may discourage some customers from frequenting a store or shopping center, thereby discouraging a retailer from locating on the site.

(6) Trade area demographics. How do these line up with the preferred customer of the subject retailer, if at all.

(7)  Overall consumer buying trends, including those impacted by prevailing market conditions. If the subject retailer is influenced more or less by economic factors, the developer needs to react accordingly. A shopping center anchored by a grocery store may provide traffic in a recessionary market, whereas consumers worried about employment or other financial factors may not be anxious to purchase discretionary goods or services, i.e., high end electronics.

The decision making process itself may differ from retailer to retailer. However, most often it contains certain common elements. In addition to determining sales volume, understanding the physical characteristics of both the site and environs, and the company’s financial hurdle rates may be deciding factors for many retail organizations. Once these baseline elements have been determined, most retailers follow a process of site visits and finally some form of committee approval. This is true even of smaller organizations where the CEO may make all of the real estate decisions. It is not uncommon in larger organizations for the real estate group, for example, to be a part of a team approach where operators and/or other departments need to agree or comment on a location or transaction. Ultimately, regardless of the underlying process, the final decision will be made by a board, a committee or the leader of the organization. Consequently, understanding who and how all of this happens, what information is critical and what is not, becomes of paramount importance to the developer, investor or real estate broker.

As is the case in many industries, few people understand the total process. Some do not even understand the basic needs of the retailer. Like how many square feet of building or land area does a retailer actually need to operate effectively and profitably. As the former senior person in an active retail organization, you would be surprised at the number of times I received a submission from a real estate broker or developer regarding a site or building that did not approximate, by a long shot, the requirements of our retail operation. For example, my operation required 6 to 7 acres of land or 60,000 to 70,000 square feet of building area. I would often receive submissions of half-acre parcels or 5,000- to 7,500-square-foot spaces, none of which could be added to anything else to attain the requisite spatial requirements.

Other times, I would get submissions for properties that would be of no interest to any retailer. One such submission was literally the top of a mountain surrounded by nothing other than other mountains.

The geographic area in which a retailer is currently operating in, or would like to expand into, also gets overlooked by inexperienced real estate brokers and developers. My company operated stores from Maine to Virginia and might have possibly considered expanding into adjacent territories. Submitting a site on the west coast, however, not only is a waste of time but negatively impacts the creditability of the person submitting it. Why would anyone want to do business with someone of this caliber?

On the other hand, seasoned knowledgeable professionals make it their business to understand every aspect of the retailer’s needs, including the industry in which they operate. This type of individual or firm invests their time and other resources in knowing everything they can about the retailer’s decision making process including the industry in which they operate, as well as all of the factors impacting those decisions. They have a firm grasp on availability, pricing and inventory for anything that could remotely be of interest to the retailer. They know the retailer’s competitors, where they are located, how much business they are doing and other information of this type.

If, and when, I or anyone like me was interested in a particular location or site, it was highly likely I would contact one of the industry professionals who had demonstrated their strong knowledge of the market. Therefore, the person who did spend the time to understand my needs and the markets in which we operated almost always benefited by their actions.

In many retail organizations the site selection process begins with the company’s so-called storing strategy. A number of factors comprise the storing strategy. Market share, sales volume potential, the retailer’s drawing power, competition, the age and condition of the retailer’s stores, the strength and nature of the competition all become considerations when developing the strategy. Initiatives of this type are often generated annually by senior executives and then disseminated to the real estate group. The company’s internal real estate representatives independently or in conjunction with third party real estate brokers or developers will implement the strategy.

For purposes of this discussion, the strategy consists of three categories — replacements, remodels/expansions or new stores. Sometimes the new stores will be divided further into core markets and expansion markets or new territories. Each category will be briefly discussed below.

Replacements:  This can be accomplished either on or off-site. If sufficient land is available on-site and the existing location has proven to be profitable, chances are the retailer will opt to accomplish a replacement on-site. Of course, this assumes the benefit of doing this outweighs the cost. In other words, does the potential incremental increase in sales and/or profits justify the cost of the replacement? This scenario is usually chosen when the retailer is, or maybe, “out stored” on some basis by the competition and a larger or new prototype store will draw incremental sales volume away from the competitor. Size alone may not accomplish this objective, but a new, more customer friendly layout, increased selection, wider aisles and other improvements such as these, particularly if they are better than the competition, could produce positive results. Savvy retailers who complete post mortems or before and after type analyses, usually have empirical data to support these types of decisions.

Remodels/Expansions:  This is another version of the replacement. Once again, a cost/benefit analysis will usually be the deciding factor. Even if the store is of sufficient size to complete in the trade area, a comprehensive remodel, together with an upgrade of product offering and layout, is often completed every 7 to 10 years. Generally, this type of scenario will result in an increase in sales volume of 10 percent to 20 percent. Accounting rules and other financial considerations may impact this decision.

New Stores:  If the management team identifies a hole in the market and an opportunity to build a new store, they will give strong consideration to this scenario. In core markets care must be taken to avoid extensive cannibalization of existing sister stores. One common theory in this regard is the thought of protecting market share. Although the retailer decision to build a new store may impact other nearby stores, the decision not to build may be influenced by the probability of a competitor taking the site and having an even bigger impact on the retailer’s trade area.

The decision to expand the reach of the retailer into a new territory should be determined by the market. If sufficient demand exists and the present competition is either weak or not adequately satisfying the needs of the customer base, an opportunity to build new stores may exist. Since often this scenario will produce all new dollars, senior management will likely encourage its real estate department to explore this effort.

The storing strategy usually forms the basis for the annual objectives of the real estate department and the capital expenditure budget for the company. For example, the deep dive outlined above may result in an overall count of 50 stores divided into the various categories. Financial types can then calculate costs, potential sales and profits and then roll them up into the overall budget for the company. The capital expenditure budget in many organizations is usually expressed as, or pegged to, a percentage of sales. If an industry is spending 2 percent to 3 percent of its sales on capital expenditures and the foregoing exercise generates higher or lower numbers, management will take note and may adjust their storing strategy accordingly.

Areas where the barriers to entry are high will often dictate fewer stores. These types of locations are almost always more expensive to pursue than others. The end result (higher profits), however, may justify the challenge, but will, in all probability, reduce the overall number of stores that can be built and opened in a given year.

Once enough sites meeting the retailer’s basic needs are identified and, assuming the location is consistent with the company’s storing strategy, a site visit is scheduled. Depending upon the organization and senior management’s interest in real estate, the site visit may be attended by a real estate representative and one or more members of senior management. Typically someone with a fairly high level of authority will need to visit the site before a final decision is made.

Site Visit:  The site visit usually includes a tour of the trade area in which the site is located. This might involve a review of existing competition including a walk though of their store to determine operational efficiency or lack thereof, product mix, pricing, staffing and other items of interest. The management team or company representatives will also want to understand how a customer gets to and from the site. If the customer cannot easily get to a site and back home again in a reasonable period of time, it may choose a competitor’s location over the subject.

Some retailers are also fairly rigid on the layout of a site plan. Ingress and egress, quantity and quality of parking, the store’s location within a shopping center, the other retailers and their own parking demands, the ability, or lack thereof, to construct a prototypical store, are among the factors influencing a retailer’s decision to pursue a location.

Lastly, but no less important, the probability of a retailer being able to actually build a store in a particular location, is also given consideration. You could have the absolute best location in town, but never be able to obtain the requisite regulatory land use approvals and permits to construct a store. Why waste the up front dollars (soft costs) if this condition is known in advance. Consequently, some retailers require either their own team or the developer’s to conduct a comprehensive analysis of the entitlement and political landscape, as well as all other potential impediments to the development process. Whether paid for by the retailer or a developer, the cost of this upfront effort is often less expensive than going through the pre-development requirements only to find out that the project is not financially feasible and/or can never be accomplished.

Anthony Colavolpe is managing principal of in the New Haven, Connecticut, office of Citron Group, LLC, an international real estate development and advisory services group. He can be reached at tcolavolpe@citrongroupllc.com.

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