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Forced to Count Every Dollar, Retailers Re-evaluate Site Selection Practices

Amid all the not-so-great news reported during the dog days of summer—weak back-to-school sales, falling rental rates—there were signs the retail industry might be coming out of hibernation.

Men’s apparel seller Jos A. Bank, for example, announced it would accelerate its store openings for the fiscal year 2010 to 30 or 40 new locations from the previously announced 10 to 15. Electronics chain Best Buy revealed it was working on 22 new store openings in the third quarter, more than the chain opened in the first and second quarters combined. Apple confirmed it planned to open its fourth New York City store on the Upper West Side of Manhattan, while rumors swirled that discount department store chain Kohl’s was scouring sites near Herald Square, next to a recently opened JCPenney. Microsoft was rapidly prepping its first two stores to open in October in the Southwest. And even Starbucks decided to keep 30 stores open that it previously had planned to close.

These modest moves toward expansion show that even in the worst of times healthy retail operators continue to have some appetite for new real estate. In fact, discounters, warehouse clubs, drug stores, restaurants and wireless service providers are already actively looking for new stores, while retailers in other sectors are beginning to review their plans for 2010, says Devon Wolfe, managing director for Americas strategy and analytics with Pitney Bowes Business Insight, a Troy, N.Y.-based site selection firm. A recent report by RBC Capital Markets and Retail Lease Trac, a Dahlonega, Ga.-based real estate research firm, estimates retailers will open 64,926 new stores in the U.S. over the next two years. (And that number doesn't include every retail firm. For example, neither Target nor Wal-Mart is included in the figure.)

Meanwhile, retail developers will deliver approximately 60 million square feet of new retail space to the market in 2010, according to data from Marcus & Millichap Real Estate Investment Services, an Encino, Calif.-based brokerage firm. Another 163.8 million square feet of retail space had been proposed for construction over the next four years, but not yet approved, reports the CoStar Group, a Bethesda, Md.-based commercial real estate information provider.

“What we are seeing now is demand that’s starting to pick back up after everything went south last year,” says Wolfe. “It doesn’t mean we are back to 2006 or 2007, but we are seeing signs of movement and that’s good.”

But though retailers might feel the worst of the downturn has passed, many firms don’t have a lot of cash set aside and execs are worried about how long it might take for consumers to open their purse strings again. So retailers have adopted more stringent return hurdles for new locations. If in 2006, a retailer might have decided to open a store based on a 9 percent expected rate of return, today the figure might be as high as 12 percent. That means each new store is eyed with a lot of caution and has to satisfy a wide set of criteria, including the presence of high-spending core customers, the availability of a competent workforce and attractive rental rates. For example, many chains now want to know what kinds of incentives they might be eligible to receive from state and municipal governments, something they wouldn’t have necessarily looked at before, says Todd Caruso, senior managing director in the retail service group of brokerage firm CB Richard Ellis. And according to some brokers, certain dollar store chains won’t consider a new location unless they can get rents per square foot that are in the low single digits.

“Tenants are turning down a deal unless it’s almost a sure thing,” says Wolfe.

Next page: Time is money

Time is money

Without a question, the most important change that’s taken place in retailers’ site selection process is the emphasis on accurate, up-to-the-minute information. Historically, many companies relied on U.S. Census Bureau data on population figures, average household income, employment levels and other demographic metrics. Many projections for growth are still based on the U.S. Census numbers. But that information is dated, having been last collected in 2000 and it doesn't reflect the seismic shifts that have occurred in the economy since 2007.

Today, retailers want quarterly, if not monthly, updates on what’s going on in any given area.

“It’s a lot more money to be able to do that, but think about what’s happened in the past nine months,” notes Dean Stoecker, president and CEO of SRC, an Orange, Calif.-based site selection firm. “If you are a retailer trying to make a multi-million dollar investment decision, you can’t rely on nine-month-old data. So they are moving to quarterly estimates.”

In fact, retailers are now so invested in getting site selection right, last year SRC experienced a 20 percent increase in total revenue compared to 2007.

Furthermore, there has been a shift to looking at markets as they exist today rather than making assumptions about growing populations and incomes. Some of the most problematic retail projects today are the ones that were built to take advantage of burgeoning residential communities built on suburban outskirts. Those projects, where they were not scrapped altogether, now sit mothballed.

To avoid making the same mistakes again and ensure that whatever information they get accurately reflects what’s going on now, retailers are using multiple data sources to re-check their statistics, says Keith Peterson, general manager of ElementOne analytics program with TARGUSinfo, a Vienna, Va.-based site selection firm. Those who in the past worked with only one site selection services provider might now be working with several to enable them to compare and contrast market reports from different firms.

There has also been a shift in the kind of data that’s considered relevant. Before, the focus was on demographics and psychographics, says Wolfe. When it came to macroeconomic data, the key metrics for retailers included population growth and housing construction. Today, retailers are supplementing that data with statistics on employment figures, GDP growth, retail sales and the number of bankruptcy filings, among other things, to get a more well-rounded view in determining whether to open a store or not. The need for this kind of supplementary data has gotten so great that in the first quarter of the year Pitney Bowes began offering a subscription to MarketPulse reports for its retailer clients, which track all those statistics on a quarterly basis.

“I think the difference is that a few years ago, you didn’t see the big market-by-market changes in economic health,” Wolfe says. “There were differences, obviously, but they weren’t as pronounced as they are right now. Now, it’s driving decisions more than individual sites.”

Last year, for example, one prospective client Pitney Bowes was working with wanted to expand into Michigan, where it had not existing stores. But in late fall, after the economy took a turn for the worse and it appeared that Michigan would suffer disproportionately because of the troubles in the auto industry, the retailer, which concentrates heavily on discretionary goods, scrapped Michigan off its list for the foreseeable future. The company figured the level of consumer spending in the state would fall short of its site selection criteria for several years to come.

Next page: Your friends and neighbors

Your friends and neighbors

Another factor of site selection that has been going through profound changes recently is the relationship with other retailers within the same trade area. Sophisticated retail operators have always tried to capitalize on any existing synergies with other chains and avoided cannibalization by not opening stores in close proximity to direct competitors. But the retail landscape has changed so much recently, with some long-term players filing for bankruptcy and others closing hundreds of stores, the remaining retailers have had to re-think who they’d like to have as neighbors, says Peterson. According to some brokers, a lot of tenants want to be located next to Wal-Mart these days, because the discount store usually brings in a healthy amount of foot traffic. Supermarkets and grocery operators, which tend to do well in recessions, have also been in high demand as neighbors.

“People are recalibrating their models in terms of their relationships in the market,” Peterson notes.

One preference that many retailers have right now is the desire to go into older, established centers, adds Caruso. At the peak of the market, when retail development followed residential growth, many companies assumed that newly completed properties would fast reach 100 percent occupancy and provide steady demand from consumers. Today, when those projections for future demand have in many instances proved to be wildly off the mark, prospective tenants are targeting centers with minimal vacancies and proven levels of performance, Caruso notes.

Meanwhile, the fierce level of competition among various players in different retail sectors has brought to the forefront the importance of a qualified labor force, says Stoecker. When a customer walks into an electronics store like Best Buy and has a question about which product would better serve his needs, the Best Buy employee has to posses the adequate technical knowledge and people skills to point the customer to the right product and close the sale, Stoecker explains. After all, the customer has plenty of options of where to shop for electronics. So to make sure their new stores are profitable, retailers are now examining population characteristics not only for the presence of potential customers, but for potential store personnel as well. They want to see data on what kinds of arithmetic, social, technical and communications skills they can expect from the available workforce in a given trade area. Those who are embracing this model range from electronics sellers and wireless service providers to the drug store chain Walgreens.

“A great location that has a terrible work force results in poor profitability,” Stoecker says. “Yet a marginal site with a good workforce can often outperform [other stores]. Especially for the grocery stores, department stores, electronics stores and wireless stores, job training is beginning to be more important.”

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