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How Retailers Approach Site Selection

Under constant pressure to stay ahead of the competition and demonstrate long-term growth potential, big-box retailers are always looking for opportunities to expand into or within markets. As markets become saturated and retail expansion slows, competition among developers for anchor tenants will heat up considerably. To secure those dealmaking anchor tenant commitments, developers should understand retailers' five basic approaches to site selection.

The bull's-eye location Retailers look for the best place to build a store that meets both today's and tomorrow's expansion priorities. Many times, retailers avoid locating a store at the bull's-eye location in a given market because an alternative site is more convenient for customers today and enables additional infill opportunities in the future.

There are times, however, when a retailer should wait for the bull's-eye site to become available. For example, a less dense, third-tier market may be able to support only one store location for a national retailer with a large trade area. Alternatively, destination retailers like IKEA and Bass Pro Shops have such massive trade areas that they often enter a market, even a major metropolitan area, with just one store location.

Co-tenancy attracts unexpected neighbors Most retailers have a herd mentality, always seeking optimal co-tenancies. These groupings become even more important when retailers enter a market for the first time. Regional retailers often hold back and wait for a powerhouse retailer to blaze the trail. If Home Depot determines that a new market is viable and can support its operation, then retailers like OfficeMax and PetsMart are better assured that they too will have successful stores.

More and more, retailers want to snuggle up next to their competition, which creates new expansion opportunities within markets. Today, it's common to find competing category-killers like Circuit City and Best Buy located on opposite corners from one another. This unique co-tenancy situation creates a synergy that prevents the competition from gaining a locational advantage. Oddly enough, it often results in higher traffic and sales for both stores.

Cannibalization can be a good thing Infill opportunities help retailers increase penetration within a market. They can build upon a well-established foundation of loyal customers, advertising, operations and management, trained workers, and distribution centers.

Infill makes sense as an expansion strategy, but it can also put retailers at risk for cannibalizing their own stores. As each new store opens within a market, sales at nearby sister stores decrease initially as sales transfer to the new location. Over the long term, however, this risk is minimized as sales eventually level out across all locations.

Sometimes cannibalization can be a good thing. For example, transferring sales to a new location can help relieve congestion in a high-volume store, making it easier for customers to shop, get help and check out.

New growth areas Retailers tend to flock to new growth areas within markets. These areas can appear because of changing demographics, such as new residential development or the announcement of a new regional mall.

The drawing power of improved infrastructure, advertising base and concentration of retail square footage at a regional mall provide instant credibility for a new regional growth area. The surrounding real estate becomes attractive to retailers looking to expand.

The Mall of Georgia in suburban Atlanta demonstrates how a rural area can be transformed into a burgeoning commercial district and become a new opportunity for big-box store locations.

Relocation: an unexpected expansion strategy A retailer can be driven to relocate a store when: the demographics within its trade area have become less desirable; a competing retailer has gained a locational advantage and cut off its customer base; a physical change, like a new unbroken median in the road, has made it too difficult for customers to reach its store; or the retailer has changed its prototype.

Retailers must move quickly to react to these unforeseen circumstances, often turning to developers for assistance in locating a viable site for its store relocation.

Understanding these five expansion strategies will help a developer quickly identify better sites. The more effectively a developer can focus on a retailer's site priorities and needs, the more confidence the retailer will have in the developer's ability to produce the right site.

This helps to build a developer's reputation and can lead to a long-standing, mutually beneficial relationship with the retailer.

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