How Can We Make Better Real Estate Decisions?

All of us in the chain store industry would love to believe that we are making better real estate decisions today than before we had digitial maps, demographic data, and predictive models.  There is no question that some companies have reduced capital losses from store closings and increased profitability of their stores with these tools.

On the other hand, the store closings of the last 2 years reached the highest levels in history.  There can only be one of two reasons:

  1.  Not enough companies are using the tools (analytics and information systems).
  2. The tools aren’t being used correctly.

There are many companies who have simply not taken the time to design real estate planning and site evaluation decision processes that give them a fighting chance of avoiding store closings and underperforming units.  Everyone knows who they are either by looking at where they show up on the retail landscape or from the stories circulated in our large but very small industry.  This is usually a result of a senior management culture that is based on the primacy of personal relationships with brokers, “gut feel,” and an aversion to math and “propeller-heads.”  Many of these companies are being weeded out by “bad luck” in the form of competitors who have learned to enhance their gut feel and relationships with some good ole’ fashioned risk management and facts.

Many of the closed stores and restaurants in the last few years were the result of a lack of discipline in real estate decisions, often in the face of evidence that would have prevented the store from opening in the first place.  The manipulation of assumptions in sales forecasting tools is a temptation that few can resist!

The pressure on public or venture backed chain store companies to grow revenues and earnings is enormous.  Even when the economy is good and a concept is “hot,” growth in same store sales of 5-10% per year is not enough to support the high multiples of earnings that stock prices or target valuations imply.  The only way to “prove” the value that everyone has decided they want to achieve is to grow the unit count and assume that all units will achieve average volume (and not cannibalize sister stores).  It’s easy to be critical of this behavior, and everyone talks about it, but at the end of the day it’s really just a Ponzi scheme that collapses when there’s a downturn in the general economy or real estate prices get so high that virtually every unit that opens is doomed from the start.

The best information system or analytical tool in the world won’t do you any good if you don’t use it in your decision process!

Now that we have flushed billions of dollars’ worth of real estate capital down the toilet again, we have a chance to learn from our mistakes and do better in the next cycle.

We first need to recognize that there are factors beyond our control such as general and regional economic vitality, real estate prices, and competitor moves.  Furthermore, the nature of each chain operator’s business creates different requirements for good decision-making:  the capital investment for each unit, the availability of land for development, and the level of competition in the category will vary dramatically.

But there are MANY things that CAN be controlled: 

  1. Strategic planning to set the mix of bricks and mortar, catalog, and ecommerce investments
  2. Thoughtful planning to determine target markets for expansion and optimization, which allows real estate teams to be more proactive in finding sites
  3. Investments in user-friendly information systems that put key facts and market “pictures” in front of decision-makers (including analytics and data)
  4. The number and skill level of the players in the real estate planning and acquisition process

Finally, it’s the executive culture and leadership that will make investments of time and money in these areas deliver on their potential.  This means the discipline to say “NO” when the pressure to open stores is overwhelming.  It is having the credibility and strength to tell the investment community (or the VCs!) that a Ponzi scheme is not a strategy, it’s a crime.  It’s not good capitalism to create broken markets that require government bailouts, massive job losses, and decimation of the net worth of our citizens.

I am optimistic that we will close many fewer stores in the next downturn.  However, it will be a hard-fought battle to change the way real estate decisions are made and make this possible!


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