Tag Archives: site selection

The Value Proposition for Chain Store Predictive Analytics

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How many times have you seen a “Value Proposition” slide with statements like these?

  1. “We are experts in “best practices” in chain store real estate analytics and we can help you join the 21st century.”
  2. “Our scientists have developed proprietary algorithms and methods that produce the most accurate predictive models possible.”
  3. “Our technology platform will deliver user-friendly maps, reports, and sales forecasts to everyone in the enterprise who wants them; with a 90 day deployment.”

Why wouldn’t these value propositions of “better” and “faster” be compelling for everyone?

In theory, they would.  But every chain store company has a point of view about its real estate program, and if vendors don’t understand it, they will never sell them anything…that works!

Let’s flip this around and look at it from the viewpoint of the chain store real estate executives.  They will invest in predictive analytics when they see the value of a proposition, not the proposition of a value. 

Most companies have a “committee meeting” where real estate deals are considered and approved.  There is usually a representative from each of the departments that has a stake in the quality of a new store, which is all of them:  finance, merchandising, marketing, operations, and of course, real estate.  Do they lose sleep over “best practices?”  Are they fascinated with mathematical models?  Do they enjoy rolling out new software applications? NO, NO, NO!  They didn’t become senior executives by contemplating their navels and fantasizing about perfection.  They know how to get stuff done. Why do they even want to talk to a vendor who offers chain store predictive analytics?  

There are several possible reasons.  First, the end game is getting and satisfying customers.  The real estate strategy and program must clearly “map” to this goal.  That means that a store, restaurant, or service center should:

  • Be Convenient
  • Have what the customer wants
  • Make it fun and easy to fulfill their needs

Convenience is based on the location of the store, which includes what it’s near, its visibility, and its accessibility.  This is the focus of the real estate decision, and the profitability of a store is heavily dependent on location quality.  Anything that helps the chain acquire better locations is worth consideration, whether it’s data, software, training or predictive analytics.  Chances are that some combination of these things can contribute to better locations. The challenge is assessing the needs of the organization and designing a plan that blazes a clear path from the current situation to a desired state that increases the number of happy customers and drives profit.

At any given point in time, the executives in a company will have the ability to visualize a better state that is achievable from where they are.  The plan must be manageable over a one to two year period, because business must continue while changes are implemented.

The trick is to foster a dialogue that leads to a needs assessment, a game plan, and a set of expectations that represent a compelling return on investment.

What are the ingredients in such a plan?  It varies dramatically from company to company.  Here are some factors that influence the best approach to good real estate decisions:

  1. Breadth of customer profile.  If 80% of your sales come from girls between the ages of 14 and 18, you need to make sure that the trade area of a store has enough teenage girls.  If your customer could be anyone, successful stores might have many profiles, and the analytics required to figure this out are more tedious and complex.
  2. Size of the store.  If you are opening 50,000 square foot stores, you will be investing more capital, opening fewer units, and evaluating fewer opportunities, so you will be able to justify more field research.  This means that you don’t need to rely as much on screening tools and complex multi-user systems that are designed for fast decisions.  If you are opening 1,200 square foot stores, it’s about screening out the dog locations to allow enough time for the ones that deserve serious consideration.
  3. Format of the store.  Predictive models for enclosed malls are very different from models for open-air centers or street retail.  Malls are mostly about the quality and tenant mix of the mall, but open-air centers require a careful analysis of the trade area demographics and competitive landscape.
  4. Decision styles of senior executives.  Some companies place greater emphasis on quantitative analysis than others, and you can’t easily change this.  There are many winning combinations of people and tools, art and science, book smart and street smart.

Each chain store company has limited time and money to invest in store location decisions.  Predictive analytics that make a difference will be discovered through a dialogue among experts who know the business and the tools and are committed to working together to find the unique value proposition that maximizes ROI.

Predictive analytics can help increase average unit volumes significantly over time.  Here are some of the ways predictive analytics empower decision-makers to see more clearly:

  • Provide access to more facts to support judgments
  • Reveal patterns in the facts that create insights
  • Simulate decisions before actually executing them
  • Establish a common “language” of factors important to decision-making
  • Benchmarking with a checklist of factors to consider before making decisions
  • Visualization of facts and patterns as a catalyst for interactive exploration and discussion among decision-makers (e.g. “paperless” real estate committee meetings)
  • Maintaining an objective record of decision logic for learning and improvement

These are propositions of value, and when applied to a specific company, they may become part of a value proposition!

“What if” – Moving from Realistic to Real

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Chain store companies are increasing their use of predictive analytics in many areas including market optimization, sales forecasting, direct marketing, and localization of product offerings.

The value of simulating decision outcomes before investing financial and human resources is compelling.  Therefore, much attention has been focused on algorithms and user interfaces that make it possible for analysts and executives to compare alternatives using “what if” scenarios.

So here’s a big fat “WHAT IF”:  what if the data that are used in the models are not accurate?  What if the location of your existing stores or competitors don’t reflect “ground truth?”  The answer is, you will get maps, reports, and sales forecasts that appear REALISTIC but they are not REAL.

After years of resistance, chain store executives are becoming eager to use more “science” in the planning and evaluation of store locations.  What does “science” mean in the context of a complex system like the retail marketplace?  It’s certainly not a set of well-defined cause and effect relationships that can be predicted with precision, such as the movement of the planets.

A better description would be “fact-based” decision-making, which means capturing relevant and accurate data about the marketplace and inferring conditions that are favorable for the operation of chain stores.  These facts include trade area demographics, proximity of sister stores and competitors, and the quality of the site.  It is certainly possible to create mathematical models that simulate the interaction of these factors in order to forecast sales, but the ultimate decision to approve an investment requires the experience and judgment of experts who use modeled estimates with other sources of facts and opinions.

Regardless of the specific approach to making decisions, if the “facts” are not accurate, mistakes can happen.  Models will generate inaccurate estimates, and experts could be misled by maps or reports that have existing stores or competitors in the wrong locations.

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It’s not easy to capture and validate accurate location information, especially when the database covers a large geographic area such as the entire US.  When you are designing decision support systems that rely upon these data, invest in content and processes that will make your software and models give you reliable answers.

Here are some of the keys to good data quality:

  1. Research the sources of content including demographic data and business locations and compile a list that compares the quality and price so that you can find the right combination for your needs.  Some data sources are VERY expensive and not a lot better than some that are more affordable.  Others are VERY cheap, but you get what you pay for.
  2. Design a process for getting your staff to update and correct business locations when they find differences between maps or reports and what’s in the real world.  Sometimes it’s necessary to designate a “chief editor” for changes to make sure that locations are not duplicated or changed incorrectly (e.g. new longitude coordinate is missing the negative sign).
  3. Select a software platform that allows you to make the changes yourself rather than relying upon a vendor to change them.  Ideally you should be able to have changes synchronized across all platforms and devices, whether desktop, web browser, or mobile (eg smartphone or iPad).
  4. When you are getting ready to spend a lot of time on a market plan or site evaluation, spend extra time validating the locations (existing stores, traffic generators and competitors) in that area.  It’s not practical to try to validate the entire US at once, with the exception of your own store locations.

ImageYour models, maps, and reports will only be as good as your data.  Before you spend $100,000 or more on a system to support your real estate planning and site selection, make sure that you are powering it with good fuel!

The Whole World’s Watching

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We’ve been hearing about global expansion by  chain store retailers and restaurants for years.  Most people probably think that in many parts of the world this is an “imperialistic” initiative by US and European companies.

My blog statistics indicate that there’s global interest in chain store development from local people. Continue reading →

Here We Go Again

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The economy is showing signs of perking up.

Although retail store closings are expected to continue at a strong pace in 2012 (see http://www.forbes.com/sites/erikamorphy/2011/12/31/2012-another-bad-year-for-store-closings/), many retailers and restaurants are staffing up for growth and looking for deals.

Is this the pregame warm-up for the next cycle of boom and bust?  Or maybe, just maybe, there’s a smarter, more disciplined group of decision-makers running the chain store companies today.

As I mentioned in an earlier post, the chain store industry doesn’t have well-defined best practices in real estate planning and site selection.  In order to begin a dialog on this subject I have created a “rubric” that describes various practices at different levels of effectiveness that can be used as a self-assessment tool for people in the chain store industry (click here for the Best Practices Rubric).

There are only nine items on the rubric, so you should be able to complete it in 5-10 minutes unless it causes you to think hard about what you’re doing, which would be a good thing!  Simply circle the description of the practice that best describes your business and when you’re done, add up the points as indicated at the top of each column.

The total points will range from 9 to 36, assuming you complete the rubric.  Based on my experience and exposure to chain store companies over the past 18 years, I would interpret the scores as follows:

0-15 points:  If you are still in business, it’s because you have smart, street-wise people              and probably aren’t doing very many deals each year.

16-20 points:  You are about average for the industry, which is OK if you don’t mind being average.  However, you won’t be able to stay average without improving, given the the struggling economy, growth of “omni-channel retailing” and the new breed of tech-savvy competitors.

21-27 points:  You know that you’re doing a good job because you have made a conscious decision to create good decision-making processes supported by good people and good tools.  You are already thinking about how to stay ahead of the game and work smart, not just hard.

28-36 points:  The business practices of your company are truly “best practices” and you represent the elite of the industry.  You might be reluctant to share what you do because you know that you have a serious competitive advantage.  However, you will probably talk about it anyway because of the positive energy that market leaders generate with employees, investors, customers, and partners.  We thank you for your leadership!

I look forward to your public and private comments on the rubric and the general subject of best practices in real estate planning and site selection.

Chain Store Planning: The Missing Link

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The 4 P’s of Marketing (Product, Price, Promotion, Place) have been around since the 1950’s.  For chain store operators, PLACE is more critical than for other types of businesses.

A better term for PLACE is DISTRIBUTION, but of course it starts with “D,” so it never made it into the 4 P’s.  DISTRIBUTION is a term used to describe what is commonly called “the supply chain” and the facilities involved in distribution are “the supply chain network.”  These facilities include factories, distribution centers, and retail stores. Continue reading →

Breakthrough in Market Planning

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I attended a franchise trade show recently and visited with a company that was selling multi-unit territories that had been pre-defined based on the expected number of development opportunities and their approximate locations.  The map they had on display looked something like the diagram on the left below, where the green and orange boundaries represent territory boundaries and the black dots are target locations for stores.  The franchise rep said that the target locations had been generated by a sophisticated modeling program and then field-validated by the real estate team.

A more traditional territory plan is shown on the right, where each target store location is a point representing the ideal center of the trade area which is a polygon showing the primary trade area.

I certainly commend this operator for using “best practices” in market planning by laying out their territories in advance and proactively offering them to prospective franchisees. 

What’s interesting about the map one the left is the way that the boundaries are just large enough to surround the points.  This means that a franchisee can select locations up to the edge of the boundary without worrying about encroaching on the stores in the adjacent territory because there is a “buffer” between the stores built into the market plan.  If the buffer is based on the appropriate level of spacing between stores based on the density of the area (e.g. urban, suburban), then it’s a great planning tool.

The problem with the traditional approach shown on the right is that franchisees in adjacent territories might select a location closer to the same edge of the territory and have significantly overlapping trade areas.  One solution to this problem is tocreate a second zone within each trade area that limits the range of choices for a site and creates a buffer similar to the one built into the map on the left.

This is the first time I’ve actually seen a map like the one on the left in a live sales situation and I believe it’s an important step forward in the state-of-the-art in market planning.  It certainly doesn’t eliminate every issue that can arise between franchisees in adjacent territories, but it establishes some clear expectations at the beginning of the process that reduces the chances of conflict at some point in the future.

2012 Predictions for the Chain Store Real Estate Industry

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I guess it’s a good time to do a “2012 Predictions” post.

I’ve been talking to a lot of people about best practices in real estate planning and site selection during the past year.  Many of my observations and insights have appeared in this blog since May 2011.  Looking ahead to the next year, there is evidence that some of the “forward looking” comments from last year will begin to appear in the practices of leading companies in 2012.

Retail store sales during the 2011 holiday season were flat compared to last year (there are so many stats I don’t even want to quote one).  The bigger news was the increase in online sales, and the biggest news of all was the increase in purchases from mobile devices such as smartphones and tablets.  This puts “teeth” in the trend toward “omnichannel retailing” that signals a new paradigm in consumer behavior and requires a new approach to retail real estate planning.

Here are two general predictions about the chain store real estate business for 2012:

#1 Betting on Clicks or Bricks

Given the continuing weakness in the economy, capital investment in store development will be more carefully scrutinized by senior management than ever before.  Given the growing success of the online and mobile channels, there will be more conversations between The CEO, CFO, CMO (Chief Marketing Officer), and CDO (Chief Development Officer or VP Real Estate in most companies).

New questions will be on everyone’s minds and lips.  Instead of “how many stores should we add this year net of closings,” people will be asking “how much can we grow sales without adding stores?”  Another way to ask the same question might be “what’s the ROI on store development compared to promotion and discounting through other channels?”

These questions will lead to some innovative planning and business models that will look very different from the traditional approaches that have not changed much in the past few decades.

#2 Performance Improvement

Investments in technology to improve real estate planning and site selection have grown dramatically in the past five to ten years.  Most of the larger chains and many smaller ones have a Real Estate Research Director or Senior Analyst who is responsible for delivering strategic plans and sales performance estimates to the decision-makers.  They have armed themselves with mapping and demographic programs, databases, and analytical tools based on everything from excel to sophisticated statistical models.  Almost everyone agrees that research can improve performance and that the investment in analysts and their tools is worthwhile.

The question remains:  how much of the potential value from research activities is being realized?  Is there room for improvement?

My prediction for 2012 is that investments in analysts and technology will continue, especially for companies that have been slower to get on the analytics bandwagon.  However, the new focus will be improving the “people” side of research.  This starts with benchmarking business processes against best practices in the industry and extends to consistent training programs to align the deliverables from research with the decision requirements of everyone in the real estate process including senior management, dealmakers in the field, and people in other departments such as marketing and merchandising. 

There’s been a lot of talk about “enterprise GIS” and “localized assortment planning” in the past few years.  The reason this is on my list of predictions is that all of the prerequisites to actually implement such performance improvements are now in place.

a)       The technology is good and has become affordable, especially with “cloud computing” which allows companies to build a platform gradually with variable costs instead of committing to a huge IT infrastructure investment to get started.

b)       The need to integrate real estate planning with other channels at the highest level is crystal clear based on the growth in online and mobile sales and the social media phenomenon

c)        The large capital investment required for bricks and mortar stores has become harder to justify in a weak economy that shows no signs of bouncing back quickly as in past cycles.

By this time next year there will be some great case studies of companies that are actually doing these things and reaping the financial benefits (although it might take another year to quantify this in a convincing manner).

In the interest of accountability, I have marked my calendar to follow up on these predictions one year from now.  I hope I can find some good cases to talk about then or we may not have a very happy new year in 2013 and beyond!

Do We Have Industry Standard Practices in Retail Real Estate?

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Why does any industry have standard practices?  Every business is different, even within an industry, so what’s the point of trying to standardize?

Industry standard practices are a lot like the rules in a game.  They provide a systematic, consistent, and proven framework within which the players develop their strategies and exercise their skills.  Having rules doesn’t make you a winner, but they make it possible to become a winner by promoting the following competitive strengths: Continue reading →

Freedom through Structure: Optimizing Chain Store Real Estate Processes

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You hear the complaints all the time.

“The field people only react to the deals that the brokers present to them.  They don’t take the market planners seriously when we target certain trade areas.”

“The analysts (aka “geeks” or “deal killers”) think they know everything because they have mapping and statistics programs.  They have no idea how the real world works.”

“I can’t open enough stores because the paperwork takes forever.  It’s easier to get a PhD than get a deal through our approval process.”

Is this just the way it has to be?  Dealmakers vs. analysts? People who drive sales and people who prevent sales?  Entrepreneurs vs. bureaucrats? Continue reading →

The Three Biggest Mistakes in Retail Real Estate

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Are you tired of hearing people use the phrase “location, location,location?”  It is an insult to both the speaker and the listener.  It’s like saying the most important thing in pro sports is winning, or that the most important outcome in investing is making money.

Now that we’ve survived another round of massive store closings and bankrupt retail and restaurant chains, let’s see if we can shed some light on the path forward for real estate planning and site selection.

I would argue that mistakes are made at three levels:  market selection, market planning, and site selection.  All three are critical to the success of a chain store real estate program and the types of mistakes that cause pain and death are different for each. Continue reading →