Few business decisions impact a company’s P&L more than a decision to invest in a new location. Get it wrong and the costs implications are huge – rent, fit-out, operating losses, lease termination payments, asset write-off, legal fees etc. Add to that the executive management time spent on trying to fix a low performing store and the total cost will very quickly be measured in the millions of dollars. Get it right and the new locations can be amongst the most profitable in the network.
So how does a franchisor or business owner choose locations that minimise risk and create significant new revenue potential?
Know your customer
Many business owners have thought carefully about their core customer profile – age, income, sex, family structure etc. and that’s a good start. Some business owners go a step further and consider the customer life stage or life events that are associated with their purchase decision.
It’s also important to consider the customer’s travel path associated with their purchasing behaviour.
- Is the customer purchasing close to home or close to work?
- How far are they travelling from home or work?
- Is the customer bundling the purchase with another activity or is it a destination in itself?
Capturing customer location data is key. What we’re trying to understand is what we call ‘distance decay’ i.e. the distance beyond which most customers stop visiting a particular shop because it’s too inconvenient to visit regularly. For many ‘local’ businesses like cafes, childcare centres and convenience retail outlets about 50% of customers will live within 5-minutes or 2km of the shop. About 75% will live within 3km or 7 minutes. Thereafter it’s the customer outliers that make up the remainder.
Distance decay is a critical insight because it informs decisions about how close the new stores can be to existing stores without creating excessive cannibalisation or leaving gaps between stores in high trade potential areas.
Define the catchment
If you have one of the more successful sites and you’ve been through the Know Your Customer processes, it makes sense to replicate what you already know works.
An analysis of your existing successful store locations can provide a precise summation of the catchment characteristics. The summary should include the count of target customers by age, income and perhaps ethnicity, family structure or dwelling type or any of the multitude of variables collected through the census process. For B2B businesses it might be an extract from the Australian Business Register that provides a better catchment insight. Other insights like household expenditures on specific retail categories can also be obtained.
- Consider the importance of competing brands and whether the existing high performing store is located amongst the competitors (like a car showroom or some restaurants) or whether the better performing locations have little in the way of direct competition.
- Are there a reference or anchor brands that are positively influencing sales?
- Who are they and how close are they to your store?
- You should also consider location adjacency to other business generators like schools, universities & shopping centres.
- Consider also the location type of the existing high performing store
- Is it in a neighbourhood shopping centre, or a large format retail centre or is it located on the retail high street?
Replicate what you know works
The lowest risk and high performing potential locations will be those that replicate what you have already proven works. By defining what characterises your existing successful locations it becomes possible to search a market area for new catchments that replicate those same characteristics.
There are very few locations in Australia that are genuinely unique. In almost all cases there are relatively large numbers of locations that are very similar to existing successful locations.
Those location opportunities might then be scored and ranked according to how closely they match your existing high performing locations. The expansion strategy should start with locations at the top of the list because they’ll most closely match what you already know works.
We’re fortunate in Australia to have some of the best census, household spending and customer profile data in the world. Additionally, location intelligence is no longer an expensive luxury afforded only by the global corporates and the largest of Australia’s retailers.
Making fact-based, low-risk decisions about store expansion is not a secret – it’s just about collecting and analysing data to create insights and make informed decisions.
Connect with GapMaps to discover how our location intelligence processes can assist you to set the right strategy and select the right locations to successfully grow your business.