COVER STORY: Digging deep

Press enter to search
Close search
Open Menu

COVER STORY: Digging deep

By Jenny McTaggart - 07/01/2007
In retail site selection, mistakes can be detrimental to a company's health. Just ask chains that have entered a new market prematurely, only to be forced to shutter a store because the growth never came, or the multitudes of grocers that are running unprofitable in-store pharmacies because they didn't first consider the powerful market share of existing drug chains. Fortunately for grocers, however, help is on the way, in the shape of a slew of modeling tools and data analysis applications now hitting the market. Leading retailers, among them Cincinnati-based Kroger Co. and Rochester, N.Y.-based Wegmans Food Markets, are already taking advantage.

Wegmans is now supplementing tried-and-true gravity modeling with deeper data such as income level and ethnic makeup. Kroger, meanwhile, is staying on top of population trends like never before, by using a demographic package that's updated quarterly. Kroger and other operators are even beginning to dabble in lifestyle segmentation, to home in on populations with specific characteristics.

More chains are also relying on in-house data from loyalty card programs to estimate the impact of building new stores in markets where they already operate, thus helping to avoid cannibalizing sales.

In addition to helping grocers find the best sites, these tools can come in handy for making merchandising and marketing decisions, to create a strategic trifecta for the operator that can hit it right on all three counts. That's more important than ever, since many grocers are choosing to focus on remerchandising and remodeling existing stores instead of building new units.

Yet with all of the promise such new tools hold, technology alone won't save the day. Retailers must invest in shoe leather, the experts advise.

"As real estate analysts, we have to be careful," observes Paul Gilbert, director of real estate at Wegmans. "We're beginning to have access to much more useful tools, but that doesn't mean we can do all the work sitting in an office."

Site selection specialist Bob Gorland, v.p. of Matthew P. Casey and Associates in Clarke, N.J., agrees. "The amount of data available from different vendors doesn't substitute [for] the amount of time an analyst or consultant must spend in the field reviewing competition, understanding strengths and weaknesses, knowing where the growth areas are, and knowing what the pricing in a certain market is like," he says. "That time in the field is skimped by many people, but it's the most important area."

In addition to technology, people are an essential resource when studying a market, notes Jim Chambers, v.p. of real estate at Mauldin, S.C.-based regional chain Bi-Lo, LLC. "Market research will continue to get faster and more reliable as more information sources are made available in electronic format, and are similarly updated more frequently," he predicts. "However, site selection still requires qualified real estate and development personnel to know what's happening in their market areas."

After all, there are many factors to consider when building a new store, he notes, including competitors' activities, changes in road conditions or travel patterns, changes in major employers, school changes or consolidations, and changes in quasi-governmental utilities, just to name a few.

Wegmans gets creative

As if the job weren't already difficult enough, site selection has become much more complicated in recent years, due to factors such as encroachment by alternative retailers, fiercer competition in general, and the drastically longer times it now takes from the initial site selection to the store opening, observers note.

"It's challenging. The easy sites are gone," admits Gilbert. "And if you're looking at a high-growth area, you can almost guarantee that your competitors are going to build there, too."

With a portfolio of 70 stores in a five-state region, Wegmans currently has 11 units in various stages of development that are scheduled to open in Maryland, Pennsylvania, Virginia, New Jersey, and New York.

For Wegmans in particular, a unique challenge is the sheer size of its stores. "Our stores are 140,000 square feet or more, so we're going up against groups like Home Depot, Target, Lowes, and Wal-Mart for large sites," he notes. "In certain counties, we've acknowledged that we want to be there, but after six years of looking, we're still unable to find a suitable site."

Does that mean Wegmans will rethink its format size, as many other retailers have begun to do? "We're going to consider more creative options, but we're not ready to design a smaller footprint at this time," says Gilbert. "We feel that the larger-store format sets us apart from our competition -- it allows us to offer the services, departments, and products that we stand out on." However, he does admit that the retailer may need to look at doing bi-level stores, a la Whole Foods and others.

Like most U.S. grocers, Wegmans' real estate team relies on gravity modeling in the early stages to project the potential success of new stores, according to Gilbert. The gravity model, essentially a modified version of Issac Newton's Law of Gravitation, helps predict how people in a certain market will shop, based on population patterns and existing stores.

Today, however, different demographic components must be considered within these models, he notes. "Oftentimes you want to look at family size, age of the population, and possibly ethnicity, depending on what type of store you may be projecting."

Supermarket gravity models are continually being fine-tuned to take into account alternative competitors, says Gorland. "On the gravity-based computer model we use, there's a new feature that deals with store loyalty. If we think it will be very difficult for a retailer to steal sales on a new site from an existing competitor, we can give that competitor a higher loyalty factor in the model."

One of Wegmans' site selection vendors, Pitney Bowes MapInfo, is working on developing more modern gravity modeling systems. "We're in the process of updating the gravity model to be more seamless with all the competitive packages out there so that they become more user-friendly for analysts, allowing them to go back and forth with data sets in a minimal amount of time," explains Bob Kennedy, director of client services for the Ann Arbor, Mich.-based location intelligence provider.

MapInfo's forecasting tools range from a basic tool called S3 (Smart Site Solutions), which develops a customer profile and a competitive profile for clients, to a more advanced optimization system that can simultaneously forecast as many sites as desired, based on particular attributes.

Nowadays many retailers choose to pick out a suitable market first, and then look for store locations as they become available, notes Kennedy.

"Busch's, which is a more upscale conventional operator [in Ann Arbor], has been successful at looking for new marketing areas," he says. "They adhered to the idea that it isn't the site per se, it's the trade area. If you find the right area, the site will then happen."

This seems to be the trend du jour. Edens & Avant, a privately held commercial real estate company and shopping center enterprise, also starts at the macro level when working with supermarkets.

"We evaluate markets that show potential for development," says David Beitz, geographic information systems manager. "This involves studying areas at the Core Based Statistical Area (CBSA) level, which was formerly called the Metropolitan Statistical Area (MSA) level. Next we evaluate county and city areas by reviewing population growth, income levels, planned and recently completed projects, traffic counts, new and planned roads, existing retail locations, and residential growth. We perform a gap analysis to identify retailers not in the market, or retailers that might consider an additional location in the market. Then we drill down and identify the available sites that fit the criteria of the retailers."

The process requires an "enormous amount" of spatial data, so Edens & Avant relies on GIS software, notes Beitz. Gravity modeling is also an important tool to calculate dollars available in the market, he adds.

But along with its reliance on technology, Edens & Avant also recognizes the importance of people to provide further analysis. "The analysis tools and data required to make decisions have increased dramatically. As a result the manpower needed to analyze the data has increased," says Beitz.

Kroger's homework

Kroger is one retailer that's constantly studying new markets. Population is still the most important factor when looking for new sites, according to the retailer's assistant v.p. of corporate development research, Dale Caldwell. "The prime consideration is the number of people, where they are, and where they're shopping," he says. "Lifestyle factors do play a larger role than they did years ago, but that's because the data is now available."

To keep up with the latest population trends, Kroger uses the STI: PopStats product from Austin, Texas-based Synergos Technologies, Inc. "One of the main reasons we started using this demographic package as soon as it became available is the methodology behind it, the source of the data, and the fact that it's updated quarterly," explains Caldwell.

Synergos provides history with its data, which helps companies understand population trends, says Robert Welch, president of Synergos Technologies. "With our numbers you can not only see if a neighborhood is growing, you can also see if it's at the beginning of a growth curve. Likewise you can see if a neighborhood's growth is beginning to plateau."

The tool also helps retailers stay on top of shifting demographic trends, such as ethnicity and income.

Kroger is also employing the STI: Landscape program, a lifestyle segmentation system. "STI: Landscape reports on the lifestyle trends of people who live in a trade area," notes Welch. "So if a chain specializes in price-oriented goods and services, they can see how consumers will likely react."

Synergos can work with up to 72 lifestyle segments, although most grocers haven't gone that deep with the data, he says. "Grocers are still tinkering with this, because it's radically different from what they've used in the past," he explains. For those retailers that feel adventurous, there's a health index to see how healthy shoppers in a certain area are, as well as a political index in case your store tends to appeal to one political party.

The vendor also offers STI: Workplace to show where people in a specific market are working.

All-in-one tool?

Similar to what Synergos is doing with its lifestyle segmentation tool, several providers of household-level segmentation systems are encouraging more grocers to consider their tools for site selection purposes. Up until now, the majority of these applications have been used for store-level merchandising.

Fort Worth, Texas-based Buxton entered the "CPG space" about a year ago. The company had had success providing customer analytics for site selection with "destination retailers" such as Kinko's, Pier 1, and Container Store, says Buxton e.v.p. Todd Walls.

In the grocery industry, however, many executives have traditionally maintained a "silo mentality" when it comes to using the same data for multiple uses, maintains Walls. "This is pretty new to the CPG space. No longer should you have three different approaches: marketing, merchandising, and real estate. Instead the three approaches need to be part of one model that points in the same direction. So you find the best location, merchandise correctly to who's living there, and market to the right person from day one."

Buxton starts its analyses with household-level data at the ZIP-plus-four level. "These databases describe who the consumers are, what media and services they buy, and what they do in their free time. It tells us how they use a company's products," says Walls.

"Demographics provided from block-level data aren't enough today," he observes. "You need psychographics to understand who these consumers are and how they spend their money. Unless you know these differences, you can't truly have an effective real estate strategy, or marketing and merchandising strategy, which in our eyes is all one thing."

Once Buxton helps its retail clients identify their best customers, the company can help determine how many locations the retailer can have at saturation level, he says. "We'll help them create a five-year real estate plan."

Another company that provides analytics and segmentation for grocers is Acxiom Corp., based in Little Rock, Ark. Its household-level segmentation system, called Personicx, assigns households to one of 70 clusters, which are divided into segments based on life stages. Its new site and segment analysis tool, Personicx MarketScape X, is a Web-based interactive product.

"Personicx MarketScape X can analyze consumers and sites using an interactive mapping piece," explains Ray Kraus, Acxiom's product manager for analytics and segmentation. "This allows our data to become interactive to answer questions on the fly."

His vision for the new tool: "We'd like to take existing store locations and put appropriate trade areas around them -- based on drive time or some other factor that the retailer determines. By doing that and looking at the customer composition in a trade area, as well as sales behavior for each store as it relates to these consumers, we can actually group store trade areas together."

Like other retailers, grocers are just beginning to realize that their real estate decisions are "joined at the hip" with merchandising and marketing, notes Matt Germain, Acxiom's client representative for the retail industry. "Companies like Whole Foods and Trader Joe's understand," he notes. "The closer a retailer gets to a neighborhood concept, the more they need distinct household-level data."

While not every retailer has perfected the neighborhood market concept, a growing number of chains are using their own data to help with marketing, merchandising -- and yes, site selection. Buxton often relies on its retail clients' loyalty card data to power its drive-time demand model, notes Walls.

Kroger, Wegmans, and Bi-Lo are using loyalty card data when they build new stores in an established market. "Based on the loyalty data we have on an existing store, we can determine the trade area very accurately -- what people are buying and what they're spending," notes Kroger's Caldwell. "We're more accurately able to predict how much it would impact an existing store if we build a new one."

Notes Bi-Lo's Chambers: "Bi-Lo Bonus Card information has enabled us to move quickly to qualify and identify new or relocation opportunities in our current store network. It's more reliable than in-store interviews with customers, and less obtrusive."

The future of site selection

While lifestyle data vendors envision their tools as even more necessary in the future of site selection, some retailers have their reservations -- at least for now.

"The psychographic analysis is becoming more and more prevalent, and pushed by many of the demographic suppliers," says Wegmans' Gilbert. "The only opposition I've had to using it so far is that there's somewhat of an inability to quantify sales projections. It can support the data you have. You can know what type of cluster groups frequent your store. But to actually generate sales based on hasn't been proven."

Indeed, demographic data is a great resource -- but at the end of the day, grocers still recognize the value of heavy field research. Site selection specialist Gorland stresses that retailers should get to know the intricacies of a market from local builders and developers, Web sites that offer information about building and construction permits, and real estate specialists.

"As sites get more scarce and building costs and break-evens go up, it becomes even more important that you're getting good, competitive data, and good data from planning agencies," he says. "The last thing you want to do is look at a site and not dig hard enough to see that a Wal-Mart Supercenter, Costco, Trader Joe's, or an independently owned ethnic grocer is looking, too."

Another important consideration: Don't think a one-size-fits-all format can go into any location. "Many chains will put a pharmacy in every store out of habit. But that just shouldn't be done if there's already extensive pharmacy competition in an area. I'm seeing many situations where retailers operate unprofitable pharmacies, resulting, of course, in a big bottom hit to the store."


Out of sites?

Grocers have mixed opinions about their current options for real estate. While some see the choices as limited, others see new opportunities that simply require some extra ingenuity. Here are a few comments about the state of site selection from retailers in the trenches:

In the Southeast, there's still opportunity for organic growth, says Jim Chambers, v.p. of real estate at Mauldin, S.C.-based Bi-Lo, LLC. "New sites in our core markets in South Carolina, North Carolina, eastern Tennessee, and north Georgia are presented to Bi-Lo every week."

The key challenge for Bi-Lo has been that in several of its markets, municipalities are beginning to limit the amount of zoning permitted for retail opportunities within geographic areas, he notes. "This now forces retailers to look beyond a one- to three-year plan. It may require planning for five to seven years in advance, and possibly land-banking sites." Bi-Lo has successfully land-banked several locations in the past, and will continue to do so, he says. But to succeed with his strategy, a company's due diligence process must keep current with the times, he advises.

Another major challenge is that the time frame from site introduction to lease execution to store completion has lengthened, according to Chambers.
Like other retailers, Bi-Lo has become more flexible with its store design to find more sites, but this has been done "within limits," he says. "Our current prototypes are either a 48,000-square-foot store or a 57,000-square-foot store. We will adjust the dimensions of a store to meet a new site's property limitations, but typically we will not significantly reduce the size of a store from the prototype." There are always exceptions, he adds, "like a good metro downtown store with an average or better parking field. We are currently working on a few options in our core markets that will be a little smaller than the prototype."

Dale Caldwell, assistant v.p. of corporate development research at Cincinnati-based Kroger, confirms that "there’s a lot of growth happening...a lot of sites are becoming available." He's hip to the many redevelopment opportunities across the country. "There are places where before, you never would have considered putting in a supermarket because the cost and space didn’t allow for it. Now you'll see someone tearing down an old factory, and a developer will come in and build a new complex with parking underneath and condominiums on top." While these developments can be quite expensive, in some case retailers share the cost with others.

Kroger is considering unconventional sites that may have parking underneath, he notes. "We're willing to modify footprints to fit, as long as the bottom line will justify it."

As for land banking, Caldwell remains cautious. "Ideally, one would like to be able to land-bank. But sometimes that’s difficult to do, because you're investing money upfront and not getting an immediate return," he says.