Chapter 10
Finding the Right Location and Its Costs
In This Chapter
• Evaluating your location options
• Locating near customers
• Determining costs
• Negotiating contracts
Picking the location for your store can be one of the most exciting tasks and definitely one of the most important. I’m sure you’ve heard that “location, location, location” are the three most important decisions in any real estate transaction, but in retail it’s even more crucial. Today, there’s no guarantee that customers will come unless you locate your store where they are or where it is convenient for them to go.
In this chapter, you find out how to select the right location considering your store concept as well as the area’s demographics, competition, and security. We’ll explore your options from a mall location to a main street one. Finally, we’ll review the key things you need to know to get the best deal from your landlord.
Store Location Can Make or Break You
A good location for your store can be much more valuable than any advertising you do. Over the course of a year, you’ll find that it’s cheaper to pay the rent required for a good location than to pay for the extensive advertising needed to pull people into a poorer location—if you can get them there at all.
If it’s hard for your target customers to get to you, if there’s no parking near you, if the area is not safe, or if the building you are in does not reflect your image, you won’t draw the kind of customers you want no matter how much advertising you do.
Your Goals
Your goals in finding the perfect location for your store should include a location that:
• Drives customer traffic (foot and commuter traffic).
• Attracts employees.
• Projects the right image.
• Ensures your competitiveness.
• Allows you to run your store efficiently.
• Meets your budget.
As you find the many available options, choose only those that help you meet these goals.
Recruit a Real Estate Partner
You may need help finding the best location, so you shouldn’t hesitate hiring a real estate professional who understands small business needs or, even better, who understands the retail industry and your target customers. Ask business or retail owners you know for recommendations of a good agent, especially if they had great success with someone who helped them find their location. If no one you know can recommend someone, you can also look for real estate professionals with either the Society of Industrial and Office REALTORS® or the CCIM Institute.
Selling Points
If you don’t know a real estate professional, you can use many sites on the Internet to find a local professional such as www.allcommercialproperty.org or www. loopnet.com to find both properties and companies that can help you.
Be Near Your Target Customers
Your first question when looking for a location is: “Can I be anywhere or do I need to be located in a particular area?” Generally, if you have been in business for some time and have a great following, you can open a store—your second or third store— “anywhere” and become a “destination” for your loyal customers and their friends.
But if this is your first store and customers don’t know you yet, your location becomes more important. Customers are not going to seek out your store unless you are right where they are or where it’s easy and convenient for them to get to.
Examining Demographics
You need to know where your target customers are located. Pick an area where your target customers live or work. If multiple options are available to you, get to know each area’s demographics including age, gender, ethnicity, occupation, household composition, and income.
Knowing an area’s demographics can help you find the right location. Only locations with a customer base like the one you are targeting should be considered. For example, you shouldn’t open a store in an affluent neighborhood if your store carries low-price, average-quality merchandise and offers limited service. This type of store would be more successful in a low- to mid-income area where customers are more interested in saving money than service or high-quality products. Or, if you plan to open a gourmet food store specializing in Eastern European imports, you are more likely to succeed in a community with a high concentration of Eastern European residents.
Affordable Demographic Data
You can get a good sense of the community surrounding your target store location by looking at basic data from the Census Bureau. Census demographic information can tell you the numbers and types of people who live in a certain geographic area, classified by age and sex. It can also tell you the number of households, the average household size, and the average, median, and per capita income levels in a given area.
Selling Points
Looking for access to demographic data for free? One good source on the Internet, FreeDemographics.com, lets you create customized market analysis reports for any geographic area.
For a monthly fee or annual subscription, you can also access demographic reports and maps from Claritas (www.claritas.com), a marketing company which helps gather demographic data and target marketing information about the population, consumer behavior, consumer spending, households, and businesses within any specific geographic market area in the United States. Another website, www.mapinfo.com , has a great retail site selection component you should check out.
To Be or Not to Be … Near Your Competitors?
You may think it’s best to locate somewhere your competitors aren’t, as long as your research indicates there’s a market for your products or services in that area. You won’t have to share customers with your competitors because you are the only choice for them. Also, you won’t need to compete on price. While these are all good reasons for locating your store where you are the only “game in town,” most retail experts will tell you it’s better to be closer to your competitors.
There are many reasons for this argument:
• Some competitors choose to “cluster” in close proximity because they are selling unique, but similar, items. By clustering together, they can draw more customers. For example, art, jewelry, and high-fashion clothing and shoe stores often find it advantageous to be close to their competitors. Customers who shop at these kinds of stores tend to go where they have numerous stores to browse.
• While foot traffic is obviously important, landing the “perfect” customer is far more crucial. By being close to your competitors, you can benefit from their marketing efforts. Successful competitors chose their locations based on the ideal demographics of a particular area. In many cases, they’ve also devoted large portions of their advertising budget toward driving traffic to their locations. You’ll likely find they have already conducted the necessary market analysis and you won’t need to spend more money on this.
• Competitors can make you better. Because survival of the fittest is the game, you are always striving to do more and better for your customers to entice them to shop with you instead of your competitors.
To succeed with this strategy you need, of course, to be confident enough in your product to outsell your competitors.
Other Business Neighbors
Another successful strategy for picking your location is to find a spot near indirect competitors—stores that do not carry similar products to yours. Opening your store near stores that cater to the same clientele with different products allows you to draw from their customer base. These stores are very often called “magnet” or “anchor” stores, which refers to their ability to attract a large number of customers. A good example of a magnet store is a large grocery or department store.
Savvy Retailer
A large wine and spirits store I worked with a few years ago opened a store right off of a major highway exit in a complex that had a Staples store and a large empty store space next to it. The landlord announced that the empty space was going to be rented out to Trader Joe’s, the grocery chain. Our retail client wanted to oppose the deal, fearing that Trader Joe’s wine department would compete with his business and take customers away from him. I explained to our client that the proximity to a grocery store was the best thing that could happen for a number of different reasons. First, Trader Joe’s draws incredible foot traffic. Second, Trader Joe’s has the same customer base— mid- to high-income people who love to entertain and love wine and food. Third, Trader Joe’s wine selection is bargain wines primarily and my client offered better quality wines for great values at the mid- to high-price level.
If you locate close to a magnet store, you can maximize your benefits from their traffic by planning your store hours to coincide with those of the magnet. If possible, you should even think about opening your store a little earlier and closing it a little later than the magnet. This way, your store can benefit from customers arriving before the magnet opens, as well as shortly after the magnet store closes. Depending on your store, the magnet store’s employees could be among your early and late customers.
You should also try to coordinate your promotional and sale activities to those sponsored by the magnet. As a small business owner, you normally have the flexibility to make on-the-spot marketing decisions. For instance, if you see that the magnet store is holding a major sales event starting on Monday, you can go in over the weekend and set up your sale. If the magnet is not a competitor, you may be able to get advanced notice of these events, and have time to advertise your sale as well.
You should also consider other types of businesses or schools when picking a location, such as office parks, schools, colleges, and hospital complexes. All of these can help generate much-needed foot traffic (or commuter traffic). For example, if you wanted to open an art materials store, the best location for your store would be next to an arts college. You’d have a lot of your target customers shopping at your store, including college students, professors, and artists.
Convenience Above All
A great location must be convenient for your customers. Your store must be easy to find with ample parking spaces and street visibility. Also, you should be near reliable public transportation, so your employees can get there. In addition, you want to have a hassle-free commute.
Ready Access for Customers
You need to make sure that your chosen location provides easy access to enough potential customers to support your business. This is why many retailers choose a location that puts them in the midst of heavy car or pedestrian traffic.
If your store depends in large part on drive-in or walk-in customers, even the side of the street you are on can make a difference. If you are on a street where most of the commuter traffic goes one way in the morning and the other way in the late afternoon, you’ll probably do better with a location that’s on the return-home side of the street. But if a large part of your business involves the sale of items to be consumed at, or on the way to, work—such as coffee and donuts—you’ll do better on the other side of the street.
Easy Access for and to Employees
For many small retailers, the ability to attract and retain qualified employees can be critical to their success. You should carefully consider the availability of qualified employment prospects within a half-hour drive of your location. You also must look at public transportation access and service because it is very likely your employees will be using it.
If good public transportation is not available, your employees may be late regularly or get frustrated with the commute and quit. If your store is located far from public transportation and the only way for employees to get to your store is by car or cab, you might have difficulty finding people who want to work for you.
You Count , Too
While your key location questions will be based on financial considerations, don’t forget to meet your own personal needs. Remember, part of the lure of store ownership is the ability to control not only how much you make, but how you make it.
If you are like most small business owners, you can expect to spend a large chunk of your time at your store. Quality of life issues are as relevant to the location choice as you wish to make them. Don’t forget to ask yourself these key questions:
• If you have a choice of locating the store in several different locations, which of them would you rather spend that much time in?
• How long are the commuting times between your home and the various choices?
• If one location is in a place where you really don’t want to be, but it appears to be the best choice from the point of view of business efficiency and profitability, would you be prepared to sacrifice some profit to obtain your desired business lifestyle? If so, how much?
Selling Points
While it might be tempting to locate a new store in your own community—it is convenient plus you already know the demographics—you need to look at what it’s going to cost you to operate in that community. Other locations might be a better business choice because of lower sales taxes, lower rent, lower wages, and utilities cost.
Parking, Please!
Customers, employees, yourself, and anyone else visiting your store all need adequate parking. How many times have you given up in despair when there was no parking to be found near the store you wanted to visit? As a store owner, you face diminishing profits every time a potential customer can’t find a parking spot.
If you are considering a space located in a mixed-use neighborhood (such as residential and retail), you should check out whether the parking lot is used by local residents without permission. If it is, you may have problems with the neighbors, some of whom may be your customers, if you want the parking only for your customers.
Community Considerations
In addition to convenience and parking, you also must consider community services, access to credit, and available utilities.
Community Services
When planning to buy a personal residence, you carefully consider the quality of the community’s social services including police and fire protection, education, and health care. When choosing a retail location, these issues should be important, too. You need good police and fire protection, as well as easy access to emergency health care. In addition to the human costs, you must think about the dollars-and-cents costs for legal liability and attorneys’ fees, theft, and higher insurance costs.
But other community services such as education, health care, and welfare services can be significant to your location choice as well. A quality local school system can give your business an available pool of well-educated potential employees. Local community colleges and high schools can be resources from which your business can draw to encourage employees (possibly through tuition reimbursement programs) to improve and enhance their job-related skills.
Access to Credit
The availability of credit can also be important. Traditionally, financial institutions are more likely to grant loans to small retailers who locate in the same community or neighborhood as they are. This means that if you choose to locate your store in an area that is not well serviced by several financial institutions, you may have difficulty obtaining credit at a reasonable rate.
Available Utilities
No matter what kind of store you are opening, the efficiency of your store operation will be negatively affected if utilities such as power, heating fuel, telephones, and water are not reliably available at reasonable prices.
You might want to consider having an emergency power generator at your store. Although such a system probably wouldn’t be sufficient to keep your whole store operating, it might be useful in some situations. For example, if severe damage to business equipment or inventory (such as computers or perishable goods) could be avoided by maintaining temperature control in a small area, having such a back-up generator might avoid costly losses. Even having an uninterruptible power supply for your computers can save you days of trying to reconstruct files if the power goes out in the middle of a backup or sale.
Better Not!
If power outages would result in big losses to your business, you might also be wise to consider adding power interruption coverage to your business insurance policy.
Safety Matters, Too!
A convenient and profitable location should not be your only concern. You also want a location that is safe for your customers, your employees, as well as yourself. Crimes against people and crimes against property can significantly add to your cost of doing business. Shoplifting, employee theft of inventory (also called “shrinkage”), and theft of business property are all too common and costly. Crimes against business owners, employees, customers, and others who enter your store are less common, but can be more tragic and traumatic when they occur.
While you’ll never be completely free of crimes against your store, there are decisions that you can make about your location that can lessen the likelihood and impact of crime on your store. Primarily, these decisions concern store location and building security.
If you locate in a high-crime area, you’ll likely need to invest in more store security features than if you locate in a low-crime area. The benefit of locating your store in a high-crime area is that they usually offer significantly cheaper rent. By saving in rent, you have the money to buy a reliable security system. Another consideration is that high-crime areas are often underserved by retailers and other businesses. Some small business owners have found they can make a good living by accepting the risks of operating in a particular neighborhood where there’s little or no competition.
The kind of security features that you need will depend on the kind of store you operate, and on how severe you think the crime threat to be.
Common building security features include:
• Steel security doors, particularly in areas of the building that are away from public view.
• Security alarm systems: motion sensors, breaking glass detectors, window and door alarms—all of which may or may not be hooked up to security monitoring services or the local police department.
• External lighting on all points of access into the building, the dock facility, and parking lots.
• Fenced, limited access parking lot and company vehicle storage areas.
• Security cameras, hooked up to a video recording system or monitored by an on-site security guard, and trained on entry points and other areas where theft is most likely to occur, such as the sales floor and the loading docks.
• Lockable cash offices, equipped with secure safes.
• Bullet-proof security glass (needed in high-threat areas, and where large quantities of cash or extremely valuable products are kept).
You may also consider hiring security guards. You can either employ these guards directly or contract with private security service companies for them. Although you can have a guard stationed at the site full time, most small stores that use security services choose a guard that only periodically checks the store after hours.
Better Not!
Before you decide to use security guards on your business premises, ask your insurance agent about how this affects your liability coverage. You should be particularly careful about this if your guards will be armed. The last thing you want is to end up paying a legal judgment to a burglar.
Pros and Cons of Various Locations
You will find pros and cons for each type of shopping location. The following table outlines the strengths and weaknesses of the various location types that you may want to consider for your business.
Consider Your Neighbors
Your neighbors should be a big factor in your location decision. You not only want to look at the general character of the neighborhood, but also the kind and appearance of nearby stores and neighbors. Just as you should never disregard the appearance of your facility, you should not completely overlook the effect that the appearance of surrounding businesses and neighbors may have on how your store is perceived.
How Much Space Will You Need?
When selecting a facility for your store, you need to think of your internal and external space and operational requirements. For example, if you are selling high-end products, your customers likely will expect a spacious and elegant sales area, so you’ll need a bigger space in a high-end area of town. If your store relies on low prices to beat out the competition, a luxurious facility may work to your disadvantage. Cost-conscious customers may feel that your prices couldn’t possibly be all that low if you can spend big bucks on your facility. In fact, some successful businesses that target the low-end use the fact that their stores look cheap or are in low-rent, out-of-the-way areas to promote their low prices.
If you are setting up a store for the first time, I strongly suggest that you map out your facility needs in some detail. That way you will be able to gauge how much space you’ll need to rent more accurately. You definitely don’t want to rent a space too small or too large. Both can be a problem. You won’t be able to set up the type of store you planned if the space is too small. If the space is too large, your store could look barren and give the impression that you are not successful.
Internal Requirements
You need to think of how you are going to operate your store and what space requirements you will need to meet. Ask yourself these key questions about store operations:
• Will you need a separate office for individual consultation? If you are opening a high-end jewelry store, that is something that you might want to offer to your customer.
• Will you need a separate room for demonstrations, events, and classes? If you are opening a wine and food store, you might want to think about offering classes and cooking demonstrations to your customers. You will therefore need a separate area to accommodate tables, chairs, and maybe a demo kitchen.
• Will you need washrooms, changing rooms, etc.?
• Are you opening a furniture store or other large items type of store? Then, make sure the receiving dock is set up to accommodate deliveries.
• Will you ship product from your store? Will you have a stockroom? Again, you need to make sure that you are set up to perform these functions efficiently and effectively.
• Will you have 30 or more employees? A lunch room for your staff should be included in your plan.
When looking at the inside space, you also need to determine if it could be constructed or decorated to provide the best look and feel consistent with the image that you are trying to project.
Making Modifications
You may find the perfect location, but the building doesn’t meet your requirements for size, layout, or appearance. Or you may find the building is almost perfect, but you must change one thing before you can use it. For example, you may need to add or widen access doors. Or you may need to increase the capacity of the ventilation system.
Don’t jump to rent this almost perfect facility, before you consider these factors:
• How much would it cost to make the modifications? Get a detailed estimate of how much the additional work would cost. You may be able to get price (if you plan to buy the property) or rent concessions from the seller or landlord.
• Will the change be allowed? You’ll need to investigate what type of permits may be needed to do the work and whether you would need a zoning or building code variance for the modifications you plan.
• How long would it take? You may need to delay your opening or open while the modifications are being completed, which could have a negative impact on the operations of your business.
Planning to Grow?
Your best bet may be to rent a location that can accommodate potential future growth, but cost often makes that impossible. A location that offers more space or features usually costs more. You’ll have to decide whether you want to take on the additional costs now in order to have the benefits of easier expansion later. Or do you want to rent a less desirable space knowing that you may have to move when expansion is needed?
You should consider a larger, more expensive space only if you reasonably believe (not just hope) that you will need the extra space in the future. You also must be sure that your additional costs for this extra space will not be a drag on your current business operations.
Savvy Retailer
Most small business advisers suggest that start-up businesses keep a tight rein on costs. Business plans can be put together that envision additional facility requirements, but acquiring the additional space should probably be put on hold until business activity and profits justify taking on the added expense.
Do It All Within Budget
Don’t forget your budget when looking for space. If you are not able to purchase or rent your facility at the best price, your store will be at a long-term disadvantage. If you spend more than your budget for space, these costs will be an ongoing drag on your company’s profitability.
During the start-up phase, you may not have the money you need for other critical expenses, such as design, signage, or fixtures. Long-term overspending on the facility will make your company’s profit-and-loss statement less attractive, so you may have difficulty borrowing money if needed.
Buy Or Rent?
Should you buy or rent your facility? Tax and cash management issues play a crucial role in the buy or rent decision, so many retailers seek the advice of their accountant or attorney when making this decision. You may also wish to do so. Generally in a start-up situation, money that would be used for a down payment to buy is needed to operate the business, so buying a location is often not desirable or even possible.
In addition to these tax and cash management issues, you also should consider other critical questions, such as: If you choose to rent, what happens when the lease term ends? Will you be forced to move or will your rent go up to a level you can’t afford? You won’t have these problems if you buy, but what if you decide another location works better for you once the business is successful? Will owning the property make it more difficult for you to make a strategic move?
If this is your first venture into the retail business, there’s no decision here. Rent your space until you have a going concern, know your customers, and can be sure you’ve got the right location. You can also somewhat protect yourself with an option to extend the lease or even an option to buy, which is sometimes possible.
Estimate Costs
Rent may not be your only cost when you pick a location. Be sure to ask the landlord if you’ll be required to contribute to maintenance, property taxes, or building insurance. Costs also can differ greatly if you choose a mall location versus a street location.
Mall Location
In a mall location, your rent is usually stated as a minimum guaranteed rent per square foot of lease area and a certain percentage of sales. In most cases, the percentage is between 5 and 7 percent of gross sales, but this can vary by type of business or other factors. If the percentage of your sales is higher than the minimum rent, you pay the percentage of your sales. If the minimum rent is higher, then you would pay that rent.
In addition, you may have to pay dues to the center’s merchants’ association, minimum advertising commitments, and be required to pay for maintenance of the common areas. So total rent could be your minimum guaranteed rent, merchant’s dues, one or two ads, and maintenance of the common areas. Be sure you can afford total rent costs, not only the base rent costs.
For example, your guaranteed or base rent could be $10 per square foot. Suppose you plan to rent 1,500 square feet. Your monthly guaranteed rent would be $1,250 (1,500 square feet times $10 equals $15,000 per year, or $1,250 per month). Your percentage of gross sales could be 6 percent. Suppose you sold $10,000 in your first month, then your percentage based on gross sales would be $600, so you would have to pay $1,250 (your base rent) that month. You would need to top $21,000 a month in sales before your gross sales percentage would be more than your base rent.
You’ll also need to design and finish the space. You pay for the light fixtures, counters, shelves, painting, floor coverage, and installing your own heating and cooling units. You may be able to negotiate with your landlord for a cost allowance toward finishing your retail space. This is known as a tenant allowance and can be used toward storefronts, ceiling, and wall coverings. The allowance will be spelled out in a dollar amount on the lease.
Street Location
In most nonshopping center locations, rent is a fixed amount that is not related to sales volume. But you will be responsible for the upkeep of both the inside of your store, as well as the exterior of your store. While in a mall location maintenance of the common area is provided, that’s often not true for the external area of your street location. Some landlords may give you a percentage-only rent deal. If you can get that, it is the safest way to go because no matter what your sales, you only pay a fixed percent. If you can get this type of deal at less than 6 percent, it would be hard to say no to if the location meets your needs.
Negotiating with the Landlord
Once you’ve narrowed down your target areas, then it’s time to get the details from the landlord. In many communities, there’s an abundance of space, so a landlord may need to provide you with information to lure you to his spot. This should include:
• Blueprints, a site plan, and the space available if you are considering a location under construction.
• Information about the trade area to give you an idea from where your customers will come.
• List of other tenants, so you know both your competition and the other stores that complement your products from which you can draw customers.
• Estimated total expenses for the space you are considering.
• Names of surrounding cities and towns and their population demographics.
• Information about population growth and trends.
Information You Must Provide the Landlord
You also need to provide information to the landlord before she will be willing to lease to you. This information includes:
• Your business plan.
• Your space requirements and plans for your space.
• Pictures of the products you plan to sell and stores that are designed similarly to the one you plan to open.
• Financial statements.
• Funding commitments.
Signing the Deal
Once you’ve found the right location, you’ll need to sign a lease. Ask your attorney to help you negotiate a lease that is fair and equitable. Your attorney can also help you understand everything in the lease agreement. Be sure you understand all the details very well.
Everything in a lease is negotiable. An attorney with years of experience in negotiating leases will know the common terms that are negotiable and what the best possible deal could be.
Think carefully about the length of the lease you accept. If you make the term too short, you could end up with a dramatic increase in rent or possibly the loss of space just when your business is taking off. But if you make the term too long and your business fails, you could face significant costs to break that lease.
You also may want to make your lease contingent on the continuing presence of a key major anchor. If the major anchor leaves the mall, you may want to add a provision to your lease that you have the option to leave as well without any penalties.
Another key term is the transferability of the lease. Can your lease terms be transferred to someone else if you decide to sell the business? Obviously, if you’ve found a great location and developed a thriving business, it will be worth more to a buyer if he can keep the same lease terms—as long as you did a great job negotiating them upfront.
You also may want the right to sublet some space, especially if you are initially taking on a larger space then you need, but want the additional space for future expansion needs. Subletting part of your space may help you defray some costs during your business start up, but be sure your contract allows you to do it.
If you are renting space in a mall and are quoted a price on the common area maintenance, you need to realize that this price is an estimate. If the mall has a lot of vacancies, your actual cost will be higher because there are fewer merchants contributing to the upkeep.
So, without a doubt, location is key, but the actual location is not your only crucial decision. Consider what types of stores are around you and how well they will help you build the kind of traffic you want in your own store.
The Least You Need to Know
• A large part of your store’s success depends on its location. Seek professional help in finding the right one.
• Pick a location that is convenient not only for your customers but also for you and your employees.
• Costs for stores inside malls are very different than street locations. Be sure you understand your total costs before signing a deal.
• Negotiating a lease can be critical to your store. Work with an experienced attorney who can help you get the best deal.
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