You are about to make one of the biggest investments in your life, so how do you decide where to locate?
As a potential retailer, how do you decide where to locate your new store? If you are joining a franchise system, then the franchisor will have to approve the site, but if you are not happy with it, then you are starting behind the eight ball!
The recent Billy Baxter Appeal decision showed that a franchisor must have some solid basis if they are to make any indication to what a store should sell.
Tony Garrison, partner at law firm HWL Ebsworth, agrees. “In light of this case, franchisors should review their documents and procedures in relation to site selection, actively encourage and insist that the franchisee seek legal and financial advice, undertake appropriate demographic analysis and feasibility studies for greenfield sites and ensure that they, their staff and master franchisees, do not make any statements which may induce persons to buy a franchise on misleading presence’s.”
This gives franchisors some pretty clear instructions. However, where does that leave you?
What should you be looking for in a suitable site?
In setting up your new business, there must be a match between the type of location, and the product you sell. Our view for years has been that there are two extremes in thinking about what you are going to sell:
• Is it a high impulse item? (so we really need to be in the customer’s face to make them aware of us)
• Is it a destination type product? (so the customer has some idea they wish to purchase before they start the final ‘Go / No Go’ decision)
If this is a continuous scale, where do we sit on the line?
Impulse vs. Destination
I always suggest you consider where you stand on the Impulse vs. Destination axis. High impulse sites are required for high impulse products and have high rents, while high destination, low impulse products can be sold in sites that are far less visible with lower rentals.
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High Impulse items
High impulse items are usually low cost, spontaneous purchases such as buying a carton of milk, some chocolate or a newspaper. The customer may make some decision where they go, but convenience normally drives this purchase. When we look at the most high impulse business we can imagine, think of a beggar or a busker. In these cases, they are very mobile, and are able to move to the best traffic flow at no cost.
As the cost of the goods you are selling increases, you move further along the line towards low impulse / high destination.
High Destination purchases
If the goods you want are reasonably expensive, and the customer probably has pre-determined that they wish to buy it, then that is a high destination purchase. If you are buying a car, you will go and find suitable car yards that are most likely to have what you want. Few of us are just walking along a street, stop and spontaneously make a purchase of a car!
Giving a value to this Impulse vs. Destination ratio
Your business can normally be addressed as x per cent impulse; y per cent destination.
Here are some examples.
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As you can see, the more premeditated the purchase, the higher the probability you will look up where you want to go, not just spontaneously make a purchase from the first store you see.
The higher the impulse value of the goods you are selling, then the more importance to be in a highly visible, high traffic location. If you are a very strong destination product, then you can take a more back street approach.
The rental you pay for a property is probably defined by the owner’s view on whether the premise is on high traffic flow and high visibility. In shopping centres or along a High Street, most stores have a different rental per square metre depending on the shopping centre management or owner’s views on these factors.
What you need to do is pay the appropriate rental for the appropriate store, and if you have a high destination type product, then you do not want to be paying top rental for the peak corner in the shopping centre. If you are a high impulse product, then you do need high passing trade, or you will not sell your goods. No point being down at the back of the shopping centre paying cheap rental, next to the discount rug bazaar if you have high impulse products such as phone cards, sandwiches or other food items.
An exclusive restaurant that has a great reputation, and word of mouth tells people how good it is, can be in a lower rental street or area, as the public will find it and come to it. A quick serve restaurant such as McDonalds or KFC must be in a high impulse area, be it in a food court or on a main high exposure road.
Site decision is probably the most important decision you make after agreeing to join the franchise system.
Whilst the law could be said to be setting some new precedence with the Billy Baxter case, and giving the franchisors some new ‘incentives’ to make sure they have a reasonable basis upon which to approve a site, the ultimate responsibility still falls with you, the potential franchisee. In the end it is your money that is going ‘on the line’, and whilst the franchisees in the Billy Baxter case were awarded $1.22M, this was really seen as just reimbursing them for the decision to go into the site. The actual rental $ you pay will be determined by the market, and the process of negotiation. If you are paying a correct market value for the store, which may be assisted by the franchisor’s representative, or the likes of an expert retail leasing company such as LeaseWise or Lease1, and have a viable product or concept you are selling, you should have a sustainable business. If you however have found a totally unsuitable store in terms of Impulse vs. Destination, then probably nothing can save you.
Select well Grasshopper!
Peter Buckingham is the Managing Director of Spectrum Analysis Australia Pty Ltd, a Melbourne based Geodemographic and statistical consultancy, and a Fellow of the FCA and IMC.
Spectrum specialises in assisting clients with decisions relating to store and site location using various scientific and statistical techniques.
Phone: (03) 9882 6488