The location of your business can make or break you. It has a major impact on the quantity and quality of customers who come through your door, and it determines the amount of rent you pay. Choose unwisely, and there is no turning back without spending a significant amount of money. That’s why it’s vital you do your research before making a commitment, using sound criteria for location assessment based on a real understanding of your business.
Know your business
The first thing you need to understand is your customers’ decision-making process for buying your products – you need to know where your products and services rate in terms of impulse versus destination.
• High impulse products are usually low cost, such as a carton of milk, a packet of cigarettes, or a newspaper. They are most often purchased spontaneously.
• High destination products are usually expensive, such as a BMW. Their purchase is most often planned, with customers pre-determining where to buy.
The higher the impulse value of the goods you are selling, the more important it is to be in a highly visible, high traffic location. If your business offers a very strong destination product, then you can take a more back-street approach, as you know people are going to search you out.
If your products are somewhere in between, it helps to think of impulse and destination on a line scale:
Determining where your business and its offer sit on that line involves giving a value to the impulse versus destination ratio: (x% impulse):(y% destination). Here are some examples:
As you can see, a busker has the most high impulse business we can imagine. Buskers are able to move to the best traffic flow at no cost – they simply pick up their instrument and cross the street. The investment they ask from their ‘customers’ is also minimal – just a little loose change.
The more expensive your products, the further your business is likely to sit along the line towards low impulse/ high destination. And the more premeditated your customers’ purchase, the higher the probability they will carefully select you as a supplier rather than purchase from the first store they see.
Once you know where your products rate on this scale, selecting the location for your business essentially involves balancing the amount of rent you are prepared to pay with the amount of exposure you need to attract customers to buy.
Higher exposure vs. lower rent
In most cases, the amount of rent you pay corresponds to the amount of traffic and visibility you receive. In shopping centres, for example, centre management will charge a different amount per square metre for each store, with the most desirable locations commanding more.
So what do you choose – higher exposure or lower rent? Essentially, the location you choose comes down to what property, and its associated costs, best fits into your franchise system’s profitability model. Let me explain…
Your franchise system will have benchmark performance numbers based on the performance of the group over a period of time. These benchmarks will indicate what your business needs to achieve in order to be profitable – usually expressed as a percentage. They will also show you, among other things, an acceptable rent cost to sales ratio.
As an example, here is a very basic profitability model for a franchise system:
If it is thought that there won’t be enough sales for rent to sit at around 10% of total sales, then the rent cost for that site is too high to begin with.
A profit and loss forecast should be completed for every site you are considering to determine whether it fits into your franchise system’s profitability model. Your basic profit and loss forecast will look something like this:
The advantage of looking at a franchise business is that it is being replicated within the system at many other similar locations, so you can model your forecast on the basis of their actual results. This is really important because if your sales revenue prediction is out, then your forecast profit can drop from a positive to a very red negative.
That said, in most cases franchisors are not obliged to share their sales predictions for a new store. However, you can gain comfort knowing that if they’ve approved a site, it is because they feel it fits into their profitability model.
If your franchisor does share their sales predictions, you will still need to do your due diligence – they may be more optimistic than is warranted. It is up to you to satisfy yourself as to the suitability of the site.
Using data for site selection
Your objective for obtaining and interpreting data is to determine whether:
1. The locality is suitable for you (macro issues)
2. The store site is suitable for you (micro issues).
Different franchisors will offer different levels of assistance, so I do recommend doing your own research in consultation with a professional.
Start by researching the locality/macro issues via the Australian Bureau of Statistics. You can easily do this online at www.abs.gov.au. Click on Census Data and you’ll find the Quickstats search. Here you can enter a postcode or suburb to see the residential demographics – household income, ethnicity, age profiles, etc. – and how they compare to total Australia.
Keep in mind:
• The nature of your offer – impulse vs. destination
• The size of store you need
• The amount of rent you can afford to pay
• The sales you must generate to be profitable
• Motor and pedestrian traffic
• The type of precinct you are in (fashion, food, homeware, etc.)
• Other business generators that will help you.
The ideal location will meet your criteria in each of these areas.
It is easy to become emotionally involved with a site, and your judgment can become clouded as a result. To ensure you make a sound decision, you must weigh up all the facts. Understand your franchisor’s profitability model, and create a profit and loss forecast for each site you are considering. Once you do your due diligence, you may well find that the potential of a site isn’t as positive as you first thought.
Peter Buckingham is the Managing Director of Spectrum Analysis Australia. He is a certified Management Consultant, and a Fellow of the FCA and IMC.