Deck 10: Site Selection

Question 1

Case 2: Examining Perfumania's Site-Selection Strategy
Perfumania (www.perfumania.com) is a fragrance retailer with 350 value-priced fragrance stores in the United States and an additional 20 stores in Puerto Rico. Despite the weak economy, Perfumania opened 59 stores in 2009, nine in 2010, and 10 to 15 locations in 2011 (including its first stores in Canada). Ultimately, the retailer plans to have as many as 600 stores.
In 2009, Perfumania decided to outsource its real- estate activities and hired RCS Real Estate Advisors (www.rcsrealestate.com) to handle site selection and lease negotiation for its new retail locations, as well as lease renewals and lease termination negotiations for its existing stores. In evaluating Perfumania's stores, RCS found that the chain had a number of locations where it was committed to paying above-market rental rates due to changes in rental market conditions. As a result, many of these locations were unprofitable. To the extent possible, RCS renegotiated lease terms at these locations and/or refused to renew these leases at the old rents when they expired.
Most of Perfumania's locations range from 1,500 to 2,000 square feet. Its regional mall locations are 1,500 square feet (of which 1,200 square feet comprises selling space) and its outlet mall stores are 2,000 square feet in size (1,700 square feet of which is selling space). According to Michael Katz, Perfumania's president and chief executive: "About 80 percent of our stores are in regional malls, outlet malls, or strip centers, and we have a few lifestyle center stores, though those haven't been as successful." Perfumania also has some stores located in major urban shopping districts. The challenge with the urban locations is being able to achieve sufficient volume to offset higher rental and operating costs.
In general, retail locations close to high-traffic destination retailers (which do not have to be apparel-based) have been the most successful for Perfumania. According to Katz, "If every one of our stores could be next to an Apple store, we would be happy!" In some instances, the chain has placed multiple stores in the same center. Currently, Perfumania has two stores with the same inventory, store exterior, and interior design and inventory in the Mall of America (a Minnesota mall with over 500 stores that attracts 40 million visitors per year). These stores are so successful that Perfumania's management is seeking a third location there. As the president and chief executive of RCS says: "The product is so much of an impulse purchase that if you're on two sides of a really big mall, and it's a great mall, why not "
The expansion of its highly profitable locations into outlet malls is Perfumania's most recent growth strategy. Other targeted areas for new locations are western, southeastern, and southwestern states. Canada represents a major opportunity since it does not have a national fragrance retailer. Perfumania is targeting three to four Canadian cities for new store development.
Perfumania is rolling out a new prototype store for its regional shopping center locations. It plans to apply this new contemporary design to its stores located in strip centers and lifestyle centers, but will only make minor changes in its outlet mall locations.
1. Describe the pros and cons of Perfumania's outsourcing its site selection and leasing operations versus conducting these activities in-house.
2. With what types of stores would Perfumania have an affinity Explain your answer.
3. Describe how Perfumania could seek to renegotiate a lease with an above-market rent with a major mall.
4. Comment on Perfumania's seeking a third location in Mall of America from the perspective of trading-area overlap.

Answer 1

Summary:
P is one of the fragrance retailers. It decides to outsource its real estate activities for its outlets to R real estate advisors. The survey showed that most of the stores paid rent above the market rate. This made them unprofitable. So, it is trying to apply a new contemporary design to its stores in order to earn more profit.
1.
Pros and cons of outsourcing site selection:
Pros of outsourcing
• Compared to P personnel, R real estate advisors have lot of expertise in lease negotiations
• R real estate advisors have access to more data on lease conditions than P personnel
• Since R real estate advisors represent several companies, they can attract other retailers to sublease P's location
Cons of outsourcing
• Since R real estate advisors represent several companies, they may not give much attention and may not provide the best location for P
• In-house site location and leasing personnel of P might have more knowledge in selecting the suitable location for P
• On outsourcing the activity, the confidentiality on P's strategy gets diluted
2.
Stores similar to P:
The case mentions that P store prefers high traffic destination retailers. The stores which would be similar to that of the P stores would include department stores, shoe store, female-based apparel store and lingerie store.
3.
Renegotiation of an above-market rent:
The renegotiation of lease is easy for P when the lease expires. In such an instance, P can state that it will pay only a lower rent and in case of disagreement it would not renew the lease.
In case of lease being still in effect, the negotiation would be difficult. As a bargaining point, P can mention its timely payment of rent and traffic generation for the mall. It can tie a reduction in rent on an existing lease to leasing a new location from the same developer.
4.
Third location of P:
The mall attracts nearly 40 million visitors annually, so it is a major tourist destination. The traditional concept of having a 30 minute drive time does not apply to this mall. Setting up a third outlet in the mall will provide more visibility to P and convenience to customers. Moreover, since the mall is huge, the overlap of trading area among other P stores is less.

Question 2

How would you determine the trading area for QuikTrip Park at the Grand Prairie AirHogs minor league baseball field

Answer 2

Summary:
In recent times, more retailers have started to locate their stores at non-traditional locales due to saturation. Instead of scrambling for in-demand high traffic corners, some retailers are making use of non-traditional locations for brand positioning, growth and other competitive advantages.
In addition to it, many sports stadiums, airports, office buildings, dorm complexes and malls have included convenience stores, often featuring a spin on the offer given by traditional convenience stores.
Determination of trading area:
The trading area for the firm can be determined with the help of the following:
• Store contests
• Loyalty card data
• By asking the attendees for their home pin code

Question 3

A cell-phone-service chain has decided to open outlets in a combination of isolated locations, unplanned business districts, and planned shopping centers. Comment on this strategy.

Answer 3

Strategy used to open new outlets:
Implementing a combination of "isolated location", "unplanned business districts" and "planned shopping centers" would be an effective strategy for the firm to open new outlets since it gives the firm a collective advantage of all the strategies.
It is an advantageous situation for the firm, because even in case of facing few drawbacks with one strategy, it can be nullified by the advantages gained from other implemented strategies.
Implementing a mix of all the strategies will prevent the firm from facing extremely awful situations. Thus, the firm can implement all the strategies.

Question 4

Case 3: Examining Rue 21's Location Strategy
Rue 21 (www.rue21.com) is the fast-growing specialty retailer that sells fashion items (including footwear, fragrance and beauty items, jewelry, intimate apparel and sleepwear, and accessories) to girls and young men at value-oriented prices. Most of Rue 21's merchandise is trendy and priced below $35. According to the retailer's annual report, "Our merchandise is designed to appeal to 11- to 17-year-olds who aspire to be '21.'"
As of the end of its 2011 fiscal year, the chain operated 740 stores in 45 states. Rue 21 opened 110 stores in 2011 alone; and it ultimately plans to have more than 1,000 U.S. retail stores. Its average store is 5,000 square feet. Most of its new stores will be in strip centers and regional malls in small- and middle-market communities.
Rue 21 credits its success to its flexible real-estate strategy as well as its sourcing model. Rue 21's overall location strategy is not based on market area or location type. Although many of Rue 21's stores are in rural markets, where it has little direct competition, it also has many successful stores in urban locations. As of the beginning of 2012, 52 percent of Rue 21's stores were located in strip centers, 31 percent in regional malls, and 17 percent in outlet centers. Rue 21 favors locations that share customer traffic with adjacent retailers such as Wal-Mart, Target, and Kohl's.
Unlike some other retailers, Rue 21 does not own any real-estate. Most store leases have initial terms of five to ten years, with additional five-year renewal options. Many of these leases have early cancellation clauses that permit Rue 21 to terminate the lease if certain sales levels are not achieved or if a strip center does not meet specific overall occupancy levels.
The retailer's store leases also provide for additional rental payments, based on a percentage of net sales, if Rue 21's sales at a given location exceed specified levels. Leases also require payment of common maintenance charges, real-estate insurance, and real-estate taxes. This shifts the burden of higher operating expenses from the property owner to Rue 21. Renewal options generally require higher rental payments in subsequent years.
Rue 21 faces several risks with regard to its real-estate strategy. In some instances, even with an early cancellation clause, it may be unable to get out of a lease at an unsuccessful location. In these cases, the chain would be bound to continue rental payments. Bankruptcies and store closings in adjacent locations can reduce store traffic in a shopping center and adversely affect the remaining tenants, including Rue 21. In addition, Rue 21 may not be able to renew a lease at a very successful location.
Rue 21 relies on more than 450 domestic suppliers and importers for product sourcing. Although most of its clothing and accessories are made by overseas suppliers, domestic suppliers are used when quick deliveries are needed to capitalize on a fast-moving fashion trend. Goods are shipped daily to each store to motivate shoppers to constantly visit the store location. Rue 21 also maintains its products' distinctiveness through its private-label brands: Rue 21 etc!, Carbon Elements, Ruse Beauté, and Tarea.
1. Evaluate the pros and cons to Rue 21 of each location type: strip center, regional mall, and outlet center.
2. Describe the pros and cons of Rue 21 not owning any real-estate.
3. How could Rue 21 reduce the risks associated with its real-estate strategy
4. Should Rue 21 expand beyond the United States Explain the complexities of doing so.

Question 5

From the retailer's perspective, compare the advantages of locating in unplanned business districts versus planned shopping centers.

Question 6

Is QuikTrip Park a destination retailer or a parasite Does your answer differ for its more traditional locations Explain your answer.

Question 7

Differentiate among the central business district, the secondary business district, the neighborhood business district, and the string.

Question 8

Case 4: Coach Expands into China's Tier 2 and Tier 3 Cities
Until now, most foreign retailers have used heavily populated Tier 1 Chinese cities such as Beijing, Shanghai, Guangzhou, and Shenzen as their initial entry points into the Chinese consumer marketplace. In contrast, over the next twenty years, retail analysts predict that a large number of foreign retailers will increasingly seek out retail sites in Tier 2 and Tier 3 Chinese cities. Bain Co., a global management consulting firm, lists 330 Tier 2 cities in China; they have populations of 500,000 to 2 million people. There are more than 1,200 smaller county-level communities that are considered to be Tier 3. Lang LaSalle, a global real-estate services firm, has identified 15 of China's Tier 2 cities and 25 of its Tier 3 cities, most of which are provincial capitals, as leading candidates for retailers.
What most researchers agree upon is that the relative importance of the Tier 1 cities in China will diminish over time in terms of population and spending power. China has more than 200 cities that each have a population of at least 1 million people. In contrast, there are only 35 cities this size in all of Europe.
Let's examine the expansion strategy of Coach (www. coach.com), a U.S.-based luxury leather fashion accessories designer and retailer, in China. Coach initially entered China in 2003 through licensing agreements. When Coach discovered that the locally managed retail outlets were very profitable, it purchased back these rights in 2009. Direct control of its image, expansion plans, and pricing was essential to Coach. The firm also realized that it needed to better understand the Chinese market and the important differences between Chinese and American consumers. Its research showed that Chinese consumers desire very conspicuous brand marking on all of Coach's apparel and accessory items.
Coach initially focused its attention on establishing its brand in such affluent Tier 1 cities as Beijing and Shanghai. The company then expanded into newer market locations such as Chongqing after it was firmly established in Tier 1 markets. This strategy is referred to as a "beachhead to a disperse location strategy." Of Coach's initial 28 Chinese stores, 12 are in Tier 1 cities and 16 are in Tier 2 cities or beyond. Coach opened 13 new stores in 2010; this represented an increase in square footage of 50 percent. It planned to open 30 new locations in 2011, representing another increase of 60 percent in square footage. Some of these stores will be Coach flagship stores to focus attention on Coach's presence in these new provincial markets, despite their having lower profitability than Coach's traditional stores.
In a conference call with financial analysts, Coach cited the Chinese market as its "largest geographic opportunity." Coach is seeking to more than double its sales in China, with a goal of $250 million (U.S.) as of fiscal year 2012, as compared with $100 million (U.S.) in fiscal year 2010.
Coach and other retailers are hoping that the lessons learned from their Tier 1 market experiences will be applicable to Tier 2 and Tier 3 cities. These retailers further believe that as first movers into Tier 2 and Tier 3 cities, they will be able to solidify their image as innovators, secure the best retail locations, and be able to obtain sourcing agreements with the best logistics and materials suppliers. On the other hand, they will be assuming high risk to their image and profits, because they may not be as successful in these smaller market areas.
Questions
1. Evaluate Tier 2 and Tier 3 cities in contrast to Tier 1 Chinese cities from the perspectives of economic base characteristics, as well as the nature of competition and the level of saturation.
2. Discuss the pros and cons of Coach's "beachhead to a disperse location" strategy.
3. Describe the location-based advantages of being a first mover into Tier 1 and Tier 2 cites.
4. Explain the location-based disadvantages of being a first mover into Tier 1 and Tier 2 cites.

Question 9

Develop a brief plan to revitalize a neighborhood business district near your campus.

Question 10

Is The Varsity at the University of Maryland a destination store or a parasite Explain your answer.

Question 11

What is a megamall What is a lifestyle center Describe the strengths and weaknesses of each.

Question 12

Should the retailers at airports care about the concept of balanced tenancy Why

Question 13

Evaluate a regional shopping center near your campus.

Question 14

Based on what criteria could Camden Food Co. determine if an airport was a one-hundred percent location for one of its stores

Question 15

Explain why a one-hundred percent location for a discount apparel chain may not be a one-hundred percent location for a moderate-priced local apparel store.

Question 16

What terms of occupancy are especially important for retailers locating at nontraditional sites

Question 17

What criteria should a small retailer use in selecting a general store location and a specific site within it A large retailer

Question 18

What difficulties are there in using a rating scale such as that shown in Figure 1 What are the benefits
Figure 1 A Location/Site Evaluation Checklist Rate each of these criteria on a scale of 1 to 10, with 1 being excellent and 10 being poor.

Question 19

How do the parking needs for a fine restaurant, a computer repair store, and a luggage store differ

Question 20

Under what circumstances would it be more desirable for a retailer to buy or lease an existing facility rather than to build a new store

Question 21

What are the pros and cons of a straight lease versus a percentage lease for a prospective retail tenant For the landlord

Question 22

Case 1: Adapting Store Size to the Type of Location
A significant trend among mass merchants is the greater use of small prototype stores rather than their big-box format. Wal-Mart (www.walmart.com) is opening a number of smaller stores (ranging in size from 30,000 to 60,000 square feet), mostly in urban areas. An extreme example of this new store format is a 3,500-square-foot "Wal-Mart on Campus" store located at the University of Arkansas.
Target Corporation (www.target.com) is using small-store formats as part of its expansion plans in Seattle, Baltimore, and San Francisco. Target's prototype store for these urban markets ranges in size from 60,000 to 100,000 square feet. Target currently has about 150 stores in urban areas, including a location in New York City's East Harlem area. In addition, Kohl's (www.kohls.com), Old Navy (www.oldnavy.com), Gap (www.gap.com), and numerous other retailers are looking at downsized stores at their newer locations.
For many big-box store chains, smaller prototypes are an ideal way to capitalize on opportunities in urban cities, where rents are generally high. These areas are densely populated, accessible by mass transportation, and have available full-time and part-time help. Despite their potential, only about 50 of Wal-Mart's thousands of U.S. stores are located in major cities. Wal-Mart also has no store in New York City, and only two stores in Los Angeles.
Smaller stores are also an ideal way for retailers to open new units in locations that were vacated by such defunct retailers as Circuit City, Steve Barry's, Borders, and Mervyn's. When Kohl's took over locations that were formerly used by Mervyn's, Kohl's was compelled to reduce its store footprint.
The Limited (www.limited.com) and Home Depot (www.homedepot.com) have used reduced-size store prototypes as a means of utilizing small, but highly desirable, locations. And there are other reasons why smaller stores make sense. These stores have lower rental and operating expenses. Older shoppers often like smaller stores because they reduce shopping time and the need to walk through larger stores. For major retail chains, smaller-store formats have less trading-area overlap with existing stores than bigger stores. Small stores can meet the demands of markets that could not be economically feasible with a larger store. Lastly, smaller stores in existing market areas can better utilize a chain's existing distribution centers than larger stores located in more distant locations.
A vital strategic issue involving the use of smaller-store formats relates to the appropriate level of merchandise selection. One potential problem associated with small stores is the need for faster inventory replenishment due to their smaller storage areas. Merchandise selection in smaller formats also needs to be more carefully planned to ensure that it includes relevant goods and services appropriate for the store's customers. Some reductions in inventory selection are simple to implement. For example, urban apartment dwellers have limited capabilities to store bulk purchases of paper towels and no need for patio furniture, snow blowers, and garden supplies. Other reductions that are more difficult to plan include color choices, size distributions, and so forth. One way of providing sufficient assortment in a small space is to enable customers to order merchandise on the Web (via an in-store kiosk) and have it shipped to the store for pickup by consumers or shipped directly to shoppers' homes.
1. Under what conditions should a large box store retailer like a Best Buy pursue a small-store strategy
2. Would the population characteristics of a small store's trading area differ from that of a larger store Why or why not
3. Discuss the concept of trading-area overlap from the perspective of small- versus large-store formats.
4. Explain how small-store formats could be a means of capitalizing on trading areas where a large-format retailer is understored.

Question 23

What can any retailer learn from this case