So you think you’re ready for an additional location and are prepared to spend the time, capital and effort to expand. We have all heard the ‘location, location, location’ mantra, especially when it comes to retailers and restauranteurs; but there is much more to successfully expanding your offering than this. Truly understanding the business metrics in your current location Is beneficial to finding the right location to occupy. The five business evaluations below will help you and your business determine what space is right for your next location.
When planning any expansion of your brand, knowing the true occupancy cost of your business is essential for the success.
1.Revenue generating space: Unlike the majority of office or industrial users, retail and restaurant space occupiers generate income on a much smaller percentage of their rentable area. Space usable for displaying goods, seating customers, or other “front of house” activities is typically in the 50%-60% range. The effective cost of occupying space is derived from dividing your revenue over this percentage of your square footage. In the case of restaurants, the kitchen is absolutely an important component in generating income; however, when planned correctly this space is typically less than 20% of the entire establishment footprint. When planning any expansion of your brand, knowing the true occupancy cost of your business (revenue divided by that percentage of your space that generates income) is essential for the success. The cost for a potential new location should be examined utilizing these metrics.
2. Revenue as a percentage of your Facility Cost: Your facility cost is generally the second or third line item on your balance sheet, but identifying the cost of your facility in relation to the revenue you generate from it is a key metric needed for smart expansion. Your annual revenue/annual facility cost (Base Rent + Operating Expenses + Utilities) will provide a benchmark you can apply to potential future sites.
3. Effectiveness: Business owners can evaluate your actual annual occupancy cost metric by dividing your sales by the establishment’s selling space. While this can also be done by dividing the annual top line revenue by the gross square footage it is more useful to use the revenue/selling space formula if you wish to apply this to other locations. Remember, not all spaces are equal due to inherent space shape efficiencies.
4. Demographics: We all know local population income and age numbers matter; however, you may be operating in a ‘destination’ center wherein people from surrounding areas frequent often as a result of commute or travel. It is thereby important to understand the demographics of YOUR customers. While the neighborhood, average traffic counts, and proximity to other similar retailers does have an effect on your success, knowing: who, why, when and how your revenue is generated will provide guidance should you expand.
5. Discounting: Probably the least exciting topic but one of the most important. Taking the number of sales at discount or special pricing and dividing it by the total sales (Discount Sales/Total Sales) is necessary when developing a stores profile. Restauranteurs who have to offer heavy discounts/specials to get people in the door rarely have the necessary capital or financials to expand. It’s common knowledge that food margins are slim, and if you’re discounting your per plate costs there better be an avenue to make up for it., i.e. alcohol sales. Retailers offer discounts based on seasonal changes or specific items that aren’t moving, however, the percentage of a store’s discounts should remain consistent. If this percentage increases quarter over quarter (not just seasonally) it’s indicative of a problem.
