Real Estate Strategy III - different types of costs ~ Sounds + Food 'n' Retail

relative location.gifStill following the great book on Retail Marketing, by Dr. P. McGoldrick, this time I'll cover the different types of cost that are included in buying, developing, and running retail locations. For previous coverage, check out post I and II

Before buying property, considerable data analysis must happen in regards into estimating turnover, which comes from data on competition, accessibility, and population. And a calculation of costs must happen, least of which is the purchase price, and more complex will be three types of cost: development costs; running costs; and contextual* costs (*: for lack of a better word).

Much of this cost data will likely come from negotiations with site developers, lease owners, and an estimation of the costs involved in the development of the location.

Naturally, with the proliferation of the internet, there are plenty of databases that offer interested parties an overview of typical sums per region or type of location. Though the following are mostly aimed at private individuals, both My-Currency and Zillow offer these types of services, and Jeremy Fain wrote about a French service, called on Tech IT Easy.

Purchase price
Traditionally, rent bid theory explains a lot of price-differencials within an inner-city environment. Variety and women's clothing stores would typically pay the highest rents and grocery stores the lowest. With the emergence of superstores and their focus on out-of-town locations, this formula can not be applied so generously anymore, though, as mentioned, I think that it should logically still apply to inner-city environments, and probably to inner-malls ones also.

And while buying the property may cost a certain sum, it is not atypical that the three of the following types of cost will far outweigh the initial purchase price.

Development costs
Three types of estimates need to be made here: design estimates, which include the costs of the architectural work; bid estimates, which involves negotiating the costs of labor, material and equipment; and control estimates, which are the costs of monitoring the project-development. For more info on these, check out this document.

In addition to this there are a number of costs that can be substantial, but are sometimes not taken into account. One is site preparation, which be steep, especially if the land needs to be converted or extensive demolishing needs to take place.

In addition to this local authorities can impose a number of restrictions on the height of the building, other architectural and landscaping aspects, and demand significant concessions from retailers to build there. All of which can at the very least slow down development considerably.

Running costs
The choice of location, site, and design can greatly affect the cost of running the operation once it's constructed. For instance, multiple floors and parking will mean that lifts will need to be maintained regularly. A location with a high crime-rate will require higher security-costs and lead to more theft. And high employment and income areas will also lead to issues regarding staff recruitment and retention.

Contextual costs
I made up this term, but it actually includes costs like delivery, promotion, and the impact on other branches of the business. Delivery costs are affected by the location choice of the outlet—how accessible it is via road or otherwise; how remote it is from the main distribution network. Promotion costs are also a factor (but a topic for another day). And the impact on other branches are a very important factor to consider. The higher the existing market-share in an area, the greater the potential loss, though, according to the book, this is often accepted as a necessary trade-off to a high growth strategy.

Final thoughts
Clearly real estate is something that needs to be thought about as part of a long-term strategy and with the help of professionals. And some of this is probably not applicable to start-ups in the retail-space. That said, choosing a location by itself is already a science—whether you rent, lease, buy, or build it. And both the direct costs—purchase or rent—and indirect costs—development, running, and contextual—will play an important part in the decision-making and business-planning.

Until now, I have mainly covered the issue of competition and cost in relation to a real-estate strategy. I'll probably not go into population and accessibility just yet, and will instead focus more on more complicated tools used in real estate strategy, beyond the simple checklist, which I covered in my first post on this. These include mathematical, mapping, and some other models, as well as, hopefully, some more data on the role of IT in this process.

For a more in-depth reading, I of course recommend buying the book on Retail Marketing, which largely inspired this article.


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