The right location can make or break any retail business. These days figuring out where to open is less of an art and more of a science. Nationwide retailers are using statistics and economic game theory to reach more customers and shut out competitors. In a retail environment still dominated by brick-and-mortar businesses, the burgeoning science of retail site selection is increasing the pace of competition.
Despite the headlines, brick-and-mortar businesses are still the heavyweights in the retail sector. None may individually be as large as Amazon, but together brick-and-mortar retailers still account for the vast majority of retail sales. In 2020, a year defined by online shopping amid a pandemic that prevented many physical locations from opening, brick-and-mortar sales still account for over 80 percent of total sales according to the retail indicators branch of the U.S. Census Bureau. E-commerce may be growing at nearly twice the rate, but the online shopping sector is playing serious catch-up. Even Amazon itself understands this, opening more than a dozen brick-and-mortar retail concepts across its Whole Foods, Go, 4-Star, and other brands. The reliance on in-person shopping means vying for physical space against competitors to sell your products is still the biggest challenge retailers face.
Retail follows rooftops
The old adage that retail follows rooftops is still true but it no longer tells the whole story. People buy things. People don’t like to travel far. Therefore, people like to buy things close to where they are. Every year data shows that the areas with the fastest-growing retail sector and fastest-growing retail rents are the places that also have the fastest-growing populations. In today’s digital age, location and demographic data are better and more numerous than ever before. Each location can be tracked by city, zip code, and county, tracking each area’s average income, commute times, family size, housing starts, and growth rate. Customers can be categorized by age, gender, race, income, marital status, and native language. Geofencing is building consumer profiles at mind-boggling rates, which are being fed into AI systems for insights. Transportation departments provide data on just how many cars pass through an intersection, or traverse a stretch of highway daily. Real estate platforms like CoStar and others give users the power to filter locations based on specific criteria and needs. Location intelligence, foot traffic analysis, and mapping software are fueling data-driven site selection strategies, taking out the guesswork, turning the process into (somewhat of) a science.
Deloitte says commercial real estate isn’t about location, location, location anymore, but rather, location, experience, analytics. Deloitte’s insights in its 2020 CRE Outlook highlight how firms are leveraging data to build a better understanding of operations. JLL recently developed PinPoint, a geofencing tool that uses mobile data to assess the quality and quantity of time customers spend shopping. JLL has dubbed the new paradigm ‘consumeristics.’
“Shopping center owners and developers are in a fight for retailer and consumer dollars. The fight is powered by big data, and the winners will be those who successfully couple depth and breadth of data with experience and critical thinking,” said Alan McKeon, CEO of Alexander Babbage, which is partnering with JLL on PinPoint.
JLL is far from the first to develop new platforms to understand retail data and analytics. CBRE and other major brokerages are also devising better ways to understand shopping behavior. Forum Analytics, a CBRE company, is helping clients merge powerful technology with prosperity retail data sets, using GIS platforms to gather location intelligence-based insights, sales forecasting, demand studies, peer unit comparison, and more. In 2019, CoStar announced a strategic partnership with Buxton Co., an industry leader in customer and real estate site selection analytics. Similar to JLL’s deal with Alexander Babbage, the deal marries data with expertise.
The result is retail site selection strategies operating with startling precision. Experts can correlate data from marketing engagement against location data to know what area potential customers reside in. Successful retailers looking to expand to an adjacent area can see which nearby town or zip code they’re getting more engagement from to target with the next location. With powerful enough tools and the right data, you can even predict where customers will be. Building typical customer profiles give retailers qualifiers to filter down in nationwide maps, finding more places where their typical customers live.
Gaming the competition
The only problem is these tools are being developed and used by everyone. No amount of data, science, or analytics can change the fact of competition. Methods may vary slightly, but often the fight for the best retail locations is between businesses just as heavily armed as the next. That’s where economic game theory, developed by John von Nuemann and popularized by Nobel Prize-winning economist John Nash comes into play. Applied to site selection, game theory morphs into location theory. The premise has become integral to the spatial economics that governs much of real estate.
When a business moves to capture more market share or more customers, competitors will move in kind. Competing businesses will move again and again until they both find what each considers the optimal location, most often right on top of each other. Neither business has an incentive to move because doing so would give the location to the competitor. In economic game theory, that’s known as a Nash Equilibrium, the most common solution to non-cooperative games involving two or more players. In a Nash Equilibrium, each competitor’s optimal strategy depends on the opponent’s strategy, leading each to choose a less than optimal strategy. It’s a basic reason why retail clusters. McDonald’s and Burger King don’t want to operate on the same corner, but they don’t want the other store operating with impunity.
In this way, retail site selection strategy can be based on defense just as often as one based on offense. In economics that’s known as agglomeration force, drawing economic activity to a specific location. Marketers call it placemaking. From the first bazaars to modern shopping malls, the desire to be near economic activity is a driving force in business, even when it means moving in directly next to your competitor. Agglomeration force is so strong practically the only way to prevent it is through non-compete clauses and restrictive covenants in lease contracts, which are notoriously difficult to negotiate and enforce.
Location theory is a guiding principle of spatial economics, itself the foundation of much of the property industry. Real estate takes up space which we only have a finite amount of, deciding how to economically use the space to maximize solutions for the endless amount of human needs is the core problem in urban planners and spatial economists (aka real estate professionals). Retail, where people fulfill a great many of their needs, plays a key role on a microeconomic level. Agglomeration provides an economy of scale, savings costs by attracting suppliers, labor, and customers. It isn’t just retail hubs that grow and exploit economies of agglomeration, it’s what the entire basis of cities is based around. Concentration isn’t a result of economic activity, it’s the cause.
All of this is an academic way of saying even the most complex, scientific retail site selection strategies are still playing by the same rules businesses have played by for centuries. The tools may be changing, but the basic game and strategy have stayed the same. Understanding the competition has always been the hardest part. Even at the best, most innovative locations, competitors will soon be close by if the site is successful. Staying ahead of the competition is key. Better data, faster analytics, and more precision enabled by new technology and mapping tools have the race to get ahead of the retail competition picking up speed faster than ever before.