The Value in Real Estate Analytics

My conversation with Steve Morris, Founder and CEO of Asset Strategies Group, drawing on his 30+ years in the retail industry.

Steve, in my January blog post, I characterized the mall-based fashion specialty retail sector as “stagnant.”  What’s your perspective?

The winners in the last decade have been at either end of the price spectrum — the off-price retailers like TJ Maxx and the luxury or affordable luxury retailers like Coach, Tory Burch, and Michael Kors.,  This reflects the macroeconomic environment, where middle class incomes are flat or down, driving more value shopping, while the incomes of the top 5% have grown substantially, driving the upper end of the market.  The other winners are those that established strong brand identities and disciplines – you mentioned the Urban Outfitters Inc. portfolio and Victoria’s Secret as two examples.

What would you recommend to clients stuck in the middle?

Stores are typically the biggest asset on a retailer balance sheet.  In a low sales growth environment, it’s increasingly important to manage these assets for maximum return.  Yet, we find many specialty retailers have not yet adopted the market research and analytics that the big box, off-mall specialty, restaurant and fast food sectors have used for decades.  The cost of these analytics has dropped significantly:  in the 1980’s big box retailers could spend $250,000 to $500,000 to study a single major market; now a specialty retailer can put together a best-in-class national research initiative for the same amount of money.

What happened to make this so much more affordable?

Data and technology.  Most specialty retailers now collect their customer records, so with relatively inexpensive geo-coding software and purchased demographic data, we’re able to identify precisely the demographics and lifestyles within each store’s trade area.   We have geocoded over 100 million addresses in the last four years.  This data analysis alone can generate a robust data-driven picture of national and market-by-market store potential, and, combined with other site and market characteristics, drive to site-specific sales forecasts.

What keeps retailers from investing in these analytics?

Specialty retail real estate business processes have traditionally been driven by new store growth in new developments or in proven existing shopping centers.  I think many CEOs have a comfort level in following the crowd, rather than building their own analytics platform.  But  we’ve looked at dozens of chains’ sales performances across the same malls and found that the correlations between retailers is just not as strong as you would expect.  So small investments in multi-variate analytics can generate significant gains in model accuracy.

It’s that easy?

Well, yes and no.  Yes, in the sense that the improved models will better ensure that a deal will realize or beat its pro forma.  But also, no, in that the models alone won’t guarantee that every deal is the “right” deal.  We recommend a market planning process that incorporates overall real estate strategy and identifies the highest priority targets to help focus deal activity.

Describe this “market planning” process.

We recommend that retailers develop, and update annually, market plans for the top fifty markets and a strategic portfolio plan.  As I mentioned above, most real estate business processes were designed around new store growth, but today 70% to 90% of real estate activity is portfolio (existing stores) related.  For a typical retailer, 40% of their leases can be impacted in the next three years when accounting for year-to-year leases, kick outs, options and natural lease expirations.  Each of these stores needs to be evaluated for renewal, remodel, re-sizing, repositioning in the center or market or closing, which typically involves evaluating seven or more variables (e.g., store age, design type, profitability, trend, size, location in center, center ranking). For the math majors, there are over 5,000 permutations.  We built a software solution to manage this process.  With this process and these tools, retailers can greatly improve their real estate ROI over the long term.

Moreover, the opportunity (and risk) is much greater today than in years past due to the rapid consolidation of mall ownership into a handful of REITs.  These developers have a price target and backup plan for each space coming up for renewal.  A retailer who comes to the negotiating table without a sophisticated national point of view is at a significant disadvantage.  We have helped a half-dozen retailers prepare their annual portfolio strategies store by store, and they have consistently ranked this exercise as their most important strategic real estate activity.

Should a retailer outsource this function or build its own staff?

Every retailer outsources some portion of the strategy “mechanics”, whether it is sales models, market planning, trade area mapping and other GIS driven analytics, customer profiling, etc.  The “mechanics” team needs a GIS mapping specialist, a statistician comfortable with the great statistical software tools available, a data specialist and someone with great market knowledge.  You need to license statistical software, higher level GIS software, a geo-coder, and buy demographics.  Your data specialist needs to build a center and competitor data base that links to your performance. So a small company – with one or two brands and 1,000 stores is just not likely to want to economically fund internally all that capability.  The breakeven is probably around a 5,000 store chain with multiple operating divisions.