Many businesses trying to grow the smart way recognize that capital planning involves an analysis of both short- and long-term needs and goals before they decide where their dollars are best spent. Regardless of how you plan your budget, your goal, of course, is to boost revenue. The question is: what capital expenditures are most likely to make that happen?
Typically, there are two main areas of focus for most chain businesses going through capital budget planning:
To allocate capital to new stores/locations
To allocate capital to improving the stores/locations they have
In this blog, we’re going to focus on the latter (improving the stores you have). You want to get the highest return on your investment and help each of your locations fulfill their potential. So, what is the best approach to do that?
Understanding your options: the four “Rs”
Let’s talk about your capital investment options. Here are some of the most obvious capital spend possibilities—and some considerations regarding each:
In the retail or restaurant business, listening to your customers is essential. When you do that, you’ll realize when your customer needs change. Perhaps you’re located in an area whose demographics have evolved in recent years. If you’ve noticed a drop in revenues, it could be that your target customer is no longer in your trade area and that the people who are in your area want something different. That calls for a change in your store, so the question is: are you willing and able to make that change?
Maybe a big competitor (or several) have recently come into your market with nicer, more modern spaces, making yours less appealing than it once was. Or perhaps some of your locations have urgent needs that need fixing (e.g. a leaky roof or a mold problem).
Relocation might be necessary when it’s clear that no amount of remerchandising or remodeling will help you boost your business again. Is the population in your trade area declining? Is your area’s economy deteriorating? Whatever the issue, it might be that different location will help you rebuild sales and get back on track.
Enlarging your space can boost your sales and provide a better experience for your customers. If you’re a restaurant that always has a long wait for tables, for example, you might be losing customers. It might make sense to expand rather than open another location. Of course, you could also consider reducing your footprint by subleasing your space.
Of course, many businesses make the decision to simply close one or more locations when it seems that putting their efforts into their other locations (or opening new locations) is the best decision. We’ll talk more about that in part two of this blog post, which focuses on allocating capital to new locations.
If you have one or more underperforming locations, you should analyze whether the problem is a bad location or operational problems, which closing will not help. Maybe your business is suffering most of all from a lack of exposure, which could be helped by marketing and advertising. You might also consider bringing in new management or renegotiating lease terms.
Each of the four Rs above options requires some internal discussion and analysis on your company’s part, but the question we hear often is, “How do we decide what to do?”
Short answer: look at what the data says. Here are a few questions to ask, the answers to which will help you determine your next steps for each location:
- Is my competition changing? Consider your competition in the area—both direct competitors and nontraditional competitors that you might have overlooked.
- What’s happening with the population in the area? You need to assess any change in demographics that are impacting each location today. For example, is your once hip area aging? Is there a nearby development that is attracting more of the young families who have always been your target buyer?
- What going on with customer behavior? You absolutely must try to understand your customer behavior. Who is buying from you? Who might buy from you if you adjusted certain things about your business or if they knew about you? Are traffic patterns causing customers to go elsewhere?
- What’s my potential? Assess whether you’re living up to your location’s potential. There are many factors that go into this, including your site, the demographics of the area (and how they fit your business), population growth and decline, co-tenants in your shopping center, and competition. You must use the best data available to assess these factors in your location analysis.
Capital planning decisions aren’t easy to make, and for most companies, they can be downright overwhelming. Questions about using data to make intelligent capital planning decisions regarding your existing locations? Contact SiteSeer’s team today. We’ll help you understand how to take a proactive vs. reactive approach to strengthening your stores so you can hopefully mitigate future problems and capture upside potential.