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The New Tech Helping Retailers Pick the Right Spot

Supermarket executives have adopted unified market knowledge systems to improve the murky and difficult process of store site selection

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My hometown, Dumont, New Jersey, a solidly middle-class town of 20,000 people, is currently at the center of a vicious, years-long turf war. The combatants? Pharmacies.

CVS struck first with a store on Washington Avenue, and then expanded west into New Milford. Walgreens volleyed with stores to the east, and further south in Bergenfield. Then a dark horse emerged, Rite Aid, establishing positions to the heavily trafficked south. Walgreens countered with another location on Washington Avenue, smack in the middle of CVS and Rite Aid territory. It's become Game of Thrones, with pill bottles.

Dumont and its neighboring towns happen to be a gold mine for prescription-fillings. For every square half-mile in the area, residents are filling more than 80,000 prescriptions per year. In Dumont alone, that means there are at least 320,000 prescriptions filled annually. Eighty thousand is a magic number for national pharmacies -- it's the bare minimum required before entering a market. There are eight pharmacies within two miles of Dumont, but the area's annual prescription demand suggests it could support four or five more. This battle will rage on.

I came to learn all this while test-driving TAS Unity, the flagship product of a tech company called Trade Area Systems. TAS Unity is an example of a unified market knowledge system (UMKS), a relatively new technology which large retailers and commercial real estate developers are using to improve the murky process of site selection. Say CVS wants to open yet another store near Dumont. It could use UMKS to help choose its next location.

UMKS is not an overtly sexy product -- it's simply a package of hardware, software, data and Web/mobile apps. But it comes with a compelling value proposition: UMKS can help retailers make better, faster decisions about where to build. Based on the conversations I've had with developers, retailers and researchers in the commercial real estate business, this makes UMKS a very exciting idea.

* * *

Site selection is difficult. It can require thousands of dollars and hundreds of man-hours to simply evaluate a site. Companies take the process very seriously, because poor site selections wind up becoming very costly mistakes. Consider all the expenses involved with opening a store: research, broker fees, property, permits, construction, staff, promotions, marketing. The threat of failure looms over everything: How is a brand affected when a store opens and then closes?

SUPERMARKET FUN FACTS
- Supermarkets assume any customer more than 8 minutes away will find their store inconvenient.

- 55% of the products in Super Centers (combo discount department and grocery stores) are supermarket items.

- 60% of home improvement superstore customers are women.

- Supermarkets assume each person spends about $50/week on groceries.


Things weren't always this way. Back in the 1950s, when retailers first started fanning across the United States, site selection was kind of easy. Commercial real estate was a personality-driven business back then, more art than science, filled with men (they were almost all men) who could pick a good spot by the look of the land or the smell of the soil. Dolores Hayden writes in Building Suburbia that Ray Kroc of McDonald's used to cherry-pick locations for his next burger stand by flying over suburbanizing areas in a Cessna.

Thanks to a number of factors, the personal approach proved surprisingly durable. Suburbanization certainly made things easier: new, wide-open markets spawned as urban downtowns were abandoned. The Interstate Highway Act of 1956 was key, as well. It accelerated the development of shopping centers and malls, and created the need for thousands of new roadside businesses.

According to Hayden, a third and less-known factor was perhaps the most important. In 1954, Congress reduced the straight-line depreciation period of greenfield income-producing property from 40 years to seven years. This meant that new commercial properties built on virgin land -- the kind of land readily available in new suburbs -- suddenly became near-instant tax write-offs. (The depreciation rate stands at 39½ years today.) The loophole created huge subsidies for developers and turned commercial real estate development into something like a license to print money.

The gold rush ended after the real estate crash of the late 1980s. The easy money was gone, and the landscape was saturated with commercial properties. The advent of real estate investment trusts, or REITs, made things more complex. Basically conceived as straight-up investment portfolios that contain buildings instead of stocks, REITs forced developers and retailers to more carefully consider return on investment. The situation's even tougher in today's post-recessionary climate. Expense, market saturation, risk aversion and a slowed residential construction industry (new homes spawn new stores) all complicate site selection.

Then there is the problem of data overload. According to Peter Patnaude, head of research at SRS Real Estate Partners, the largest retail real estate services company in the United States, there are "thousands" of potential variables that can be taken into account when choosing a site: age, race, gender, income, credit scores, crime statistics, regional voting records, divorce rates, traffic patterns, loyalty card information and weather just being the teeniest tip of the iceberg.

But the would-be customer is only one part of the equation. Retailers must also have intimate knowledge of their own locations -- no small task when you're talking about thousands of properties -- as well as the locations of their competitors. Some of this information lives in databases, and some of it lives in the heads of people within the companies. This presents another problem. When employees retire or, worse, move to a competitor, they walk away with a tremendous amount of knowledge.

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John Cantwell writes mostly about design and teaches at the School of Visual Arts.

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