In case you missed part 2 of “Moneyball” and Real Estate, click here.
Reduce Your Risk, Eliminate Bad Locations
Now that we have explained to you “Moneyball” and have shown you a demonstration of the 3L Score it’s time to put our service to use in a real life situation.
Scott and Gina Smith are the owners of a InkWrap from Lake Havasu, AZ. They are the makers of auto, boat, RV, off-road vehicle wrap graphics using premium vinyl wrap material. They create premium, high resolution consumer wraps for car and truck owners, and premium commercial wraps and fleet graphics for the the advertising and outdoor promotions industries.
Scott and Gina have decided that it’s time to start evaluating the possibility of opening a second retail location and are thinking of looking at Las Vegas as a possible destination. They have allowed us to assist them during their initial research stage.
InkWrap – It’s not a wrap, until its and InkWrap!
501 N Lake Havasu Ave Ste 106
Lake Havasu City, AZ 86403
Phone – 928-846-5148
Website – www.inkwrap.com
Email – email@example.com
Business Owner, Age 28-50, College Degree
Our business is generated from a combination of “Small Town” word of mouth, local advertising, combined with a high traffic location.
We are competitive, but on the higher end, we sell our quality and design.
Space Requirements for Las Vegas: 1,000 to 1,500 SF of retail space in either a Neighborhood or Community center. Ideally this new location would have a drugstore or grocery store as the main anchor tenant and have a high daytime employment population.
The Real Estate Challenge
Like many small business owners who are in their initial research stages, Scott and Gina are not working with a commercial real estate broker and instead are using many of the free services available online to start their search. Using the free Loopnet search they have determined that there are approximately 59 locations currently available on the market matching their search criteria (1,000-1,500 SF retail space in a community or neighborhood center.) Scott and Gina would like to narrow their search results down to 10 to 15 locations before scheduling a visit to Las Vegas.
Step 1 – Reduce Your Risk, Eliminate Bad Locations
A common fear amongst many business owners in today’s economic environment is that they opened their business in the wrong location. We’ll recall an excerpt from our previous blog post titled “Retail Business Planning” (read the full article here):
“Although a great location may not guarantee success, a bad location will almost always guarantee failure. A new retail business needs to be where the customers are. You want a location with a reasonable degree of security, access to public transportation for your customers and employees, adequate parking for commercial as well as personal vehicles, room for an office, and that all-important sales space. Where you locate will determine the hours you keep, who your clientele is, and what types of promotions you do. Also, where you set up shop will impact how long it will take you to grow. Luckily, you have lots of options.”
In terms of reducing risk, the first step that Scott and Gina need to take is to eliminate perceived “bad locations” from their search results. With the assistance of the Stability Strength Score as discussed in Part 2 of “Moneyball” and Real Estate we can quickly evaluate all of the locations in our search results. Scott and Gina have determined that any location with a Stability Strength Score that is 55 or lower (40-55=Unstable, 40 or below = Very Unstable, download the 3L Score Dictionary) should immediately be eliminated.
Here are the properties that will be eliminated from our search results (click on the image to see a larger version):
The process discussed above allowed us to eliminate 20 of the 59 properties in our search results, leaving us with 39 to still go through.
Step 2 – Are your customers willing and able to spend money today?
Imagine your own neighborhood and the local geographies your friends live in. What you experience and what you see and hear about those around you impacts how you think of the future and influence your spending decisions today.
Perhaps, many of the homes in your neighborhood are “underwater,” and those that are selling are often sold at a loss. There are noticeably more “For Sale” signs standing in yards waiting for a viable offer. You now see vacant homes in your neighborhood, and maybe more in the neighborhoods around you. Compared to last year, maybe more of your neighbors have either lost their job or have had their wages and hours cut. Your closest friend, like you, is bringing more work home on her computer at night, but not getting paid more. She calls it “job insurance.” She’s worried because hardworking capable friends can’t find work, and they are looking. You hear numerous similar anecdotal stories at local school sports events, cocktail parties, church and other places.
Wouldn’t an environment like that affect your willingness to part with your cash? Would this type of environment cause you to “splurge” less and save more when possible? Would it cause you to grace the doors of discount/value stores with a new mentality and check menu prices more closely when eating out? If you haven’t experienced this, good for you. But your customers might be going through it right now.
Taking this into consideration Scott and Gina have decided that the Willingness To Spend Score for each location that they are evaluating needs to be greater than 40 (for reference download the 3L Score Dictionary). (click on the image to see a larger version)
This process has left Scott and Gina with 27 properties to review.
Step 3 – Be Picky, Find the Right Location for Your Business
Thanks to the filtering process the 3L Score Scott and Gina have the ability to be even more specific in their requirements allowing them to eliminate riskier locations so that they can focus their time and efforts on locations that will potentially bear the most fruit.
During their research process it was decided that Scott and Gina could be more selective and they decided that they would like their final set of potential locations to have a Stability Strength Score of at least 65 and Willingness to Spend Score of at least 40 leaving them with the following 11 locations to consider. (click on the image to see a larger version)
While the 3L Score does not guarantee business success at whichever location Scott and Gina may choose in the future, they can feel comfortable knowing that they have eliminated the riskier locations from their search allowing them to focus on better opportunities.
Interested in learning more? Visit our website http://www.catalystanalytics.com/retail-restaurant/ and register for a Free Trial or give us a call at 888-600-2370.
* Note – Scott and Gina have not made any formal decisions regarding the expansion of their InkWrap brand into Las Vegas or any other market for that matter. This exercise is to be used as an example for the purposes of showing the practical business use of the 3L Score. We thank Scott and Gina for their time and for allowing us to use their brand InkWrap in our example.
“Moneyball” and Real Estate -Part 2
In case you missed part 1 click here.
Now that we understand “Moneyball,” the next part is to examine how the concept of using statistics and mathematical algorithms comes in to play when evaluating retail real estate locations. As businesses assess the impact of the “great recession” and position themselves for future growth, having a grasp of the changes to their local market(s) will help them achieve their goals. We have developed a new market research program called the 3L Score that is designed to be a barometer of the the economic stability and consumer spending mentality of the neighborhoods surrounding any address in the United States.
What is the 3L Score?
The 3L Score is not an annually updated data base printout that you’ll look at with a blank stare. It is an up-to-date custom designed snapshot of the condition and make-up of the customers supporting your current or future business location. The information relied upon for the 3L Score is comprised of last completed quarter and current month data. Often the information is only days old. The 3L Score allows for quick decisions and shaves off hours of precious time you will spend analyzing a location.
Quickly evaluate and score any business location in the United States. Immediately recognize the big differences between locations and get insight to recent significant business changes you have experienced based upon the changing consumer. Your location hasn’t changed, your product mix hasn’t changed, but your customer base may have significantly changed from what you knew it to be 2 years ago, 6 months ago, or even one quarter ago.
The 3L Score contains 2 unique scores within each report, the Stability Strength Score and the Willingness to Spend Score. These scores, when combined with demographic information such as population, daytime employment, household income and age will give you a clear picture of the neighborhood make-up and mentality surrounding every location.
Stability Strength Score
The Stability Strength Score reflects the likelihood of future change to household make up, household formation patterns, and the probability of the consumers surrounding your address changing in the foreseeable future. It reflects the future stability of the local economy given what is known today, and also assesses the relative strength of an area to withstand an economic hit.
Catalyst Analytics’ proprietary algorithm measures the general ability of an area’s residential households to withstand shocks to possible employment/income changes from the local and national economic environment. It reflects the very stability of the geographic area itself, in terms of income, employment, and the strength of the average household’s ABILITY to be there and remain.
Willingness to Spend Score
Imagine your own neighborhood and the local geographies your friends live in. What you experience and what you see and hear about those around you impacts how you think of the future and influences your spending decisions today.
The Willingness to Spend Score quantifies your area’s qualitative household attitude toward spending disposable income on a scale of 0 to 100. The lower the score the more cautious the local households attitude to parting with their money. A score of zero (0) would equate to “survival desperation- hoarding all cash possible,” whereas, a score of 100 would equate to “will splurge to reward hard work or goal achievement.”
View a 3L Score Demo below:
In Part 3 of “Moneyball” and Real Estate we’ll put the 3L Score to work as it helps Scott and Gina Smith of Inkwrap in Lake Havasu, AZ decide which retail locations to visit as they look to expand their business to Las Vegas. Click here for Part 3.
“Moneyball” and Real Estate – Part 1
Moneyball: The Art of Winning an Unfair Game is a book by Michael Lewis, published in 2003, about the Oakland Athletics baseball team and its general manager Billy Beane. Its focus is the team’s modernized, analytical, sabermetric approach to assembling a competitive baseball team, despite Oakland’s disadvantaged revenue situation. A film based on the book starring Brad Pitt and Jonah Hill opened September 23, 2011.
Synopsis of Moneyball: The Art of Winning an Unfair Game
The central premise of Moneyball is that the collected wisdom of baseball insiders (including players, managers, coaches, scouts, and the front office) over the past century is subjective and often flawed. Statistics such as stolen bases, runs batted in, and batting average, typically used to gauge players, are relics of a 19th century view of the game and the statistics that were available at the time. The book argues that the Oakland A’s’ front office took advantage of more empirical gauges of player performance to field a team that could compete successfully against richer competitors in Major League Baseball.
Rigorous statistical analysis had demonstrated that on-base percentage and slugging percentage are better indicators of offensive success, and the A’s became convinced that these qualities were cheaper to obtain on the open market than more historically valued qualities such as speed and contact. These observations often flew in the face of conventional baseball wisdom and the beliefs of many baseball scouts and executives.
By re-evaluating the strategies that produce wins on the field, the 2002 Athletics, with approximately $41 million in salary, were competitive with larger market teams such as the New York Yankees, who spent over $125 million in payroll that same season. Because of the team’s smaller revenues, Oakland is forced to find players undervalued by the market, and their system for finding value in undervalued players has proven itself thus far. Read the rest here
“Moneyball” and Real Estate
Similar to the discoveries made by Billy Beane and the Oakland A’s, we at Catalyst Analytics believe that there is a need to re-evaluate the process of site selection for retail real estate.
Retailers and restaurant owners/managers around the world use detailed customer intelligence for strategic real estate leasing and acquisition planning, new market expansion, franchise development, and marketing strategies and tactics – including product mix, pricing, promotion and advertising tailored to each of their locations. A common misconception by outsiders is that the key to retail success is “location, location, location.” The real key is recognizing that it’s not the real estate itself, but rather the make-up and spending mentality of the consumers surrounding the real estate, (including daytime employees) that will determine success or failure.
Find success in new/different retail locations
It has taken time, but most businesspeople in the U.S. have come to recognize that this “economic recovery” is very different from those in past decades. We have had major structural change that will last for years.
If your current decision making tools utilize annually updated database printouts with no means to interpret the major structural changes that have occurred within the U.S. economy since the upheavals of 2008, you may be in trouble. Your location hasn’t changed, your product mix hasn’t changed, but your customer base may have significantly changed from what you knew it to be 2 years ago, 6 months ago, or even one quarter ago. Significant structural changes have occurred in the U.S. and Global economy since 2008, changing not only who your customer is but also how and when they part with their disposable income.
To give you an brief example of a few of the changes that we are talking, about we recommend that you watch the video below about Echo Boomers and Baby Boomers.
Continue reading “Moneyball” and Real Estate and see how we use the 3L Score to help a small business owner find the best location for their growing business. Click here for part 2.