INTRODUCTION - These notes were taken by John M. Little at a training given by Charles Rial and Associates in Miami on June 17-19,1987.
DECLINE OF INNER CITY
II. THE RISE
OF THE MODERN CHAIN
Chain stores are a
new development. They moved mostly to the malls. They had a price
also had more sophisticated systems such as centralized buying,
merchandising, advertising, personnel training, and profit sharing. In
other words, these stores had all kinds of systems to make a store
work (support systems). This makes it much tougher for the
neighborhood merchant to compete against them. Chain merchants are
perceived by the consumer as doing a much better job. The
expectation of community support is not enough, in and of itself, to
insure the success of neighborhood merchants.
Commercial areas used
to be thin
strips. Modern chain stores are being built on larger blocks of land.
As a result, when you want to attract large chain merchants into an
older neighborhood you have to assemble larger tracts of land. In
the inner city this means that displacement will often result.
Consumers make decisions based on such factors as:
Don't put too many
into a commercial revitalization project. The lenders don't want to
make a social statements. An example of a revitalization project
that was "heavy" on social objectives (without fully taking
into account market factors) was the shopping center that was built
in a neighborhood in reaction to a riot. The main marketing tool was
ideology (i.e. loyalty to neighborhood). The shopping center failed.
Consumers will not change patterns merely by saying "shop with
the brothers". They will only change their patterns when you
have attained a level of sophistication so as to give them a "great
little place to shop".
Many time local merchants do not do a good job. They do not provide a quality product and service at a good price. The question then is how do you change this.
creating more wealth in
the black community than individual efforts because there are not the
role models in that community. Franchises provides a system that
merchants can plug in to. Franchises can make up for the fact that
black business persons do not have parents or other role models in
the community who can provide the training to insure business
Before the automobile
and malls, a
typical strip might support eight blocks. Now, with reduced
population and market, the strip might only be able to support three
blocks of businesses. It might make sense to "decommercialize"
a number of marginal commercial blocks and turn them back into
housing. In other words, concentrate the effort on just a few
VARIABLES IN RETAIL
1 Product mix and merchandising flair.
2 location and its cost
3 ability to use wholesaler resources and services
4 gross profit
5 inventory turns e.g. if you keep an average of 50 pairs of jeans on stock and you sell a total of 500 every year, you have an "inventory turn" of 10.
6 supplier credit - Supplier credit is advantageous because there is no interest to be paid You can use supplier credit in a startup situation if you do your home work.
7 labor costs
8 control over of advertising - A lot of money is wasted on advertising.
9 In tune with customer base - is/should be, coupled with ability to respond to changes in the market demand, e.g. inner city stores who are able to adapt to a changing customer base due to gentrification.
V. KEY VARIABLES IN COMMERCIAL REAL ESTATE
1. Location - It depends on how much you are paying for it. e.g. bayside charges $40 per square foot (based on $120 per square foot construction costs) whereas in the ghetto you might be paying $4 per square foot (based on $40 per square foot construction costs). The more rent you charge the nicer building you can build.
Three types of commercial rent.
a. Base rent
b. common area charges
c. percentage rents (percentage of profits) -- This is gravy for the landlord because his bank has loaned money based only on the base rent and common area charges.
2 Credit worthiness of tenants - 70% of tenants in malls are chains that can provide their own financing It makes the mall developer better able to get financing from the bank In neighborhood revitalization you might look to a mix of chains and individual tenants.
3 Financing costs. - Amount of payment in relation to borrowing is defined by interest rate and the term of the loan Subsidies mixed with *commercial lending can lower the blended rate.
4 Tenant mix or anchor tenant
5 Operating costs
6 Land costs
7 Cost of construction relative to rent
8 Tenant charge in excess of rent.
VI. PUTTING TOGETHER A DEAL
3. Get commitments
STEPS IN COMING UP WITH A
DEVELOPMENT CONCEPT FOR COMMERCIAL REAL ESTATE
1. Define Trade Area.- Boundary from which you would expect customers to come from within. The area from which you expect 80% of your customers.
2. Collect Basic Market Data - Count number of people within the trade area with the amount of dollars that they spend, etc.
3. Inventory the existing retail establishments and interview merchants.
4. Rank priority tenant types (e.g. Drug stores vs. ladies retail etc.). See below for more detail on how to do the ranking.
5. Consumer survey. You ask questions like "what kind of stores do the customers shop at now, etc. Many times merchants do their own study, so this survey only needs to be the basic information. You will use it to catch the interest of potential merchants.
6. Develop a tenant mix. (see below for more detail)
7. Review sites and prepare site plans.
8. Early financial projections.
9. Seek preliminary commitments from credit worthy tenants and banks.
VIII. PUTTING TOGETHER A DEVELOPMENT TEAM
The following is a list of the types of people that need to be put on a development team. Not all of these need to be on the team for every development. It depends on the circumstances.
IX. TRADE AREA
The factors that determine where and when people shop.
How to determine trade area:
Besides defining trade area by demographics, competition, barriers ect, you can also define target area for existing businesses using INTERCEPT SURVEYS where you ask people on the street where they live. You then put dots on the map and draw a circle around the 80% closest to your center and you call this your trade area.
X. RANKING POTENTIAL BUSINESSES AND DEVELOPING TENANT MIX
Call computer service
in Los Angeles
(Urban Decisions Systems) and they will give you information based on
census tracts. This service costs about $100.00-$200.00. They get
this information from such sources as the Census of Retail Trade,
sales tax data, economic studies based on regional differences in
spending patterns and economic studies based on racial differences in
spending patterns. This data answers questions like "how big a
drug store will our trade area support?". Contact Urban
Decision Systems Inc., P.O. Box 25953, Los Angeles, Calif. 90025. The
telephone number is (213) 820-8931. Call up United Decisions Systems
and give them the census tracts or zip codes (or portions thereof)
that you are interested in. Say to them that you want a store
summary, population report and some individual reports.
The "Store Report"
you The annual sales potential for different types of businesses in
your target area. It tells you the aggregate volume of sales for
that store type, the per capita expenditure and the gross supportable
With this information
you can estimate
the potential market share of a particular type of store for your
If a business would
have to capture an
excessive share of the market, it should not be included on the list
of good potential businesses for a target area. As a rule of thumb a
"convenience goods" store should not have to capture more
than 30% in order to break even and a "shoppers goods"
store should not have to capture more than 15%. If the actual
business would have to capture a greater percentage than this the
business would not be feasible and should not be included on the list
of potential businesses for your target area.
You can estimate the
market share as
Once you have
determined, in a general
way, what types of stores might be feasible, you might then want to
do a consumer survey in order to really focus.
At this point you should have your tenant mix.
Use these market
studies to determine
which tenants to talk to. Market studies can get you beyond merely
using politics to talk banks and potential tenants into
participating. You are not asking them to make a decision based on
politics but on market factors.
XI. COMMERCIAL REVITALIZATION ACTIVITIES
XII. THREE CYCLES OF REVITALIZATION
focus is to stabilize the businesses that are already there.
2. Then, create a climate for investment.
3. Then, Re-commercialization
If you don't do the preliminaries, the Winn-Dixies of the world won't be interested in coming in.
XIII. REVITALIZATION PROCESS
1 Physical Improvements
2 Business Assistance Services
3 Coordination of Public Resources
4 Organizing Component
5 Marketing/Promotion Component