Unlikely Cities Yield Surprising Profits
In our previous article, The Secret to Retail Store Profitability, we discussed a retailer client that was unsure whether to expand or close its three-store chain of French clothing boutiques. We helped the client understand the key drivers of boutique profitability and that by “right-sizing” its boutiques, the retailer could operate them quite profitably.
The question then became: Where to expand? It’s a question many businesses face as they map out a growth strategy.
Location, Location, Location
Thinking about potential boutique placement sites presented two primary choices to make:
- Should we select locations based on attractive demographics, or based on low rental costs?
- Should we follow the leader (i.e., place our new boutiques next to other leading upscale clothing boutiques) or blaze a new trail (i.e., find new retail locations not yet discovered by the market leaders)?
Choice 1: Inexpensive Upscale
We gathered extensive demographic income and wealth data (using a combination of government and credit company sources) for the entire U.S. at the ZIP code level. With this data we ranked the 50 largest metropolitan areas on two dimensions:
- Size of the upper-income populations in each metro area
- Rental rates per square foot in each metro area
Not surprisingly, some metros with attractive upper-income demographics (e.g., Miami, Beverly Hills, San Francisco) also had very expensive rental rates, which made them a risky proposition for expansion.
We wanted to make sure our first-round boutique expansions would be profitable, so we took the most expensive cities off our list. What remained was a surprisingly long list of cities with a combination of at least modestly attractive upper-income demographics and very attractive rental rates. Denver, Dallas and Atlanta jumped to the top of the list.
Note that the upper-income populations of those cities were much smaller than areas such as Miami/Fort Lauderdale. However, as long as we scaled the boutique size (in square feet) to fit the population size and resulting potential revenue stream, our client could be reasonably confident of locking in a profit the day they signed the lease.
Choice 2: Follow the Leader
We also quickly determined that, with our relative lack of brand name strength and our desire to reduce risk, we would limit ourselves to a follow–the–leader strategy: Within the target metros, look for opportunities to place boutiques in the malls or shopping centers where one of our top three competitors was located. The logic behind that choice was:
- We were competing for the same customer, so by locating near our competitors we could count on a high volume of upper-income foot traffic
- Our offer was distinctive enough to attract some of our competitors’ shoppers into our boutiques
The Expansion Plan: Follow the Leader into Upscale, Yet Inexpensive, Neighborhoods
Our client executed this expansion plan vigorously in Denver, Dallas and Atlanta. They’ve since expanded into a number of other metro areas and now have 15 boutique locations throughout North America. In the process they have gained the confidence and expertise needed to support a robust boutique operation; quite an improvement from the early days when they had only three boutiques and were questioning whether they should close those boutiques and exit the relationship with their French designer.
The moral of the story is this: Often, there are only two to three key drivers of value creation in a business, so invest your time and energy to figure out what those drivers are and then craft a strategy to pursue them religiously. In this case, the client was able to lock in a profit the day they signed the lease simply by right-sizing the store to match the local demographics and prevailing rental rates.
KARL STARK AND BILL STEWART | Columnist | Co-founders, Avondale
Karl Stark and Bill Stewart are managing directors and co-founders of Avondale, a strategic advisory firm focused on growing companies. Avondale, based in Chicago, is a high-growth company itself and is a two-time Inc. 500 honoree.