If you’re like most small businesses, then your number one goal is growth. But establishing and maintaining solid growth year over year can be extremely challenging, especially if you have been in business for a long while. According to the Statistics of US Businesses, there are roughly 6.7 million businesses in the United States that have at least 1 employee or more. In 2015, the most recent year available, there were about 612,000 businesses that closed and around 689,000 businesses that hired an employee. Chances are if you’re interested in the topic of this journal entry, then you are a business owner/professional, who is looking to grow their business and wants to know the best practice for qualifying a market for a new business location.
There are a number of ways to grow your business. You can focus on growing the business organically – this is when you decide to focus internal resources to attract new customers by hiring a salesperson, hiring an online marketing expert, expanding your product offering, and many other activities. You could choose to do a merger or acquisition – this is when you purchase or merge with a competitor to rapidly increase revenue. Or you could choose to expand into new markets by opening a new location. All three have their pluses and minuses, the biggest of which include the initial investment and the effort.
Today, I want to focus on expanding into a new market and how to qualify a market for a new business location. The term “new market” could be defined by opening a new location down the road, across town, or in another city altogether. The important thing is that we “Qualify” the new opportunity by making fact-based decisions, instead of relying on hunches or “That looks like a great location”. The thing to remember is that of the 6.7 million businesses, about 10% close their doors each year for one reason or another. So, we’re going to look at how Market Area Reports (MAR), can help your business qualify a market for a new business location.
One of the things that MAR does really well is analyzing location data. The primary function of our core product, the Market Area Report, is to give the client summarized data about the market that they serve. But one of the really nice things that we learn from the market area report is what the profile of our market looks like. Imagine a franchise operating multiple locations. Obviously, some locations are going to be performing better than others. Well, if a franchise was looking to expand into a new market, then wouldn’t they want to try and replicate the business model of one of the better performing locations. Well, the first step to doing that would be to look at the location of the better performing franchise locations. What is it about that location that allows it to perform better than others – remember, every franchisee thought that the location that they were choosing was going to be a good one. Clearly, some of the management techniques will influence the better performing business, but looking at where the business is situated is also very important. This is where the market area report comes in.
Let’s say we have two locations, one performing well, the other one is performing “OK”. We want open a third location by expanding the business into another city. We’re running a healthy food-focused, medium-sized grocery store, similar to a Whole Foods, Fresh Market or a Sprouts, that is currently doing business in Orlando FL, and we want to open a new location in Miami. Miami seems like a similar market to Orlando, very touristy, climate and demographics seem similar, health conscience, and it’s pretty close to Orlando (3.5-hour drive), so management could travel back and forth to watch the new location. But, they’ve never really explored Miami at all, it’s a pretty big city, in fact, according to Census.gov, Miami-Dade County has 2.5 million people living there. So, we would need to figure out where to start our search, so that we can qualify a neighborhood to see if there are any real estate opportunities. We might even figure out that Miami isn’t where we want to be at all, and instead we take a look at Jacksonville Florida.
Let’s begin. First, we would need to know whether Health Foods R US, has any “Current client data”. This would be customers who have visited the location in some recent time-period, preferably the last year. What we’re location for is self-reported name and address, so we can analyze where they live in relation to the location and what their household demographics are. If we don’t have this information, then we would need to try and collect it. The Fresh Market that I go to collects email addresses, so they can email coupons and such – this would be a good way to start. An email address is just like a fingerprint, there can only be one, and some companies can do what’s called a reverse address append, which is to say append a name and address to a known email address – MAR can do this at an additional cost to the report. You could also try collecting the information via an in-store survey or give-away. Depending on the size of the location the more data you have the better, but MAR likes to try and analyze at least 500 data points. Ideally, we would want to run this process for both locations, so that we can look at the geographic and demographic differences between the well performing and poorly performing locations, but we can still run a report to try and find a look-alike location in Miami.
After we have collected the Current client data, we will run our market area report. We’re interested in a few key facts:
- What is the geographical area that the clients live in?
- What is the reach, or what percentage of our clients come from what distance?
- Where is the competition?
- What is the demographic makeup of our clients?
- How many households are in the area and what is the total penetration?
- Which neighborhoods surrounding our location does our location have above average penetration?
- What is the profile of the higher penetration neighborhoods?
Once we have established these key market summary statistics, we’re ready to go find areas in Miami that look similar to the area we’re doing well in, in Orlando. We’ll set the search radius to match the current market area in Orlando, then MAR will systematically move the latitude and longitude and summarize 9 locations until we find an area that appears to be an acceptable match. See below for an example of how we do this.
By establishing a location in the Northeast section of this area, MAR systematically moves the latitude and longitude of the search location/radius, so that we can summarize the underlying block group data to identify where potential new locations should have a better success rate. The diameter of each radius ring is 5 miles, so you can see in this example that we are analyzing approximately 100 square miles. Below shows a map where block group median income has been laid underneath, so that you can how diverse an area can be.
Take a look at the below to see where the three radius rings starting from Northeast to Southwest have been identified as having very different median incomes. You can see from the color shifts that the center radius ring is going to have a lower median income than the Northeast location, and the Southwest location is going to have the highest. After intersecting the block group demographic data with the radius rings, the results confirm that the median income for the center radius ring is $32,212, while the Northeast ring is $44,835, and the Southwest ring is $50,463 – Almost $20k higher than the center ring.
So what you say, I didn’t need to do a honeycomb looking analysis to know where the rich people live. Well, that’s true, but what if we also wanted to layer in age. Age could be very important to our Health food store. Let’s say we tend to hit a younger demographic.
Not as clearly defined, is it? In this case, the average age of the top center radius ring is actually the youngest coming in at an average age of 37, while the bottom left radius is 42. Not a huge difference, but could be significant at a difference of about 15%.
I think you’re probably beginning to see my point. If we summarize the above questions from the market area analysis, then summarize the same metrics in our search, we can find areas that look similar to begin to narrow our search. One point to note, we can’t summarize penetration because we wouldn’t have penetration in the new market, but we can summarize the high penetration block groups.
I hope this journal entry helps you to better understand how MAR can help your business do the preliminary research for qualifying a market for a new business location. As I mentioned prior, the purpose of this analysis is to assist the business owner in identifying areas that they’re going to want to do more research in, for instance, available real estate options, traffic counts, etc. Once you have identified a solid real estate opportunity, MAR is happy to center the location and rerun the analysis. Feel free to reach out to us today if you have any questions!