Franchising | January 2010 | By Staff

Site Selection

Brian V. Hill, a restaurant specialist at Pitney Bowes, warns not to assume you know your target demographic when selecting a new market. Go by the numbers, instead.

Examine the customer base before constructing a second unit.
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Q: How do I pick a second location that will be as successful as my first?

There’s a treasure trove of information located in the existing location via the customers. The key to successfully finding your next site is mimicking the success you have in your first site. You want to look at the customer base in general—who the customer is and who the customer isn’t. Sometimes finding out who the customer isn’t is almost as important as knowing who the customer is.

The goal is you’re trying to find markets that follow your blueprint for success. Franchisees often skip this step and rely on standard broker jargon that relies on the number of homes around the site. All that information is valuable, but if you don’t know specifically what your brand needs in terms of the types of consumers and number of rooftops, it doesn’t help you. When I say “rooftops” I mean households and apartments—mailable addresses.

Many times the franchisors can be a wealth of information, too. The companies typically already have compiled information about the types of consumers that respond well to the brand in terms of wealth, education, and background.

Franchisees can also gather this information through surveys that they either hire someone to conduct or that they do themselves.

In general most franchisees have a good idea of their customer base but they don’t know the nuances. They often assume that 80 percent of their business comes from 1–1.5 miles away. That may be true, but it also might not be. It depends on the density of the market. If you’re in a suburban setting, your trade area is going to be smaller than if you’re in a rural setting. And if you’re in a downtown setting it could be blocks or streets.

The key they’re looking for is, No. 1, where are the customers before and where do they go afterwards; No. 2 is how much do they spend and how often do they visit; No. 3 is what was the occasion for the visit. You want to build a snapshot of customers that tells you why they come to your restaurant, how far they travel, and when they come.

We recommend franchisees survey from Thursday to Sunday, all dayparts, and the drive thru as well as the dining room—at least 1,000 surveys. Once a franchisee knows the answers to these questions, it becomes fairly easy to find his next location.

By having that information, you’re able to do an old fashioned sales penetration analysis where someone actually can pin on a grid around the location where the consumers are coming from and how much they’re spending. It makes it very easy to make a trade model and figure out where the majority of your business is coming from. They then can say, “OK, in my next site I’m looking for a trade area that is 2 miles wide or an 8-minute drive, and these are the types of consumers that make up my marketplace, and this is where they’re coming from before they arrive and where they’re going afterward.”

In general most franchisees have a good idea of their customer base but they don’t know the nuances.

Real estate brokers are often demonized in the next step, but quite frankly, real estate brokers who work with informed franchisees can produce very good results. If a franchisee can bring all that research he’s gathered, the broker will find him sites that meet that criteria.

We’ve found that in general in the quick-serve market, about 45 percent of sales result around a home-base sale, which means the customers were either going to or coming from home. So right off the bat you know that almost half of your business is going to be reliant on the residential population that’s close to the site. That being said, it’s important to know how close they are and not only how many rooftops but the quality of rooftops. A good real estate broker will know that.

The second biggest driver of quick-serve sales is work. So it’s important to have a healthy mix of homes and office parks in your trade area. There is no 100 percent defined trade area for any franchisee, but you get it by looking at the geography around a location that represents roughly 75 percent of your overall monthly sales. The more urban or dense the site is, the smaller the trade area. Typically when you’re dealing with less-dense areas, the trade area can be quite large.

We prefer to mark trade areas in drive times versus miles because that’s the way consumers think about it. This is all based on the old business model that the closer consumers live to you, the more likely they will shop at your store. It’s friction of distance.

If you can identify the correct trade area, you’re going to eliminate the friction of distance for your customers, meaning you’re going to make your store the closest, most convenient one for them to frequent. In the end, you want to place your site right on top of your target population.

What’s interesting is that franchisees, just like their consumers, will typically want to eliminate distance and will build store No. 2 close to store No. 1.

It’s that same friction of distance at play because as a franchisee grows, he has control issues. It may be that the franchisee is going to oversee operations of both sites, so he’s going to want them to be fairly close. The problem with store No. 2 in terms of proximity is that franchisees often do not have a realistic understanding of the size of their trade area and will cannibalize sales of the first unit. If you place store No. 1 too close to store No. 2, you’ve got a real problem.

Now one plus one doesn’t equal two, it equals zero. That’s why the good old-fashioned trade area is so important to understand.