Digging in the Dirt

Get to know a site and your company needs—before breaking ground.

Traci Carneal, Freelance writer

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A lot of affordable land is sitting pretty and empty, anxiously wooing the next buyer eyeing a desirable new store site.

But it’s vital to fight the temptation to commit to a piece of property—no matter how sexy—without considering a host of factors, from traffic flow and surrounding competition to consumer needs, your company’s market strengths, and local developmental barriers.

The property that appears to be the obvious choice and easiest to develop may in reality be the wrong location for a company’s niche, according to Jim Fisher, CEO of site development research firm IMST Corp., Houston. “Many people have a tendency to fall in love with dirt,” Fisher says. “Rather than falling in love, the dirt should be analyzed to see if it is truly viable for the intended use. All dirt has a purpose, but the challenge is to find the right purpose.” Build it and they will come? No, says Fisher. “It’s the exact opposite. If the trade area is not there to support it, don’t build it.”

Some retailers, for example, want to develop a property they already own or can get for a good price. Price and ownership alone cannot be the reasons to break ground, concurs Dennis Ruben, managing director of NRC Realty & Capital Advisors LLC, Chicago.

“It’s important to do your research before making site choices and decisions,” Ruben says. “Using a site-analysis company before starting the development process can help determine traffic patterns, average income in area, range of employers and other factors.

“Do you want to be on the side of the road with early-morning or evening traffic? What image do you want to portray? Who are your competitors?”

According to Scott Hartman, president & CEO of York, Pa.-based Rutter’s Farm Stores, a significant question is, how much capital are you willing to invest? “The amount we put into a project before we can even turn a piece of dirt to start is most often in the hundreds of thousands of dollars range,” he says. “It’s a risk to pay upfront for professional fees to determine if a site is viable, and that can be hard for the independents.”

With the credit crunch, stricter zoning regulations, a tumultuous economy, and increasing competition, retailers face immense challenges while looking to expand. However, thorough planning can ward off a huge mistake or open the aperture to greater long-term payoffs.

Before Digging In

Whether building from the ground up or remodeling, consider your objectives before you embark—and when you do, think beyond just the store itself. Is the prospective property in a residential area that lacks a c-store? Or is it in a heavy traffic area that provides a chance for a new store to fill a niche? Is a store’s offerings better geared toward morning or evening commuters?

Most c-store retailers, especially independents, will conduct some due diligence before approaching a site-analysis company, spending money on drawings or meeting with real-estate lawyers, according to Travis Heiser, president of IMST. “By the time a site reaches us, normally the client knows it’s available, knows the contract terms and is looking to us to see if they should close the deal,” he says.

Bob Stein, president of fuel-pricing software specialists KSS Fuels, which recently acquired Market Planning Solutions Inc. (MPSI), says successful retailers rely on predictive site-selection models to help them identify new site locations. “Considering the average cost of a new store is about $3 million, it’s important to not only understand how a store will perform at a particular location, but how it will impact other stores in your existing network,” he says. “A predictive model allows you to analyze the outcome of making changes to your network before you spend any capital.”

H.N. Funkhouser of Winchester, Va., operator of 21 Handy Mart stores, believes strongly in prepurchase market research and analysis. Many of the company’s stores feature a Subway, Dunkin’ Donuts and Baskin-Robbins.

“The first thing I do is hire a consultant … to study whether a site makes sense for my business,” says Ken Rice, executive vice president & COO. “I want to know the projected volumes before I commit to a property. Their analysis also provides our realtor with a tool for marketing the other sites in a property, since we often develop a large piece of land and then sell off the other retail spaces.”

Whether positive or negative, site consultants should identify potential changes affecting a site: a rumored road change, or a new center across the street with a Best Buy, Barnes & Noble or Staples, for example.

Part of any site analysis, of course, involves traffic flow. It’s critical, says Heiser, to clarify why cars are passing by a site: “If you can explain traffic demand, then you can start to determine if you can meet this demand.”

Equally important is knowing the competitive landscape that already exists at a site under consideration. “C-store retailers need to realize that people are buying gas and convenience items right now, before your site goes in,” he says. “Where are they getting it?”

It’s not just how many competitors you have across the street or a few blocks down; it’s also who they are, how they price their offerings, and how they operate that can be more important. Heiser explains, “We see clients re-enter established urban areas confident they can dominate the market.”

These trade areas typically are more mature, saturated with older and often outdated outlets that lack amenities or consumer appeal. Being the new player in such neighborhoods can mean a fresh opportunity to differentiate from the competition, but also the risk of being dismissed by a nonchalant consumer base blinded by a same-old-same-old mentality.

That said, Fisher believes 98% of competition is self-generated. He says new competitive activity takes place because existing facilities in a trade area are older and have been abandoned in many ways, and some strong, aggressive new retailer sees an opportunity to establish a dominant position.

In some cases, it’s a plus to be located near a successful competitor, much like two likeminded retailers anchoring a mall or two QSRs competing on a block.

Handy Mart, for example, elected to locate a store directly across from a Sheetz, a family-run chain regarded among the best in the c-store industry. According to H.N. Funkhouser’s Rice, “The Sheetz store had no competition, and we saw they were doing very well. After talking to people in the community, we felt there was an opportunity for us to also thrive.” Rice says the Sheetz is a complement to Handy Mart’s offerings: “There’s plenty of business for both stores—multiple brands and multiple offerings for consumers.”

So Now What?

With due diligence completed and site in hand, in comes a company such as Lend Lease (formerly Bovis Lend Lease), which is the project manager through site completion. Lend Lease not only looks at how to develop a site, but also how to build it, says David MacDonald, executive vice president for Chicagobased Multi-Site Group, a business unit of Lend Lease specializing in turnkey retail design/build.

“We run these tasks at parallel paths,” he says. “It’s not like running a race, with the baton being passed from one person to another. From the time the site is identified until the end, we have the baton.”

The company will be doing exactly that for 7-Eleven Inc. at least for the next three years (see sidebar, p. 10). Integral to Lend Lease’s strategy are site investigation reports (SIRs), which MacDonald calls a “best practice in the development industry.” An SIR helps identify the unknowns with a project— the need for a traffic light at an intersection, storm-water management, a vacant underground utility line—and makes recommendations to the client. “That diligence upfront prevents a lot of false starts,” he says. “Too many people spend a lot of money developing properties they have to write off because they didn’t discover the unknowns.”

One client, for instance, lost $50,000 in architectural drawings because “they jumped the gun” before zoning was approved. “You can look at past history of a township and get a good idea whether a request will be accepted or not,” MacDonald says. “If the past 400 sign variance requests were not approved, there’s a good chance yours will not be, either. It’s the delicate balance of time and money with the investment you want to make.”

The No. 1 issue today with ground-up construction is storm-water management, MacDonald says, explaining regulations are only getting tougher, particularly in Colorado, Florida and the Pacific Northwest. “Water is very precious,” he says. “The quality of the water and how you reclaim it is a big cost to consider today. “

Dig In

“We talk a lot about ground-up, but there are two other areas that c-stores are focused on: going into existing buildings or shopping centers and taking an endcap placement, and conversions of existing convenience stores,” MacDonald says. “These are the three major strategies people are using to grow their chains.”

Some major chains prefer building stores from scratch to ensure a consistent store profile. For Rutter’s, Hartman gets personally involved in the selection process. When it comes to building on a new property, sometimes “we know what we are dealing with, and sometimes we get thrown a curve ball,” he says. Local and state governments play a significant role in how smoothly a project progresses.

H.N. Funkhouser’s Rice also prefers starting from the ground up, “because we have a vision of a better cookie cutter for the customers of today, what they are looking for.”

“It takes about one year to build a store and a year to get it running smoothly,” he continues. “We finance our stores ourselves and move at a slow pace—about one new store every two years. We also are doing some remodels at the same time and refreshing our existing stores.”

Rice starts out looking for a multiacre lot, and in most cases opts to develop an entire retail center to help defray some of the infrastructure costs. The economy has caused the company to slow down a bit, but it plans to complete development of a 10-acre site that contains a Handy Mart store and Dunkin’ Donuts drive-thru, with 7 acres left for additional retail.

In the Zone

Working with different municipalities can pose zoning challenges, according to Bob Vallario, vice president of real estate for Whitehouse Station, N.J.-based Quick Chek Corp. Calling New Jersey “dysfunctional,” Vallario says he has to comply with 563 different municipalities in New Jersey alone, where the c-store retailer operates 116 stores—90% of its business.

“None of [the zoning boards] plays by the same rules. They all have attorneys to handle the many subject areas prone to misinterpretation, so we have to have legal guidance as well,” he says. Vallario warns of additional predevelopment costs, including extended due diligence, professional fees for engineering, traffic planning and zoning code research.

“We’ve had cases where we were 100% in compliance with the rules and regs, but the township still voted us down,” Vallario says. “You are guilty until proven innocent with the zoning boards in our area. There are opportunities to grow and expand, but you have to be prepared for the challenges.”

Quick Chek was facing such obstacles in the spring, where it was proposing to build a 4,524-square-foot store and 12-pump fuel island at a former auto dealership on a major New Jersey thoroughfare. Needing multiple variances, the company faced some legitimate concerns about site views and minimum lot sizes.

But the company also faced questions from residents that bordered on the ridiculous, such as dangers of having gas tanks near a residential community (c-stores with gas are commonly found in residential neighborhoods); and environmental concerns stemming from exhausts, even though the proposed site is adjacent to a highway that carries more than 20,000 vehicles a day.

Despite the broader challenges of operating in a patchwork state, Quick Chek has identified more than 20 sites for future development and is on track to meet its corporate objective for new store openings, Vallario says.

Handy Mart operates primarily in the Shenandoah Valley of Virginia, and its biggest challenge has been building stores that fit the somewhat traditional image zoning officials want to maintain. The company keeps this in mind from early in the design stages, and this philosophy is reflected in the company’s success with local zoning officials. “I haven’t had one zoning request rejected to my knowledge,” Rice says. “You’re going to have folks on planning commissions who want to design your store. I anticipate that and try to keep their culture in mind as we create the designs.”

Rice does point out the new challenges his company faces, with more transportation/ roadwork costs being shifted to the retail development: “The government feels taxpayers should not have to pay for such changes because we want to build a new store.”

While hesitant to divulge the location of the specific site, Hartman described a situation in which Rutter’s faced a heavily traveled road, and railroad tracks running next to the property. Rutter’s had to get the railroad operator’s input to address issues such as setbacks and rights of way.

“We were required to make some improvement to the road that crossed the tracks,” he says. “That, combined with the fact the road was sitting at an interstate exchange, and the future of the interstate on- and off-ramps was up in the air, led transportation officials to speculate that we were building a store that possibly could inhibit one of their road options in the future. We had to work through that with the powers that be.”

As part of the approval process, Rutter’s was required to plant trees and build a wall around the front side of the same store, which inhibited some of the visibility. It took four and half years from property settlement to store opening. “In today’s ideal world, we would like to think we could build them in two years or less,” he says. “But most are taking up to four years now.”

Reasons to Remodel

While it’s often more economical to take over an existing site, that’s not always the case, according to IMST’s Heiser. For instance, some situations require costly retrofitting or underground tank problems that can lead to expensive reclamation, or taking down a dilapidated structure.

Despite these risks, taking over an existing facility can be more economical than ground-up construction. According to Heiser, one IMST customer, a multiunit operator, has changed strategies from new build (freestanding c-stores with fuel) to remodel. The company faced so many developmental barriers— cost of land, zoning problems, utilities, easements—that occupying space in ailing retail centers became the more appealing approach.

“This company owned five good sites and they couldn’t get any of them out of the ground for various reasons,” Heiser says. “They identified weak retail occupancy in market areas where they excelled and began to move into retail centers to become the neighborhood store, with or without gas.”       

Network Expansion, One Step at a Time

Here’s some advice from Market Planning Solutions Inc. (MPSI) for retailers looking to expand existing business through new build opportunities:

Know the market: Gain market intelligence to ensure your strategy is based on sound, reliable and factual information.

Identify market objectives: Using the intelligence gathered in step one, begin the process of prioritizing and identifying objectives for each market of interest.

Determine site strategies: Best-of-class retailers ensure their site strategies are consistent with market objectives. Employ tools to test “what-if” scenarios.

Develop an integrated network plan: After determining the strategy to implement on a site-by-site basis, it’s time to create your network plan on a holistic basis, not just by individual sites. Use predictive modeling to evaluate interaction and cannibalization.

Finalize the plan: Development of the fi nal market strategy involves an economic evaluation of the proposed changes. The economic results and zoning/ permit restrictions may redirect the proposed plan.

Implement the plan: Create a detailed implementation schedule and continually review market conditions before investing capital. Ensure supply/ demand has not changed.

Monitor the plan: Continually review and update your network plan to accommodate market dynamics and internal changes in corporate direction. Institute audit programs to stay on track with objectives. 

Modular: A Growing Trend

Modular construction is on the rise in the convenience industry, according to David MacDonald, executive vice president for Chicago-based Multi-Site Group, a business unit of Lend Lease.

“For many years RaceTrac would only do ground-up—sticks and bricks,” Mac- Donald says. “But this strategy is difficult today, with the economy resulting in fewer inspectors and other related challenges. Imagine building a facility when the inspector is only coming out on Wednesdays. I’m not dismissing ground-up, but a retailer needs to look at the best approach for the company and the area.”

Los Angeles-based Madison Industries developed the modular construction design for Race Trac’s Raceway franchise stores. As a result, the chain has reduced the development phase (from breaking ground to completion) from 120 to 150 days to as low as 55 in some cases, says Mike Davis, Madison Industries’ vice president and general manager. Madison has designed and constructed at least 280 stores for the national chain.

“Hess is now 100% modular with new builds,” Davis says. “It’s an economical way to produce multiple sites costeffectively.”

While going modular may not be a feasible alternative for smaller chains, it can work for larger chains with multiple sites. “Plus, the steel and metal construction has been shown to withstand harsh weather like hurricanes,” he says.

Another growing trend is preengineered solutions, where sections of a building are delivered on a semi-truck, MacDonald says. “You have to ask yourself: Am I building a one-off or an entire program? When building an entire program, it makes sense to invest in a preengineered solution since this … requires some upfront investment.” 

7-Eleven Selects Lend Lease for Site Expansion

Scheduling an interview with David MacDonald, executive vice president of Multi-Site Group for Chicago-based Lend Lease, for this story was a challenge, but only because business is booming for the company—and that’s a good sign in light of today’s economic climate.

“Business is coming back,” MacDonald tells CSP. “Everyone wants to meet; everyone wants to talk. These are great issues to have.”

In fact, a strong indicator of increased development activity is 7-Eleven’s selection of Lend Lease as its exclusive construction service provider for the next three years. 7-Eleven plans to add at least 500 stores in the United States and Canada this year through traditional growth (individual store leases-purchases), business conversions and acquisitions.

“Basically, 7-Eleven outsourced their construction department to us,” says MacDonald.

The Multi-Site Group’s three-year agreement with 7-Eleven, signed in March, gives the company immediate responsibility for 7-Eleven’s new-store construction.

“This responsibility does not just start with the construction phase,” he says. “Lend Lease has full responsibility to take the 7-Eleven sites through the planning and zoning cycle, and this starts the moment a site has been selected by the 7-Eleven real-estate team.”

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