How Many Stores? Identifying Under-Served Markets

By Robert Roman

08/01/19

Physical location is often thought of as the single most important factor for retail success, but other factors must also be considered when selecting a site for a new wash.

One of these factors is competition, or how many stores an area can support.

One technique to determine this is the index of retail saturation, which allows developers to evaluate markets as under-served, saturated, or over-served.

For example, if a market is under-served, this implies it can support more retail space whereas saturated implies the volume of a product or service in a marketplace has been maximized.

As a result of innovation, productivity rises.To illustrate, the first step in site selection is area analysis to evaluate the market and define trade area boundaries (i.e., Reilly’s Law).

Techniques used for this purpose often include site-screening tools that evaluate factors such as population size and characteristics, economic base, demand, and competition (i.e., number, size, distance, type).

Such tools can also be composed in a manner to indicate the target market’s overall retail potential or buying power. The target market is a group of people that are considered likely to buy the same products and services and consists of consumers that share similar characteristics.

Once potential sales have been determined, the saturation index is calculated as the function of the demand for the product and the available supply of the product.

For example, demand may be expressed as the function of population and per capita spending whereas supply would be a function of store dimension (i.e., square footage) for retail facilities of the product class.

To illustrate, the threshold distance is the amount of area (or population) that a car wash needs to cover the cost of acquisition and production. For example, a typical express wash has a breakeven point in sales of about $450,000 or, according to our model, a threshold population of 6,200 and market range of 12,400.

Market range contains the amount of area or population needed beyond threshold to obtain normal profit. Thus, if a trading area contained a population of 50,000, we might expect it to support four or five profitable stores.

Consequently, if someone intended to build in such a saturated market, further growth would have to come from somewhere. Obviously, one way to grow is to take existing market share from competitors.

This has occurred in many regions as new, modern washes are introduced in mature markets predominated by self-service, in-bay automatics at gas sites, and full-service conveyors. Whereas in over-saturated areas, the tendency is to compete on the basis of cost (e.g., $3.00 base price).

Another way to grow is through product innovation. For example, empirical models show firms that can develop products of higher quality grow larger at the expense of less profitable firms though a process of creative destruction.

Consider the proliferation of self-pay terminals, belt conveyors, and buffing systems. As these new systems have replaced the old, the process of creative destruction induces reallocation of workers, which has a direct link to productivity growth.

For example, productivity can be defined as net profit or throughput (price minus cost of goods) divided by operating expense. Thus, as innovation results in a decrease in overall operating expense, productivity rises.

Consider McDonald’s decision to place self-serve kiosks in every one of the company’s stores in the United States. Here, customers are able to order directly from one of these kiosks, after which they can then pick up their food at a counter or wait for an employee to bring the meal directly to the table.

It works because Gen-X, Millennials, and successive generations are used to a computer interface for making most of their daily choices, so a self-serve kiosk (or mobile app) feels native and intuitive. According to Inc.com, McDonald’s mobile app is currently ranked #3 in Apple’s app store.

Not only does this approach allow McDonald’s to reach customers on a more emotional level, it frees up workers (i.e., counter attendants) for more productive activities.

Grow from an increase in overall customer demand.Arguably, from time to time the car wash industry will continue to see innovation from R&D departments that results in the reallocation of workers.

Another way to grow is from an increase in overall consumer demand. For example, experience has shown a subscription program (monthly unlimited) can increase baseline wash volumes by a factor of between 1.25 and 1.5 or more.

And finally, a more recent development to consider is digital car wash networks that have the potential to change both the size and shape of trading areas.

As more companies join a network, the market range for these companies will expand resulting in a more even distribution of demand. All of these new customers will contribute directly to the profitability of these companies.

Bob Roman is president of RJR Enterprises – Consulting Services (www.carwashplan.com). You can reach Bob via e-mail at bob@carwashplan.com.

 

 

 

 

 



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