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Targeting growth cities

It’s getting harder to ID stellar locations


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Finding good real estate is tougher these days, but there are still cities that can boast healthy economies and strong growth.

As the U.S. economy continues to flounder, the pressure is on to identify expansion markets that will counter the national trend of slower growth.

Let's face it. The national news related to the economy, the housing market, and consumer spending has been less than impressive lately. Economists are predicting slower economic growth for the year with a GDP that is expected to dip from a gain of 2.5 percent in 2007 to 2.1 percent in 2008.

But those numbers don't tell the whole story. There are a number of markets and sub-markets across the country that are touting strong economies with solid population and employment growth, as well as impressive sales numbers. The trick is identifying those booming markets that will continue to perform well despite the national economic woes.

During more challenging economic times, the old adage about location, location, location becomes even more important, and franchise groups are putting more thought, research and analysis into their strategic planning for new locations.

Foster's Grille, for example, has 21 restaurants open and plans to open another 12 to 15 in 2008. Although the slower economy has not prompted Foster's to reign in its expansion plans, the company has adjusted its strategy related to where those new stores will be planted.

Foster's Grille has the Mid-Atlantic and Southeastern U.S. in its sights due in large part to the growing population in those regions. "We want to go into markets that are growing, where the trend is up, and where customers can afford our product," says Tom Palazzo, vice president of franchise development at Foster's Grille Franchise in Haymarket, Virginia.

The company is targeting locations in Maryland, Virginia, North Carolina, South Carolina, Georgia and Florida. Within those states, Foster's Grille is focusing on major cities such as Raleigh-Durham or Chapel Hill in North Carolina, and staying away from secondary and tertiary markets. "We are also finding that the cost per square foot on the rent side is so much better in many of those markets, and we have established good relationships with developers that are active in those areas," Palazzo says. Foster's Grille typically leases an end-cap location in new centers with major anchors such as a Home Depot or Target.

Tapping market data

Although definitions of "top markets" differ widely depending on individual concepts and target customer groups, franchisees can find ample research and data to help narrow their choices in today's market. High tech and land constrained cities that offer barriers to entry for new retail development, as well as cities with positive employment growth topped the list of favored options among Marcus & Millichap's National Retail Index for 2008. The top five markets included San Francisco, San Diego, Seattle, New York City and San Jose.

The NRI is a snapshot analysis that ranks 43 retail markets based on a series of 12-month forward-looking supply and demand indicators. Markets are ranked based on employment growth, vacancy, construction, retail sales, rent growth and local housing market conditions.

The lower tier of Marcus & Millichap index includes primarily Midwestern markets that tend to register slower economic growth. Among those markets that saw the biggest slide in rankings this year are cities such as Tampa, Phoenix and Riverside-San Bernardino, California due to their exposure to overbuilding in housing and retail. Phoenix, which experienced significant building in the housing and retail markets in recent years, slipped from the No. 3 spot a year
ago to No. 13.

Another study of the top retail markets, by Sperry Van Ness, revealed some that are flying below the radar. In addition to key cities such as Dallas/Fort Worth and Las Vegas, the list of top picks included smaller growth markets such as Albuquerque, Charleston, Raleigh/Durham and Salt Lake City.

These markets represent opportunities for a variety of reasons, although strong demographics and population growth tend to top the list. Albuquerque, for example, is expected to account for half of the job growth in New Mexico, which equates to employment growth of 2.2 percent, which tends to foster a stable, productive local economy. 

Site selection savvy

Fitness Together recently marked the opening of its 400th store. Ironically, the store was in San Diego, which was ranked second on Marcus & Millichap's Index. But while Fitness Together might be in agreement about the positive outlook for San Diego, a key part of the brand's expansion strategy is to drill down into those larger markets to find a specific audience.

Identifying markets that have a high concentration of affluent people with the necessary disposable income or average household incomes that can support the $500 to $700 per month that a typical client spends at Fitness Together is critical to site selection. The firm provides personal fitness training services. "We cater to a very affluent market. So we're looking at markets that can sustain good and bad times," says Kevin Betts, president of Fitness Together. The company expects to add between 90 and 110 franchise units in 2008.

Fitness Together often has to focus on a particular neighborhood or suburb of a larger city to find the specific demographics that reflect its affluent clientele. For example, while the outlook for Phoenix may not be as rosy as it was a year ago, Fitness Together can find its target clientele in areas such as Carefree, Ariz., a well-to-do community of about 4,000 on the outskirts of Phoenix.

Obviously, population growth is important.  "But we have to look at one: what population is there, and two: what the disposable income is like," Betts says.In certain areas, there is a high amount of population and high amount of affluency, but the affluency comes from home equity that has gone bad. "So that's why we focus a lot on disposable income rather than net worth," he adds.

Long-term strategy

Another argument that surfaces is that franchise groups don't need to change real estate strategies due to fluctuations in the economy if they are taking a long-term position in a market. "Retailers are going to be a bit more cautious in choosing locations given the market conditions," says Bernie Haddigan, a managing director at California-based Marcus & Millichap.

But most retailers are expanding into markets in accord with long-term strategies. "Proven brands that are well located are going to be looking beyond this cycle," he adds.

"We don't overreact to upheavals in the market," agrees Debra Webb, franchise development director for Atlanta-based Huddle House. "We have been doing this for 44 years, and we take more of a long-term view."The standard franchise agreement at Huddle House is a 15-year commitment with three, five-year extensions.

"Our target markets have never been major markets or inner cities where financial issues are a problem. We have always focused on outskirts or small towns," Webb says. "With those types of environments, you don't see the swings that you see in the major cities."

Huddle House currently has 430 locations, and the chain averages about 10 percent growth per year. The chain plans to add 40 to 45 new stores in 2008.

Huddle House is currently focused on expanding into the Midwest in states such as Missouri, Illinois, Indiana, Ohio and West Virginia, as well as west of the Mississippi in Texas, Oklahoma and Kansas. For example, Huddle House has opened locations in Indianapolis, Joshua, Texas and Beckley, West Virginia within the last two months.

In addition, Huddle House relies on franchisees knowledge of the local markets. "Our franchisees are already citizens in these communities, so they are aware of the local economy and how it affects them," Webb adds.

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