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Organic expansion in Retail - Beyond "location"

We at Cosin have noticed that retail entrepreneurs and executives looking to expand their operation - at the global, national and regional levels - do not spend enough time on strategic analysis, neither in a variety of elements that can compromise the success of this enterprise.

Whether the retailer chooses a model of organic growth or chooses to grow through acquisitions, it is essential to consider some variables that have nuances depending on the expansion model.

Understand some fundamental elements for Organic Expansion, and the order in which they should be examined to effectively initiate this expansion, in your business operation:

1. Knowing the region and target consumer

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That's where we going?

Vital for this process, assessing the target region goes through a detailed analysis of: - resident and in transit population; - target audience consumption habits; - evaluation of competitors (residual market, strengths and weaknesses); and the prospect of new developments in the area.

We also note that consumer habits in the target market can be quite different from those seen with consumers in the market where the network has been successful. And these habits, for us, are influenced, among other factors, by the way people move. It's not enough to draw a radius with a compass on a map to find the real area of influence, imagine the following situations:

  • Being 300 meters from a region where a large group of potential customers circulate, but separated from this area by a railroad, means not attracting them;
  • A bank branch located on one side of Paulista Avenue in São Paulo, will have a hard time attracting potential customers who live or work on the other side;
  • A department store in São Paulo has an influence radius that can be up to 20 times smaller than other city in the countryside or in other states.

An objective analysis of competition can avoid, among other things, underestimating the expertise of a local player, its relationship with the customer, or its ability to react to a new entrant. The combination of understanding competition with the knowledge of consumer habits reveals the relative importance of these attributes: price, assortment, service, store environment and convenience, which unfolded in detail, define the DNA of the retail unit and its attractiveness to certain audiences.

2. Replicability of previous success in the target market

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What features define our success?

Certainly, among the answers are: - product innovation; - window of opportunity in the area of influence; - lower costs than competitors; - more efficient processes; or higher quality service.

The executive must assess how the variables that better explain his success - often translated into growth and/or profitability - will behave in the target markets. Some restrictions may arise, such as the existence of a player with a similar offer, distinct consumer preferences, tax differences, differences in attributes for the available labor resources, less efficient supply chain, higher real estate costs, lower price projection or higher direct costs.

However, we believe that the presence of these restrictions does not imply immediately and necessarily in premature failure of the expansion strategy. The retailer must evaluate adjustments in the business model to better adapt to the target market.

Note this example: more structured and larger networks have a range of prototypes and formats, and can choose those that best appear to meet the preferences of target customer segments, increasing the chances of success. We are also certain that real estate inflation is another type of frequent restriction and requires seeking alternative solutions, such as the identification of a potential partner or a build-to-suit model.

3. Micro-market knowledge

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Let's open the store in that exact spot?

After going through the previous steps, it's time to evaluate real site alternatives. After understanding the region and population characteristics, it is possible to infer the network's chances of success at that specific spot - or at least identify whether it is a clear no-go.

Moreover, it is necessary to analyze the physical aspects and constraints of the site and its surroundings, to assess the required licenses, effort and economic and legal feasibility of this alternative.

It is essential to evaluate the information impartially, especially the data from the parties only interested in closing the sale (and not with the operation's success), after all, we know that, most likely, they will tell really exciting stories about the area and how it is in perfect tune with your business.

We often see retailers making an evaluation of new points of sale and then too late realizing that "we are on the wrong side of the street."

4. Local team and leadership

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And who will run the business?

It is important to choose carefully the leadership and team that will be leading this expansion. It's obvious, but remember that controlling variable conditions (ceteris paribus), leadership can deliver better performance, and this has often been proven in retail.

The issue is precisely whether the company has quality leadership available to allocate at a new point of sale starting from scratch. We note that the entrepreneur is usually someone who stands out commercially, and to a large extent, is directly responsible for the success of the business. However, it is common for this entrepreneur profile to not prepare a leader who is capable of leading a new store to have similar success.

We know that the decision to take the best leaders of old stores (with good sales) and allocate them in new ones is difficult, since it jeopardizes the company's cash cow. On the other hand, it is certain that weak and geographically isolated leadership can doom the expansion.

To help settling this impasse, some networks choose an expansion model in regional hubs and thus prevent a new store from being completely stray from corporate leadership and other mature stores that carry the network standard.

In mature segments, this occupation model makes all the difference, as it has the indirect benefit of saturation, bringing fast visibility and brand awareness for the network, usually accelerating the point of sale maturation curve.

Conclusion:

We are convinced that after analysis, adjusting the model and eventually strengthening some skills in the team, it's time to put an efficient expansion machine to run, with detailed planning and well-defined management and control points.

It is extremely important to note that the skills required for planning and executing a successful expansion strategy are complementary to those needed to operate the daily routine. With our experience, we find that not underestimating this process will be vital to not destroy the company's value due to future unprofitable stores.

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