November 9, 2017

Part 1: How to Rank Markets for Expansion

Location, Market Ranking

By Debbie Miggins, VP Location Services

Your organization has identified that it is the right time to expand into a new market or markets. No doubt, that decision can be an overwhelming task, if for no reason other than the sheer amount of possibilities that your geographic area may present. For example, in the United States alone, there are more than 19,000 cities in which you might find your ideal place. It can also feel overwhelming because of the potential consequences should you choose wrong: financial devastation.

So where do you start? In this two-part series, we explore how to use a systematic, statistically-based ranking process for identifying the right market for expansion in order to ensure the best results for your investment, your offering and your typical clientele.

Kalibrate's recommended market ranking process comprises six steps:

1) Define Objective and Identify Constraints
2) Select Markets to be Ranked
3) Identify Variables
4) Compile Variable Data
5) Determine Variable Weights
6) Prioritize Markets.

This blog post will address the first three steps, which are key to ensuring that the market ranking results meet your expansion goals. Part 2 of this series will address the final three steps.

Your Market Ranking Process Begins Here

1. Define Objectives and Identify Constraints

Establish a clear objective for expansion. Because there are various methods for entering new markets — via ground-up builds, acquisitions, or a combination of the two approaches —understanding your organizational objectives with regard to the investment strategy is paramount. The right markets and variables can't be included in your ranking process unless you understand what you want to prioritize. Knowing what the investment strategy is will be helpful in determining which variables will drive the market ranking.

Unless the candidate markets for expansion have already been identified, then it's important to establish constraints (think of it like filters) for selecting them to expedite the process and ensure the right markets are being prioritized. Constraints are used to identify the markets that you should consider for various expansion opportunities. Following are examples of types of constraints retailers might employ in order to select markets for inclusion in the ranking process:

  • Only select markets that are within a certain distance from existing retail geographies in order to take advantage of current distribution and management teams.
  • Ensure available investment dollars will enable critical mass achievement in the selected market.
  • Select markets where “Competitor A” — with whom the organization cannot compete successfully — does not retail.
  • Select markets that are ripe with acquisition opportunities (many sites with low performance, but high potential).
  • Select only those markets that are projected to grow over the next five years.
  • Select markets where quick service restaurant inserts are performing below average.
  • Select markets with a population greater than “x”.

2. Select Markets to be Ranked

After objectives and constraints are clarified and implemented, you can begin to select markets to be included for ranking. This selection, of course, needs to closely align with the goals for prioritization, including the constraints that have been established. Site data, demographics and analytics about each market are important in understanding which candidate markets meet the defined constraints. Geographic Information System (GIS) tools are often used when distance criteria is a constraint in selecting markets and can be used to compile market level stats such as population growth, competitor mix data, etc.

The data required to select candidate markets can come from a number of sources. Many government organizations throughout the globe publish their census results online. Online mapping resources often show the location of petrol stations and reveal the brands providing insight about the competitor mix. There are also third parties that can provide detailed site data from field surveys and consulting firms that can advise on things like critical mass. The more accurate the data, the better the end result will be. That doesn't mean that more data = better, though. Striking a balance is important. Data should be clean and valuable, not simply plentiful.

3. Identify Variables

Now that the candidate markets have been selected for inclusion in the ranking, you can begin the process of identifying relevant variables. Like the selection of candidate markets, the variable selection needs to complement the objective for ranking the markets. The variables are simply the data you want to gather for each market. They are the input that will ultimately be used to rank the markets.

Variables usually consist of two types — supply and demand. Supply variables reveal facts about the competitive landscape. For example, the average volume performance of all sites could reveal an opportunity to produce higher sales than in another market having lower average volume. The average margins would reveal profit opportunities. And facility strength variables could show you where there is an opportunity to enter the market with a particular strength of your own, one that competitors are not displaying. Further:

  • Presence of ancillary offerings, such as quick service restaurant and car wash, provide insight into non-fuel revenue opportunities
  • Location strength versus actual performance can identify the number of potential acquisition candidates
  • Average land cost provides insight into the investment for a ground-up facility
  • No. of competitors making up 50% of the market share reveals the strength of the competition; the lower the number, the more difficult it will be to compete against a few dominant players.

Demand variables complete the picture by focusing on the consumers in the market. Your demand variables might include: population growth over a given time, average household or disposable income, and number of vehicles by fuel type. Demographic summaries of a market's consumers lend themselves to use as demand variables in your prioritization effort. Lifestyle segments relevant to your brand profile can be leveraged to better understand the market's fit for your target customer profile.

The data for both supply and demand variables can come from a variety of sources: third-party providers, “free” online resources, internal proprietary data, field surveys, consulting firms, government census results, etc. Now that you have identified both variables and source, you can begin compiling the data. How do you do that? Part 2 will expand on the final steps in the market ranking process.

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