Caniece Haywood

Maximizing the Real Estate Investment in Retail

The integrated approach of store lifecycle management can yield big returns for retailers.

by Caniece Haywood, June 2011

Real estate remains a top expense for retailers. Many spend anywhere from two to four percent of revenues on capital expenditures alone — the majority of which is real estate. For a US$20 billion retailer, this equates to US$400 million to US$800 million per year.

Retailers have always been challenged to maximize the effectiveness of this significant investment. However, in today’s market, consumers are spending less in-store, as evidenced by lower transactions and sales per square feet, and the steady growth of online and mobile shopping, which is eroding in-store spending. As a result, it is imperative that retailers utilize tools to drive down overall facilities costs. This can be achieved by ensuring the appropriate planning for markets, sites, and stores; proper site selection and lease negotiations; efficient build-outs and remodels; and cost-effective facilities management.

At the same time, retailers must select the best locations and maintain them appropriately to maximize traffic and ensure a consistent customer experience, thus positively impacting revenue. No longer are intuition and gut feelings enough to make the right decisions. No longer can siloed departments be expected to optimize results.

In retail companies, real estate functions are faced with many operational challenges that, if addressed, drive significant value. We hear a variety of common challenges from our engagements with retailers:

  • Lack of comprehensive view of the real estate deals in the pipeline

  • Difficulty in planning and modeling markets and sites

  • Poor timeliness of data or access to store performance information

  • Varied budgetary estimates and approaches across projects

  • Lack of visibility to lease terms and impact on maintenance

  • Lack of visibility to warranty information

  • Disparate methods and tools used to track construction and remodel projects

  • Slowness of maintenance work order completion, with too much down time

  • Billing errors and common area maintenance (CAM) overpayments

These operational challenges mandate manual interventions to processes to get the job done, but yield less than optimized cost controls across store openings, closings, remodels, and facilities maintenance. 

Top retailers today take a more holistic view of their real estate — from market planning, to selection, to build out, to maintenance, to store closings — all with the goal of maximizing return on investment. This integrated process has been labeled “store lifecycle management.” (Oracle has named it “Store Excellence.”) An integrated store lifecycle management approach to real estate management enables retailers to identify profitable new store locations, to open and remodel stores on time and within budget, to lower costs of contracts and material, to minimize leasehold occupancy costs, and to reduce costs and improve availability of store facilities and equipment.

A recent Insight project focusing on store lifecycle management with a large auto parts retailer identified some salient issues, particularly in lease administration and facilities management. The customer’s issues centered on gaining visibility across the enterprise into asset warranty, maintenance history, and maintenance inventory levels. Company executives often knew (or in some cases only suspected) that they would pay for items that should have been covered under warranty, that they did not perform scheduled maintenance as planned, and that they were unable to leverage spend on key maintenance items. At the same time, they had manual processes to manage their leases that led to errors in lease accounting, billing, and poor visibility to lease options. The Oracle Insight team helped define store lifecycle management solutions and identified several benefits:

  • Increased return on construction costs

  • Reduced maintenance parts and repair labor costs

  • Reduced capital expenditure by increasing asset life

  • Increased lease administration productivity

In addition to the two areas of store lifecycle management that were explored with this customer — lease administration and facilities management — there are two areas that complete a best-in-class store lifecycle management solution: site selection and construction management.  

Four Key Components of Store Lifecycle Management

1. Site Selection: The first component enables synchronization of site selection across all phases of the deal pipeline for all lease types. The end-to-end process includes site identification, document collection, analysis of key metrics (e.g. predicted sales performance), site submittal for review and approval, lease negotiation, and construction approval. Comprehensive site selection eliminates many manual activities, reduces site selection cycle time, accelerates construction approval that will lead to earlier store openings and associated sales revenue, and drives productivity for the real estate professional. 

2. Lease Administration: The second component enables the real estate professional to proactively execute lease terms, conditions, and obligations. Key capabilities include tenant/landlord lease administration to automate rent payments/ billings and monitor key dates and contacts, a location repository of leases, pre-built enterprise resource planning (ERP) integration, real estate analysis, and CAM recovery and reconciliation. These capabilities enable retailers to reduce total occupancy costs, increase profitability, analyze performance, reduce manual re-keying from lease tool to ERP, and enable financial and regulatory compliance.

3. Construction Management: The third component enables the retailer to synchronize scope and execution across all phases of the construction process for all project types in a timely manner. Key capabilities include program management across projects, time-phased task management, budget and forecast generation, advanced procurement, exception-based management, and project performance reporting. These capabilities enable reduced budget overruns, improved schedule adherence, an increased ability to audit scope and spending changes, improved productivity of all project team members, and lowered cost of contractor and material procurement.

4. Facilities Management: The fourth component enables retailers to perform preventative asset maintenance and streamline execution of facilities requests while managing asset transfers, reclassification, taxation, and disposal. The process includes requesting work, planning and scheduling work, executing work, analyzing key performance indicators, and identifying assets. These capabilities enable improved productivity of maintenance professionals, decreased surplus spares and inventory stock, reduced unplanned downtime and maximized asset utilization. 

The Benefits of an Integrated Approach

An integrated and holistic approach to store lifecycle management can have a significant impact on retailers and help drive down one of their highest costs, thus maximizing return on investment. Key overall benefits include:

  • Faster opening of stores due to monitoring critical project dates and expediting problem resolution

  • Reduced deal cycle time by providing an open and collaborative deal platform

  • Reduced administrative costs and better compliance with accounting regulations by automating and unifying lease administration

  • Improved store appearance and extended store asset life by efficient work order and preventative maintenance execution

  • Greater data transparency and improved analysis via a single repository of real estate activity data 

 


Caniece Haywood is a senior director of Industry Strategy and Insight at Oracle.