An assessment of the competition
in commercial real estate in a local market

© Kira and Ruben Kanayan

When talking about competition today in the retail market, opinions vary from those of panic to euphoria. The situation is further complicated by the fact that in Russia and the CIS countries not everything is clear about format and terminology.  Indexes differ and are sometimes not even similar. Determining a strategy for the development of retail trade involves a fairly large amount of research and the volume of information is growing. In order to help owners and those working in trade outlets to assess their competition, we offer a complex method of assessment and examine it using shopping centres as an example.

Research tasks for retail outlets and where to source information

New shops and shopping centres open every month, however there are now very severe demands and a large shopping centre in its planning stage cannot afford to make mistakes in its strategy against competitors. Also many chains and independent shops link development prospects with trade in shopping centres. For retail chains an assessment of the situation in the shopping centre market helps resolve the following problems:

• Conception correction
• Choosing the optimal space and assortment of goods in order to successfully develop in today’s retail outlet market (high rents and difficulties with choosing plots of land and buildings)
• Investing in productive ways of selling  and cutting back on unsuccessful ones
• Being able to quickly occupy niches in the market
• The need to maintain and strengthen one’s position

The correct setting of tasks is a part of success. Probably no one will argue on such an important question as, how do commercial properties and proposed new trade centres manage without research. And this is where it becomes interesting. It happens that to “create a budget” for market research is very simple, especially in large companies. However the results without wanting to offend market research companies, but simply state a fact: For the last five years from the studies we have done on market research for retail companies and shopping centres, more than thirty percent has been useless. There are several helpful rules when carrying out market research for new shops and shopping centres:

• It is necessary to take information from several different sources. For example from our personal experience of market research in the provinces, it is better to assign the ground research (collecting information on existing outlets, the competitors, price monitoring and rents) to a local marketing agency. If a company has been in the market for a long time, it will take into account local peculiarities when assessing the above. However the weak point of local agencies is their conclusions, which are parochial and not far-sighted. The other problem is that they do not always have information about projects, which external developers are working on. Literally if there is a building-site or at least a fence, then the project enters their report. And projects from Moscow or large national companies can be very large scale. Companies, which deal in commercial properties, generally have a strong research team. However they often offer standard solutions not always adapted to a specific market.

• It is essential to assess whether information is reliable. Specialized periodicals, announcements in the media and on the Internet should not always be trusted. When talking about commercial properties the negative sides are often not mentioned or played down and the advantages exaggerated. The scale of a project or the size of an area can be augmented to have an effect on competitors; sometimes earlier completion dates are shown (this is not just optimism on behalf of the owner, who hopes that the building work will finish on time).

An abundance of formulas, charts and tables always make an impression.  However there is a special skill which is essential for any retail marketing expert.  That is the ability to read the small print in the market research reports and to look at how the information has been obtained. For example, a solid title for a report: “A study of the preferences of buyers in relation to the place where items are bought” or “Expense structures for popular consumer goods” for a town of a million people. Without fail the more complicated and foreign the language, the more it ought to impress the client. At the end in microscopic print: The figures were obtained from a survey of a hundred people. Unfortunately many readers have probably seen such reports on several occasions.

• Indexes should be adapted to a specific place (town, area, specific type of shop). Managers go to conferences and training courses in search of figures. They go to large towns and abroad and buy information, plans and even employees. However to take indexes from another situation as a reference point is not far-sighted and even a little dangerous. Relative indexes are very useful. They help to assess the present situation correctly and future possible scenarios (we examine several relative indexes below).

• Research should help show the situation as it really is. This is even if the result completely goes against the original conception, which the manager has created or which the marketing department has worked on for months.  At times it is very difficult to give up original plans. However it is better to adjust them in time and start to move in the right direction. The expense of reconstruction and conception changes on an already operating trade outlet is much higher.

Assessment indexes for competition in a local market

We are going to examine what indexes are used to make an assessment of the degree of competition in a local market

1). The dislocation of existing and future commercial properties in an area

Four shopping centres on one piece of land connected by corridors on two floors (Shanghai, People’s Republic of China)
Photo 1.

Apart from trade outlets already in an area, it is also necessary to look at places where competitors might build in the future. First and foremost this is projects in the planning stage. Will the project be finished, and how far will it resemble the announcements? These questions are all part of an analysis of the information: The name and reputation of the developers, the planning stages or construction and their policy for attracting tenants. Secondly vacant plots of land should be looked out for where large trade outlets could be built. It also follows to pay attention to the development of the surrounding area and determine where it would be possible to work with the “neighbours” to increase the number of customers. Unfortunately in Russia you rarely come across joint ventures (much more often companies work independently of each other or there are standard conceptions, which are quite weak. Or the owners of neighbouring plots of land or buildings openly wage war, blocking facades or entrances to car parks). A joint car park or an underground or elevated corridor, which connects two shops and of course mutual conceptions could make shops more attractive and increase the number of visitors (photo. 1).

A large number of competitors is not a reason for pessimism. A tendency in the market of shopping centres in a number of Russian towns is to reallocate where people go to shop which leads to a decrease in the number of visitors to shopping centres which have conception and planning problems. Interestingly in Russia and Ukraine very many “bad quality” outlets have been built on very good sites and at times there is no room for expansion or reconstruction. It is a great advantage for a new shop to be on a good site. We have noticed that the site may be good according to all the indexes, but can it meet the necessary requirements? The priorities for hypermarkets and large shopping centres are good access from the main city roads, a constant flow of traffic past the centre and a big car park. A local shopping centre needs pedestrian traffic, good public transport links, a visible façade and blocks of flats in the area.

Geography defines how far a local market is protected or vulnerable to competitors. Good road access in a small town or area is not only an opportunity, but to a certain extent a danger. It means that there is not a long time on the road to any of the competitors and customers with cars in towns of 200-400 thousand people are fairly mobile. Shopping centres in local areas, which fulfil two kinds of demand on goods, services, amusements and food: Frequent and periodic. These projects are currently the most stable although they are not highly profitable. However if the local shops and shopping centres do not provide a good service or the owners are not far-sighted (“what do our customers do with a submarine…”) demand even on frequently purchased goods can move to large shops far away. Several shopping centres near Moscow could serve as an example of this.

2). The saturation point of shopping centres for an area

The index for saturation point is one of the most loved and cherished (perhaps second only to the sales turnover figures for well-known chains per one square kilometre). The city situation has been compared to Europe and Moscow and experts hold different opinions about how much area a market can contain. However in practice it is not possible to state the indexes. The first difference is in defining trade outlets. In one part of the reports and reviews on a market the index for the overall space is used and in the other parts the GLA index (of the space given for rent) is used; for large outlets the difference is very significant. Often the general area of a shopping centre is worked out to include the office space, hotel and even flats. The second difference is what exactly is considered a “shopping centre” when defining a saturation point. In Russia the criteria for “modern” outlets have not been clearly defined and it is not exactly known how many outlets have been taken into account in the market research companies’ reports in Russian towns. That is why the figures can be misleading. We worked on one project in Kazakhstan, where our client had obtained very optimistic results from a market research company specializing in real estate: The market is free of shopping centres and there are no “modern” or “high-quality” establishments. However there were some large newly built markets (clothing and food), with a beautiful high building with columns and even escalators. The new tenants slightly reorganized things inside and in a couple of months it was an absolutely modern shopping centre, which was also on a very good site and had managed to become very popular with the local people. When defining a saturation point and competition, new trade zones are very rarely taken into account: For example shops specializing in the same or different goods in one area, but not under one roof. Also local market research companies often think places are shopping centres if that is what is written on the sign outside. So hypermarkets and corner shops, which have been extended and are for rent, turn up in their reports. And vice-versa large district shopping centres are sometimes called hypermarkets (“Altai” in Barnaulye, “Tom” in Tomsk and others). It is interesting that when the hypermarket “Iyushny” opened in 2004 in Tyumeni, the owners specially used the word “hypermarket” in the name in order to stand out from the large number of other shops and outside was a proud sign “shopping centre”.

The saturation point in the commercial property market is usually considered in square metres per 1000 inhabitants and it is important to take into account several significant features of this index:

• The general saturation point using the spaces in a shopping centre in an area
• The saturation point according to types of shopping centre (See Figure 2). Shopping centres are divided into types according to the Urban Land Institute (ULI) classification. The number of spaces in each of the types is determined in a given area. It immediately becomes clear, where the niches are and what kind of possibilities there are for competitors to develop a plot of land or real estate.

After the index has been calculated, the most important thing is to correctly assess its significance. Whether it becomes “frightening” or not depends on several factors: The number of customers and the customers’ income. In a number of towns in Russia with a population of a million the significance in 2007 was in a band of 420-670 square metres for 1000 inhabitants; in towns with a population of 300-700 thousand people within the limits of 130-300 square metres per 1000 inhabitants (not counting the city of Kaliningrad which has a very high saturation point). It is expected that by 2010, if all the planned projects take place, the amount of space in shopping centres will double in many towns with a population of 300 thousand to 1million and the saturation point index will exceed 800 square metres of rented space per 1000 inhabitants. This would mean very serious competition and a battle for tenants and customers. In the provinces they very often orient themselves on Moscow and Saint Petersburg according to the amount of space and trade outlets, and do not take into account the size of the population. However in these megalopolises which have colossal amounts of inhabitants, migrants and visitors to the city, the saturation point index is much lower. For example according to certain prognoses in Novosibersk by 2010 the saturation point for spaces in shopping centres per 1000 inhabitants is expected to be almost 40% higher than in Saint Petersburg and more than twice higher than in Moscow. Analogically a saturation point is estimated by comparing consumers’ incomes. Practice shows that in local mini-markets in Moscow and multi-functional complexes for several blocks of flats or cottage complexes, 5000 square metres of space in shopping centres (including of course the services and sports centre) can work effectively. But in Tambov, Ulan-Udai or in the North Caucasus the same area would bring in an income for 1 square kilometre and only if there was a significantly large number of customers.

It is expected that with a rise in the saturation point of spaces in trade outlets the main competition in shopping centres will be between light industry goods. This would mean a large fall in profitability in this area as opposed to others. Firstly light industry goods demand less resources for entrepreneurs (purchases, goods’ stock, delivery and storage of goods and sales’ conditions) compared to food products, technically complicated goods and building materials. Secondly there are fewer demands on the premises when organizing the sale of light industry goods. This all leads to the fact that modern technology and new ranges of clothes and shoes can be easily put on sale in any space. Thirdly clothing, shoes and accessories are traditionally sold in the central part of the city and departments with goods which consumers like (well-known brands, multi-branding) could find their place in street retail, on the first floor of shopping-office-hotel complexes and not work very well in district level shopping centres on the outskirts. It is important to notice that tourism to countries in Europe and Asia is developing because of an increase in consumers’ incomes and that the prices of light industry goods are often lower there (especially during the sales), than the same brands in Moscow and cities of a million people in Russia.

3). Comparison of shopping centres in terms of their attraction 

We need to remember that attracting visitors to a shop or shopping centre and making sure they return is dependent on several factors:

• A wide assortment– it is possible to satisfy several demands in one place, not only for goods, but also services, amusements and food
• A large assortment of one or several goods categories. The customer knows that in this place there will be an extensive choice and prefers to shop there
• Attractive prices
• Convenience and additional services

A comparison in terms of attraction really helps when assessing the strength of different shopping enterprises in an area and also the degree of “danger” from competitors. It becomes immediately obvious which shopping centres have the greatest power of attraction; whether they have a niche market for a goods category or a price category without any strong competitors and can fill the planned centre. An example of such a comparison is shown in figure 3 (note: in the table the typical anchor tenants are arranged in descending order of attractiveness and according to the situation of the shopping centre market in Russia at the beginning of 2007). It is possible to see that the centres in this example are practically not in competition with each other. However the opposite can be true: All the shopping centres in one area can be very similar and even the new ones not that different…

4). Comparison of shopping centres according to price and customer age groups

It is possible to divide the assortment of goods and services in existing shopping centres into several groups according price and define the share for each group in the shopping centre proposals (figure 4). The three shopping centres presented in figure 4 differ in position: Democratic, moderate (in practice very often “moderate plus”) and expensive. If goods for customers in different brackets are presented equally, then the shop does not have a clear position: For example spaces allocated to everyone without a conception. That is why customers with either a high or low income will not feel at home in this centre.

The next stage is a comparison according to the age and income of a specific audience. In the diagram below representatives from each age group have been examined as visitors to a shopping centre. For example even if the shopping centre sells goods for little children, the centre may not meet children’s needs in terms of leisure space and entertainment. Not every centre is for spending time with little children – if there is no children’s room, play area, cosy café and the young people “mess around” in the cinema… The situation is clearly visible in figure 5, and it turns out that with quite a number of centres and high competition in several sectors there is no shopping centre for all the family. There are even free segments in this example – shopping-amusement centres, places orientated on a young audience and comfortable shops and shopping centres for older people.

5). A definition of the sales’ potential in a local area

Traditionally the tenants themselves make a prognosis of the sales from a space in a shopping centre per one square kilometre for their business or service, which they then compare with the rent. However when planning a concept this index is important also for the shopping centre owners: It shows how stable the situation will be for the tenants, whether no one will want to leave or there will be a mass evacuation. We present a methodology for estimating expected sales in some goods’ categories for one square metre:

• Obtain statistical data on the population and the income of people who live in the local area. The quality of official data has greatly improved and information can be obtained relatively easily.
• To determine the general amount of income = the average income in the area x the number of inhabitants. This index gives an approximate picture; for a more precise determination of the percentage correlation of inhabitants with different incomes usually additional research is carried out and expert estimates are used. Often shop owners and developers are met by an illusion about the population’s income: In that the official figures are lower and people in fact earn much more…This is far from always the case and the number of customers with a high income is not in fact very high. It is enough to look at the expenditure structure …
• Obtain information about the income structure in the area
• Determine the general amount of expenditure on a goods category = the amount of expenditure on a goods category x the general amount of expenditure
• A determination of the general amount of commercial space (in square kilometres) for a given category in a local area
• An estimate of the index for the average sales for one square kilometre according to a given goods’ category (now and in the future)
• A definition of the share of a shopping centre (shop or chain-store dependent on the situation) in the space
• An estimate of the index for a planned shopping centre (shop or chain-store). Successful well conceived trade outlets on a good site might have a much larger share of the sales, than a joint commercial space in a local market. And vice-versa – if everything is not going well for a new shop, it makes sense to make a “pessimistic” reading
• Compare the obtained figures for a no damage estimate. With an increase in the saturation point in a number of goods’ categories it is sometimes obvious that to open a shop in that place is pointless.

If all these indexes are examined when estimating the competition in commercial real estate in a local market, there is a better likelihood of taking the right decision. We have tried to concentrate on those places which cause the most problems and difficulties. Of course there are other indexes which we will look at in the following articles.

© Kira and Ruben Kanayan,
Authors of the book “Planning shops and shopping centres” and the book “Merchandising”
Leading consultants for the company “Union-Standard Consulting”, Moscow

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