5 Steps to Optimizing Capital Across a Retail Chain
Most large retail chains mainly contain their capital needs through store leasing arrangements or by offloading capital investments to their franchisees. However, it still takes a lot of capital to ensure retail spaces align with ebbs and flows in demand and meet consumer’s expectations for pleasant, up-to-date environments.
While capital might seem to be an issue left to the corporate staff, it affects retail operators at all levels. Capital budgets are needed to cover store refreshes, openings, closings, and brand updates. And beyond the physical building, capital is also needed to cover signage, floors, fixtures, tables, equipment, carpet and painting. With so many factors to consider across so many locations, how can a retailer make the smartest decisions about how best to invest those funds?
Sometimes, capital spending decisions are driven by a central strategic planning committee. They see where the hot markets are with opportunity for growth, and analyze mega trend data to determine where the chain should pull back. Other times, local or regional leadership control the capital purse strings, relying on general managers whose instincts have consistently delivered profits over many years.
When is the right time to change the planning approach? There are a handful of situations where a fresh, comprehensive strategy for allocating capex comes into play for retailers:
- A new executive comes onto the scene. The new plan is brought in by new leadership, such as when a new vice president of facilities is hired, and they address the CEO seeking the funds they need, and do so using their own style and approach.
- Mergers and acquisitions. When one retailer acquires another, there’s a heightened need to fully understand the status and upgrade needs for each of their facilities. Whether the stores will continue operating as the current brand or not, the acquiring operators and finance people need to have a strong forecast for required capital.
- Consolidations. Many times, when exiting leases exist, the property must be in an agreed upon state. What's taken? What's left? The CFO needs to be fully aware of the cost of closing the store without any potential surprises.
- Disaster capital really gets consumed dealing with the aftermath of disasters, such as hurricanes and wild fires. Emergency repairs can bring the entire capital budget into question.
- Brand update. To stay current and competitive in the marketplace, retailers periodically tweak the in-store experience to meet customers' experience needs. Rolling out a refresh across a chain, whether it’s front of the house or in the back-end infrastructure, can be a massive undertaking.
The smartest retailers allocate their capital through an overall approach. Whether the trigger for taking a new approach is one of the cases outlined above or simply the need for greater financial diligence, make sure your process includes the following five essential steps.
- Get a current condition assessment for each and every location. Especially in large chains, unless there’s a regular, standardized process for gathering information on current status, you won’t know how well, or poorly, each unit is positioned. Is it reflecting your latest brand formula? What's the state of wear and tear, and how does that reflect on customer appeal? Consider deploying a lightweight surveying tool that can be run on a smartphone or tablet to ensure it’s easy and cost effective for the manager of every location to do this, whether it’s assigned to an assistant manager, the maintenance crew, or a third-party assessor.
- Create a comprehensive and consistent scorecard so that the condition data you collect is consistent across all locations. Create that scorecard mindful of the likely consumers of the capital. For a restaurant chain, it should include kitchen equipment, dishes and serving ware, as well as dining room fit and finish. Also, ensure you’re capturing which brand prototype each facility represents, especially if your brand or formula has shifted over time. By knowing exactly what you have, and where, you can easily identify prototypes. Between facilities, brand and real estate, your organization can develop a standard assessment template, which is more than just a checklist. This assessment template is a true reflection of the “as is” state of each location, so you can budget appropriately. The key is ensuring the data is uploaded and available in a centralized database for use by your planning team.
- Ensure budget estimates for the needed improvements are realistic. It’s one thing to know the “as is” state, but the most powerful capital plans are powered by estimates for improvement that have credibility with executives and project managers. When a chain is planning a comprehensive brand refresh, that work is generally done by brand managers in conjunction with store architects and project managers. However, when there’s condition inconsistency across facilities, with must-have repairs, upgrades or zoning-based requirements on the table, you need to have confidence in those across sites. Rather than asking each facility general manager to become an expert in updates and repairs, use a third-party estimating database for budget estimates that are relevant and reliable down to a location level.
- Review your leasing records to stay in sync with terms and restrictions associated with capital improvements. Whether you’re considering closing locations or making substantial changes for a new brand, it’s essential to have your capital plans cross-referenced to the latest lease terms you have in every location. You might be surprised by the variation across landlords, cities and states on the responsibilities defined in each lease regarding which party manages, and pays for, keeping the facility up to date. Leases also vary on the approvals required and cost-sharing arrangements that might be built into the agreements. Without clear visibility to which party is responsible for replacing or repairing facility assets, you won’t have a true picture of your capital needs.
- Enure you can connect capital investments to expected performance results. Some of your potential or planned investments will be mandatory, ensuring your continued “right to operate” as required by landlords or zoning organizations. Those business cases are relatively binary. On the other hand, plans for a major or minor brand refresh will most likely include assumptions on a resulting lift in same-store sales. The tougher situations involve the edge cases of desirable, but not mandatory, deferred maintenance. For deferred maintenance reduction, some businesses use a “Facilities Condition Index,” with an established target that represents how up-to-date or behind-the-times each facility is.
The bottom line is that facilities capital plans connected to an expected business output will have the greatest chance of being accepted by your CFO and COO. Following the steps above, and synchronizing their use and outputs across all the locations in your chain, can help to ensure alignment between brand, store operations, facilities, real estate, and your CFO. Each business has to make the most of its available resources, and the same is true for retail chains and their need to optimize capital investments.
Robert Abdul is senior vice president of Accruent, the world’s leading provider of physical resource management solutions.
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Robert Abdul is senior vice president of Accruent, the world’s leading provider of physical resource management solutions. Abdul is responsible for retail, major accounts and EMS. He has over 20 years of experience leading enterprise software sales and operations teams. Over the last 15 years, Robert has been focused on retail and corporate real estate IWMS cloud software. As Lucernex COO and interim CEO, Robert led the acquisition of Lucernex by Accruent. Robert started his career working for Anderson Consulting and Eisner Consulting where he gained experience in various ERP software such as Lawson, JD Edwards and PeopleSoft. Robert holds a Bachelor of Science Degree in Computer Information Systems.