As a retail developer you have acquired land next to an existing shopping center

Question

As a retail developer you have acquired land next to an existing shopping center and are seeking financing for a second Center. Your lender is very skeptical, but you argue that the existence of a center at a location does not mean that this site is a poor choice for developing an additional new center.

a. Using retail market concepts, carefully explain, generally, when doubling the square footage of retail space at a particular location should lead to (more than/less than) a doubling of retail sales in the area?

b. As a lender what would you propose that the developer do in the way of gathering data to prove his case, configuring the center and insuring its success?

Explanation / Answer

Answer (a)

In retail market business, when doubling the square footage of retail space at a particular location should lead to more than a doubling of retail sales in the area. This is because the existing location of shop is already running and they had their existing customers. Now when they see another shopping center near by the existing center, they will get excited and they will foresee this location as a bigger business location with multiple centers. They will do mouth publicity and help in pulling more customers at that location. Thus the new center will attract some more customers hence increase in customers at that location. Slowly the location will convert into a bigger market place, which will pull more customers for sale at that location. Thus by adding a new center at a particular location, it will increase the number of centers at that location. The increase in number of center at particular location will convert the location in a bigger market. The bigger market will pull more consumers and the sales will increase. This is the common philosophy that adding similar type of centers at one location, will make ease for the customers to purchase their needs from one location only. Thus larger the number of centers at the location, more number of customers will be pulled and higher sales at that location.    

Answer (b) –

The lender will request the developer, to collect the sample data of similar situation like by adding the additional center near by the existing center, will increases the sale of the retailer in that region. If the developer is able to find such data, then it will be a good base for the lender to take the decision based on that data. The lender may ask the developer to bring alternate ways of proving this scenario. Finally the lender wants to get convinced that the proposed case will be feasible for the retail business, and the fund will not be waste. The lender may figure out similar cases based on his previous experience.

The purpose of this sampling data is to get the confidence in the fund investment in that region. If the developer is able to show some meaningful data to the lender, then the lender will get convinced and approve the fund for the new center configuration to the developer.

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