Site Selection Mythbusting #3 - The best deal is the "best deal" and the saga of the San Francisco 49ers
Site selection at the local/small business level is a tricky situation - a combination of demographic and market research, analysis of costs per sqft to expected revenue, brand compatibility and other metrics that are sometimes hard to quantify such as visibility, "feel" of a space, etc. But at the large, corporate level, site selection gets a LOT harder. Labor pools, tax incentives, environmental regulations - each of these and more start factoring into the decision. Amazon's HQ2 is the most recent (and VERY public) example of how businesses determine where to locate - but there have been many other businesses over the years that have shuffled from one location to another trying to find the best spot - often through receiving massive tax breaks and other incentives to locate. Those incentives are often the most publicly reported on items, and of course those incentives are very important in terms of the bottom line to the company. Yet, all this press about incentives has created a myth that "the best deal" is when a company has been successful in squeezing the last dime out of a negotiation. As the San Francisco 49ers are finding out, sometimes the "best deal" isn't always the best deal.
First, a bit of back-story. The San Francisco 49ers are one of the NFL's most successful franchises. They've won 5 Super Bowls, been to 6, and have been a Bay-Area fixture for almost 70 years. For 42 years (1971-2013) the team played at Candlestick Park (eventually 3COM Park at Candlestick Point), a facility they shared with the San Francisco Giants baseball team - until the Giants got their own stadium (PacBell Park, now AT&T Park) in 2000. It was right around this time when NFL teams embarked on a stadium building bonanza, with almost half the league constructing new stadiums between 1995-2005. The 49ers of course, soon followed suit; or - at least - they tried to.
After some failed negotiations in the late 90's, the 49ers resumed discussions with the City of San Francisco in 2006 to build a new stadium at Candlestick Point as part of the city's larger efforts to lure the Olympics to San Francisco. Due to a variety of political and practical reasons, the 49ers broke ties with the City and focused their efforts on a new stadium in Santa Clara, which is about 40 miles south on the map and about an hour's drive if you're lucky. Today, the 49ers play in Levi's Stadium, which I hear has a nice feel in the seat (I couldn't resist).
Conceptually the Santa Clara move wasn't a completely spiteful to SF - the team's offices and training facility had been located in SC since 1987, and technically the team would still call itself "San Francisco" - though the 49ers would be much closer to San Jose than the Golden Gate Bridge. But this move wasn't about practical or logisitical elements - what this deal was about at the end of the day was money. LOTS OF IT. Unlike the Chargers or Bears from previous posts, the 49ers were able to get Santa Clara to pony up big time for their new stadium. While the good people of California like to delude themselves that this stadium was privately financed - Levi's was almost entirely financed through public money in what many would call a very complicated arrangement. While it's true the City of Santa Clara created a private authority to protect the city, Santa Clara authorized the authority to borrow $900 million - and they're on the hook for the debt, not the 49ers. In fairness, the 49ers did borrow a few hundred million from the NFL and they do pay a $5m annual lease back to the city, which on the surface, it looks similar to the Bears deal before. However, given the value of inflation, that $200m the 49ers put in in 2013 only equates to $150m back in 2003. In essence, the 49ers got themselves a $1.3 BILLION stadium, with all the benefits and heavily mitigated risks. Sounds like a great deal right?
The 49ers got a ton of cash - but their scorched-earth negotiating tactics cost themselves a ton of goodwill in the process. The 49ers leaving SF meant that the city couldn't put together a suitable stadium for their 2016 Olympic bid. Local politicians started drafting legislation in punishment, aimed at either banning the team from relocating 100 miles of San Francisco or forcing them to relinquish their name - though I would argue that those moves were political grandstanding at its finest since none ever came close to passing. Shortly after opening the doors on the new stadium, things turned sour between the 49ers and Santa Clara, and were made worse by some bizarre dealings with a local soccer league. Things are so bad now that the 49ers and the City of Santa Clara are suing each other over a alleged breach of contract. As a result of those missteps, the terrible on-field product the 49ers have produced since 2014, and other associated NFL PR gaffes, attendance this year has been awful.
So what does this all mean? There's no question the 49ers made some really, REALLY boneheaded PR moves on their way both out the door and in Santa Clara - stuff that was entirely of their own doing. That being said, at the time the team made a move that looked like the best deal on paper. So far though, it's turned out to be a really bad deal in reality. Had the 49ers worked with San Francisco and stayed put, there's a very good chance that even with their woeful play and NFL PR problems they'd have maintained better attendance and public opinion of the team. Furthermore, by staying in SF it would be highly unlikely that they would be in a lawsuit right now, because the City of San Francisco and the team had a long-standing working relationship. As a working relationship, while there was a long history of team offices and practice facilities being located there, the two sides never had to work each other on anything even remotely as complex as a $1.3 billion (with a B) stadium.
Now, typically I try to find a small business example locally but the details of lease agreements and other incentives at the store level are very hard to come by. There's a few that I'm personally aware of, but for confidentiality reasons I'm not allowed to disclose them all to you! As a result, for my local example this week, I'm choosing to use the the relocation of the Subaru headquarters from Cherry Hill, NJ to nearby Camden, NJ. For those unfamiliar, Subaru had a smaller, older HQ facility in Cherry Hill, about 20 min away from downtown Philadelphia. Needing additional space, Subaru did what every good business does - they looked for the best deal they could find. They found it in Camden...and in a comprehensive aid package totaling $118m. The new HQ is under construction and will be over double the size of their current facility and will come with all of the new shiny bells and whistles that befits the primary location of an international auto manufacturer. Not a bad deal - getting someone to give you $118m for a total of 600 jobs to move a grand total of 10 minutes! Economic development at its finest!
And yet - signs are starting to appear of issues between Subaru and New Jersey. A proposed revision of the tax break promised to Subaru led to a near-withdrawal of the company from Camden. While Gov. Christie didn't end the tax break after all - the facility Subaru is moving into has been affectionately called "an inaccessible, climate killing office park." It's too early to tell if relations between Camden and Subaru will sour any time soon - but if Subaru fails to deliver on their promises to the Camden community the way the 49ers botched their dealings with Santa Clara's soccer league (do NOT mess with Soccer Moms!), then there's a real good chance that this partnership will go sour - fast.
So how does all of this translate to a small business? It essentially boils down to this: lease holidays, tenant improvements (TI) and other financial incentives are great and critical to protecting your business - but the relationship between you, your landlord, and your community matters just as much if not more than upfront cash. Rents increase, taxes increase, and unforeseen challenges happen all the time in business. Having an understanding landlord and a supportive community can mean the difference between riding out bad wave and flipping over into bankruptcy. So, when working to find that next location, remember all those intangible, difficult to quantify aspects of your search, as it can often mean the difference to your success.
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Site Selection Myth Busting #2: "Get the most store you can afford", and the wise moves of the Chicago Bears
There's a saying in residential real estate - "get the most house you can afford", since the value of real estate typically goes up. This often translates in the commercial world to getting the most store a business can afford, since moving isn't easy and the more floor area a store has, the more revenue that can be generated (in theory). However, this myth often ignores the very real perils of having to occupy and maintain said space. In this second installment of site selection mythbusting, I examine why the myth of "get the most you can afford" is so toxic, using the NFL's Chicago Bears as a very real, positive example to follow.
Just a bit of context - the Chicago Bears are a long, storied franchise in the NFL, having existed since the 1920s. They play in the 3rd largest media market in the country, and have over 9.5 million potential fans to draw on in the region, and football is BIG in the upper midwest - maybe not the religion it is in other parts of the country - but you know when it's football season by Lake Michigan.
Somehow though, that market size and passionate following didn't translate into a massive stadium. In Dallas, where the Cowboys are worshiped, the owner Jerry Jones built an 80,000 seat stadium a few years ago with capacity up to 100,000. The Bears though? The new(ish) Soldier Field tops out at 61,500 seats, with a max standing room capacity of a few thousand more than that. Until a few years ago, it was the smallest capacity stadium in the country - despite having the 3rd largest market. What gave?
Well, there's a few things that affected the size and location of the stadium back when it was being planned in the 1990s - but there are far better analyses of the political machinations than I could ever hope to provide. The Bears originally weren't planning to stay in Chicago proper, having explored options in nearby suburbs of Hoffman Estates, Elk Grove, and Aurora (party on Wayne). At one point, the Bears threatened to move to Gary, Indiana, to which then Chicago Mayor Daley replied "Let them move to Alaska." Anchorage, of course, would have been a rather unlikely relocation destination for the Monsters of the Midway, and the Illinois legislature rejected the options to build a new stadium outside of Chicago.
Eventually, the Bears, the State of Illinois, and the Chicago Park District (operators of Soldier Field) came to an agreement to renovate the stadium at the same location. While many have derided it's rather...unique appearance - the fact remains that since Soldier Field 2 was built, the Bears have fallen below the 100% attendance mark just ONCE in the last 10 years. This despite the fact that DA BEARS have produced some shockingly bad teams in the last decade, while playing outside, in winter, IN CHICAGO.
So, why does all of this matter? Well, the fact is that the Bears could've stuck to their guns, maybe financed the deal themselves and gotten a massive domed stadium somewhere else in the Chicago area. This maybe could have boosted their revenue - or it could have ended up like the Detroit Lions - who did exactly that and found themselves the only NFL team to lose money in 2013. Instead, the Bears struck a deal to give the land to the City, who promptly picked up the majority of the tab to build the new field. The Bears paid 38% to the deal, and pay an ongoing lease rate of $5.7m/year through 2033. Discounting at 7% over the 30ish year period - the Bears are on the hook for...$300 million dollars. Those Detroit Lions, by comparison, are paying over $350m PER YEAR in debt obligations. And by today's standards, considering the LA Rams are privately financing their $2.6 BILLION stadium - its a brilliant deal for the Bears. Sure, they don't get other stadium revenue like concerts or soccer games - but then again, they don't have to manage those events either, since they ceded control to the City.
Despite the fact that Forbes thinks the Bears whiffed on some massive financial opportunities, in my opinion the Bears were shrewd, competent business people who understood that the more space they controlled, the more they had to spend to deal with it. From a retail store perspective - if you sign a deal for a 2500 square foot store, you as a business owner need to generate revenue to support that floor area. Often times for retail, that floor area means inventory - an initial upfront expense that you need to then sell through to make your revenues and hopefully profits. How many times do you see stores with tons of room and little inventory? This is because they got lured in by the siren song of high revenues.
A prime and unfortunate example of over-expanding in Philadelphia is Cella Luxuria, a local luxury furniture chain. In this author's opinion, Cella sold a very good, albeit niche product, and had a few store locations to their name (and would've been an ideal client for SSC!). But, as Cella added a second location, they added 8,000 square feet of floorspace without effectively increasing their market size; and in their previous expansion adjacent to their existing location, they picked up 12,000 square feet of floor space that they had to fill with inventory.
The location at 12th & Chestnut wasn't any significant distance away from their location on South Street. People living in Society Hill or Queen Village aren't that much more likely to venture to a place on South St vs Midtown. This is opposed to, say, opening a store in Manayunk or Chestnut Hill. Such an expansion would have opened up reasonably sized, rather affluent markets whose customers are less likely to travel into Center City to furniture shop. By opening the new store so close, they were cannibalizing their market.
Lastly, 12,000 square feet at 12th and Chestnut is not cheap on a month to month basis, and while South Street isn't 18th & Walnut, those 8,000 square feet weren't free either. High style furniture doesn't move quickly like clothing or food or other high turnover items. After all, people typically don't change their couch every day. So, it's a hard business when you have high fixed costs (inventory, overhead) and need strong cash flow (sales) to make things work. If the business had to borrow cash to finance the inventory and those couches/tables didn't sell through at the needed margins, that would have put tremendous strain on the company.
It's only an educated guess, but adding more inventory (cash out up front), and floor space (cash out each month), without significantly increasing their market reach (i.e no significant increase in potential customers) led to an imbalance of expenditure and revenue, and forced them to close their doors at all 3 locations less than 2 years after expanding to South Street. Whether it be stadiums or restaurant seating - buying more space than you need always comes with hidden costs that can destroy a company's profitability over time. It's always better (and more fiscally prudent) to "outgrow" a space than to "grow into it."
Please come back next week when I explore the third and final myth in the series: "Why the 'best deal' isn't often the best deal. "
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To end the year, I thought I would combine two of my favorite things (Football & Blogging) and relate them to the work SSC Solutions does. Over the next three weeks I'll be dispelling a few site selection myths that trap businesses of all industry types and maturity levels, using the NFL for case studies. Where possible, I'll try and cite a local Philadelphia example as well, to further demonstrate how these myths can impact companies of all sorts. First up, the sad, sad tale of the LA Chargers.
For the uninitiated, the San Diego...er...LOS ANGELES Chargers moved from San Diego to LA this year, in what I'm sure they intended to be a permanent move. However, things have been so bad at their new home, that even if they manage to win the abysmal AFC West and get a home playoff game, they will more than likely set a modern day record for lowest attendance for an NFL team. Now, in fairness to the Chargers, they are playing in a temporary setting while their new LA stadium is being built - something that has also affected attendance for the 2002 Bears (9% decline) and 2014-15 Vikings (21% decline) while their new digs were being constructed. And unlike their future co-tenant Rams, the Chargers chose to play their games not at the spacious 93,000 seat Colosseum, but at the StubHub Center, a soccer stadium with a max capacity of 27,000 seats.
The Chargers used to draw well over 50,000 fans when they were playing back in San Diego. Now, they're lucky to pull in half of that, and those that are showing up are often fans of the visiting team. Things may improve somewhat once the team moves into their fancy new home in Inglewood next year - but I doubt it. The Chargers are learning very quickly some of the key myths about site selection and brand loyalty.
The Chargers and Rams (and maybe the Oakland Raiders?) are just a few of the coastal examples of teams moving for the allure of a bigger market - following the myth that market size determines financial destiny. Stop me if you've heard this logic before: if company X can just capture Y percentage of the market, it will result in Z dollars. Let the money flow right?
On the surface, this makes total sense - a 100% capture of a small market isn't as valuable (in theory) as 50% capture of a market 3x the size. LA, with a metro area population of 13 million people, is more than double the size of the St. Louis (former Rams home) and San Diego (Charger) markets - combined. [For the Raiders, the Vegas market is 1.5 million - 3x that of Oakland, though a lot smaller than the bay area more broadly]. If the Rams and Chargers each take 50% of LA, that's over 6 million potential season ticket holders for each team. Simple yes?
NO. As the Chargers are rudely discovering (and the Raiders will likely next year), the number of people in a place is not as important as who those people are. Not just incomes, which is what most experts look at - but their mentality, the other things on offer in the market, and the local attachment/compatibility to the brand. LA as a market spent 20 years without football. That's an entire generation without an NFL team - 20 years for people to learn to like other sports - or to be drawn to the other football available in LA - USC and UCLA. Those fans old enough to remember football in LA weren't terribly nostalgic about the Rams, though I'm sure they're glad to have them back; and they most certainly didn't want the Chargers. The team Los Angelenos wanted was the Raiders. The Chargers as a brand don't have the same cachet as the Raiders - and understandably so. There was a point of time where the Raiders were embodied by LA culture in a way that the Chargers could only dream of. Heck they did a 30 for 30 on this very subject.
Sadly for the Chargers, they're just one example of a business thinking because their product is good or in demand, the brand will be successful. This just isn't the case. The failure of a Subway restaurant at 45th & Baltimore in West Philly is a perfect example of this hubris. Subway, in my opinion makes decent sandwiches at decent prices and has a very recognizable brand. That area of West Philly was (and is) becoming increasingly affluent and densely populated and needed a decent sandwich shop. Time to cash in yes?
Nope. The people moving in to that part of West Philly prefer local stores to chains, artisinal to mass produced, and organic to...inorganic? (I never understood what the opposite of that was supposed to be.) The Subway was even the subject of outright opposition by the local community. After a few years of business, it closed up, and the space is now rented to a local cafe.
The Chargers, like other businesses suffering through an ill-conceived move, are stuck between a proverbial rock and a hard place. Their ability to survive in LA will be a result of how effectively the organization can both produce a quality on-field product while similarly making tremendous efforts in their public outreach to fans - and even then, it may never work out.
The NFL has massive public relations issues at the moment, and the way the Chargers left San Diego doesn't exactly endear themselves to a city like LA, which lost two teams in a similar fashion two decades ago. Add all that to the previously mentioned 20 years of cultural changes and Chargers fans may never materialize in LA; and as mentioned, if the Chargers can't convince people in LA to be fans, the way the team burned bridges leaving San Diego makes a return back down I-5...tenuous at best.
For the Chargers players stuck playing in front of opposing fans at home, I do hope things get better for them soon; but for other businesses seeking riches in a larger market, let this be a cautionary tale. Market size only matters if your customer is there.
General thoughts and musings about the work SSC Solutions does and other things happening in and around Philadelphia