While regulations dictate where cannabis stores can open, several other factors determine if it will succeed
Opening a new retail location should be an exciting time for business owners, but it can also be one of the most stressful challenges.
Between picking a neighborhood, calculating the potential sales, looking at the population demographics, reviewing existing competition and then negotiating a lease, there is a lot of ground for any entrepreneur to cover. But cannabis retailers face additional challenges when it comes to scouting a new location, and even after finding a suitably zoned location that also meets the legal requirements, there are many hidden dangers that can sink a new business.
Right Place/Right Time
Rich Kizer, co-owner of Kizer & Bender, an internationally acclaimed, award-winning retail design, strategy and consulting firm in Chicago, has scouted countless locations for a variety of retail-based industries over the course of nearly 30 years.
Years ago, Kizer began working with a famous doughnut company. His first task was to sign off on a new location the company had already scouted. At first glance, the location was perfect: the right number of commuters, the right demographics and not much competition nearby. But on closer inspection, Kizer refused the deal and told the company’s board of directors not to take the location “even if it was the last lease on earth.”
“There was only one problem: It was on the side of the street that people drive on their way home,” Kizer says. “A doughnut shop has to be on the side of the street where people are driving in to work.”
The opposite is likely true for cannabis stores: To be convenient for customers, they should ideally be located on the side of the street where people are driving home from work.
Do it yourself
Before turning the search over to a third party, business owners should know that many commercial brokers and consultants have a fixed clientele of strip malls, business parks and shopping centers that pay commissions for finding new tenants. They will often push to sell or lease multiple locations.
Instead relying on a third party, location hunters can scan a zoning map of their preferred neighborhood and then visit the area to find and call vacant properties.
This tactic can be especially helpful in dense inner-city neighborhoods, where many landlords simply hang a “For Lease” sign in the window and let the daily foot traffic provide inquires.
Just about anything that makes access to a location inconvenient — such as forcing a commuter to make a left-hand turn across traffic — is what Kizer refers to as a “natural barrier.” Common natural barriers are railroad tracks, bridges, medians, one-way streets, rivers and other bodies of water. These can prohibit customers from reaching the business.
Kizer says a good test to find natural barriers is to assume the role of the customer and commute to the location. During the commute, review the entry points to the parking lot, he says. If the store is in the inner-city, consider the amount of foot traffic on the street, which way people are heading, where they are coming from and whether there are public transit stations nearby. If the location is in a strip mall, check to see if another business is using all the parking spaces.
Another consideration is planned disruptions due to road construction. Ask city officials if there is any planned roadwork or major structural changes expected within a 12-block radius of the property. If the city is planning those changes, Kizer suggests bringing it up during lease negotiations and modifying the rent over the duration of the construction.
“It’s only fair,” Kizer says. “When it’s open, baby, we’re back to the right rate, but if it’s a pain to get to the store, the rent has got to be fair.”
Diamonds in the Rough
Greg Hufftaker, program manager and licensed attorney for Canna Advisors, says great locations are often found near public transportation hubs and arterial roads.
“The closer you are to a bus stop and an interstate the better,” he says, “because you want all your patients to be able to get there regardless of their mode of transportation.”
Old bank buildings also make for great cannabis retail locations since security is an obvious concern for both businesses, Hufftaker says. Plus, the proliferation of online banking has led to fewer and fewer brick-and-mortar banks over the years, leaving many former bank buildings vacant across the country.
But avoid locations near schools and churches. Even if local regulations allow cannabis shops to be located nearby, churches and schools might not be the easiest neighbors for a cannabis entrepreneur to have.
However, don’t overlook low-income areas, Hufftaker says, pointing to studies in Denver that have indicated a new dispensary can raise property values.
“Rather than looking for an already great neighborhood, consider one that you could improve,” he says.
Amenity vs. Liability
Not all so-called amenities are a benefit to potential renters.
Parking lots are always a plus, Hufftaker says. Particularly in urban environments, they can be a huge benefit because nobody likes to hunt for a parking spot and then pay a few dollars just to quickly run into a pot shop.
But other features may not be nearly as important. Landlords are quick to highlight the value of a security system, but it could be old and costly to update, and might be completely insufficient for the needs of a cannabis business.
Similarly, locations with fences can save time and money, but only if they meet regulatory requirements; otherwise they must be removed and replaced.
Hufftaker says he’s seen patios advertised as potential consumption areas, despite them being illegal. It’s the real estate agent’s job to sell the property, but up to the renter to determine its worth.
Finding the Target
A great location, even when it has all the right amenities and is free from natural barriers, can only be as strong as the patrons supporting it. To find those patrons, Kizer says companies should first look internally at their own sales data and identify the demographic that has been the largest contributor to the company’s current success, then detail the company’s ideal client with factors such as income, age range, family size and whether they are home-owners or renters, among other considerations. Once that information has been compiled, there are companies that can analyze that data and pinpoint locations near a dense population of that ideal customer.
“They can give you everything you need to know, even traffic trends on the street,” Kizer says.
A report from a demographics provider should include recent changes to the area such as fluctuations in the local median income and population of the target demographic.
Another important statistic is the consumer price index (CPI), a government figure that portrays the difference in the cost of consumer goods in an area over a specified time. The CPI is an indicator of the overall economic health of the area and should be used to partly assess the value of the retail property.
When reviewing a potential location with a landlord, people should have a printed copy of the demographics report and CPI with them, Kizer says.
Calculate the Sales Floor
Once a demographic and geographic target is established, Kizer says the next step is “finding a location that is going to work for you.” This part can be considerably more difficult, and it comes down to zoning and the right numbers in terms of cost, demographics and physical space.
A good exercise for business owners is to get an idea of their current store’s average revenue by square foot for the year and the average amount a single customer spends per transaction. That calculation can be applied to the size of a potential new location to determine the number of customers and amount of sales per square foot the owner should expect from that sales floor. From that point an owner can get a rough idea of how much the store can take in and, more importantly, how much it can pay out.
Review the Competition
Obviously, businesses prefer as little competition as possible, but within certain neighborhoods, that’s wishful thinking.
Determining a particular neighborhood’s threshold for another cannabis store can be challenging. Numbers alone can be misleading, because some cities have an abnormal demand for a certain product. For example, Seattle can support numerous profitable coffee shops on a single block, while Portland, Oregon has hundreds of cannabis retailers.
Kizer says to visit the competing stores and estimate the square footage of each store’s sales floor to get a total estimate of the sales floor already in the area. Using their own sales data (average customer transaction and revenue per square foot) as a guide, business owners can get an idea of how much locals are already spending on cannabis, then contrast that number with the demographics report to see if the target customers are being underserved.
“If you can’t make money there, go home and watch television,” Kizer says.
Negotiating the Lease
Hufftaker says the average lease in cannabis retail is between five and 10 years, which is similar to other commercial industries.
“That’s enough time to learn the neighborhood and, at the same time, enough space to see where the market is heading,” Hufftaker says. “If you’re thinking of relocating, then that will give you enough lead-time to find a new space.”
Kizer says he has three mandates for a commercial lease:
– The lease must have at least two options to renew. This ensures the renter will be able to develop the business without the fear of being forced to move or pay an unreasonably higher rate at renewal.
– The right of assignment (not unreasonably withheld) to allow the renter to transfer their rights and liability to the leased property to a qualified tenant.
– The ability to sublease to a tenant, while remaining liable for paying the rent and agreed terms of the lease.
Kizer says the lease should also include an attachment indicating the improvements and upgrades the property owner must maintain to keep the lease in effect. In the real estate world, this document is often known as “Exhibit A.”
Business owners should always have an attorney who is familiar with retail leases review all documentation before signing.