Over the course of my career, I’ve helped select sites for over 1,000 new branches. In my role as a consultant, I’ve found that many C-level executives at community banks and credit unions aren’t familiar with some of the most fundamental principles that (should) drive a branch distribution strategy.
When crafting a long-term distribution strategy for a retail financial institution, there are three basic elements that should determine which sites are appropriate for new branches: markets, locations, and sites.
1. The Right Market
Markets represent geographies and can be both big or small. And it’s not just about the size of the market, but more importantly the potential of the trade area that surrounds a possible branch.
At the large end of the scale are metro areas. Metro areas all have a core city and adjacent suburbs, surrounded by smaller cities and towns. The way the US Census department defines metro areas assumes the core city acts as the major focal point for jobs, and while the surrounding areas also have employment zones, the general movement of people during daytime hours is into an urban core.
The largest metro areas may have multiple core cities and employment zones and be comprised of multiple counties. The key is there is some common bond or connectivity between these geographies. But what really matters is the trade area within the market. This is the primary geography that will be served by the new branch site, the area where 70-80% of your customers will come from.
Trade areas will vary in size based upon local market conditions. In very dense urban areas like New York City or downtown Chicago, a trade area might be only 4-5 blocks in any direction. In the suburbs, it may be a five minute drive time from the site, and in smaller towns and more rural settings, perhaps 8-10 minutes or more.
The general rule is that the denser the population, the smaller the trade area. With higher density, traffic volume is heavier and the distance you can travel in a convenient time is shorter.
What should you consider when thinking about markets? You need to assess the overall demographics, business environment, and competition. Is there enough demand for banking services? Is that demand growing? Are the existing branches showing good, consistent deposit growth? Or, are there are already so many bank and credit union branches that your share of the potential pie will be too small?
2. The Right Location
Location, location, location. It sounds like a cliché but it matters. Once you have studied your market and identified a neighborhood that has the right market conditions for a successful new branch, you need to find the right location within that neighborhood.
“Locations” are not the same thing as “sites.” Locations are areas within the neighborhood that act as the primary retail core serving the neighborhood, and locations come in many types:
- Retail corridors with a string of small strip centers generally containing smaller neighborhood-oriented retailers.
- Town centers or downtowns, especially in older cities in the northeast, often act as a community’s focal point.
- Community shopping centers generally anchored by a grocery store or national pharmacy surrounded by banks, restaurants and other retailing.
- Big box centers, like Home Depot or Target, where one store dominates the parcel and may have many building pads or small strip centers on the outer edges.
- Regional malls with hundreds of stores under one roof, or nowadays the outdoor mixed-use retail centers.
Selecting the right location is equally as important as selecting the right market. Branches perform best when aligned with retail centers visited at similar frequency to bank visits. That way you are convenient to your customer’s existing shopping patterns, and not a stand-alone destination. This is the reason why community shopping centers with a large grocery store anchor are the most favored locations.
3. The Right Site
A “site” refers to a specific building parcel at a location. You can have a great location in a good market, but choosing the wrong site at that location can significantly hurt the branch’s performance. Like markets and locations, sites come in a wide variety of types.
Try to imagine your site from a potential customer’s perspective. Can they easily see it? Does it have good access, can they get to it easily?
Free-standing buildings at hard corners are best as they offer visibility from both directions. Free-standing buildings at the main shopping center entrance are the next best. They don’t have visibility from both streets, but they have good visibility at the main entrance and easy access as well.
Most shopping centers have one or two main anchors and a string of smaller in-line stores. In-line spaces are inferior to the outer pads because they generally lack both visibility and accessibility. If you must choose inline space, the end-cap is usually the best. In-line sites buried in the middle of the center are the worst because they are hard to see and hard to find in the strip center.
Finally, branch sites inside a supermarket rank last (as I’ve explained in a previous article, Why In-Store Supermarket Branches Are a Bad Idea). These sites are generally too small and too expensive relative to the business potential.
Aligning Markets, Locations and Sites for Success
Market conditions determine the overall opportunity and probability of success. The location determines how well you can serve that market by taking advantage of natural consumer shopping patterns, and site quality determines how visible and accessible you are to those people.
How much of a difference does it make to get the right alignment? Here are some examples:
- Locations that lack significant retail focal points underperform due to lack of convenience and draw, impacting sales by as much as 20-30%.
- Hard corner free-standing buildings generally perform best, and by comparison branches that do not have these characteristics typically have 10-20% fewer sales.
- In-store sites generally perform at only 25-35% of free-standing traditional branches.
Take the time to get it right. You are making a long term investment and when all three things align, success will follow.