Retailers who already outperform the competition thanks to a compelling customer promise and strong brand are ready to expand. In the following sections we’ll cover real estate strategy from a regional level, dive into the specifics of choosing a strong retail location, and then touch on the pros and cons of vertical integration.
Real Estate Strategies
First to Market
When faced with the admittedly significant obstacles to finding good real estate for cannabis, many retailers take an opportunistic approach, rushing to be “first to market” for fear that all the good opportunities will be gone quickly. This typically results in poor real estate decisions and brands spread across locations with entirely different customer bases. The only cases where we’ve seen the first to market strategy deliver obvious wins are those where owners sold in the very early days at the peak of irrational exuberance (and often before the business was fully operational).
It’s true that some of the first stores in new markets have made incredible amounts of money in a short period of time. It’s also true that in most cases, their performance has since been surpassed by better-run stores in better locations. There will always be new opportunities, and as time passes more commercial landlords become open to cannabis. Speed won’t overcome bad real estate. Bad real estate will eventually lose.
The best real estate available by traditional metrics (cost vs. traffic potential) may not be the best real estate for your brand and your customers. Strong retailers choose locations based on their customer promise and brand. If you’re all about convenience, then gas station-anchored shopping centers in high density areas may be the obvious solution. A premium or luxury brand needs premium or luxury neighbors.
Many successful retail brands follow a hub-and-spoke market strategy where centrally located flagship stores build brand equity and consumer awareness while more efficient and profitable satellite stores capture consumer demand more broadly and capitalize on your brand equity. A hub-and-spoke model in a large city allows for a large number of stores in a dense geographic area, making both staffing and marketing dramatically easier and more efficient. Most forms of marketing cost the same whether you have one store in the market or ten.
I’ve spent the better part of 20 years sourcing small-footprint retail real estate in more than a dozen major metro areas across North America with companies ranging from startups to Starbucks. “Location” is often cited as the most important factor in retail success. In cannabis, finding great real estate is more complex, and even more important. A great location is not sufficient to guarantee success, but it is the most significant single factor.
The seven keys to success for a cannabis retail location include:
- Traffic and Parking
- Size and Layout
- Regulations (setbacks, buffers, and zoning)
Visibility is the most efficient form of customer acquisition. According to a recent survey in states that have legalized recreational cannabis, 36% of adults 21+ are current consumers. Choosing a location with good traffic and high visibility is the most efficient way to build a customer base.
Visibility is driven by a combination of factors including:
- Placement: a free-standing building is more visible than a corner unit, and the corner is more visible than an in-line space.
- Frontage: the width of your store on the street matters far more than the total square footage.
- Façade: a building where each space appears differentiated offers better visibility than one with uniform color patterns and signage.
- Sight lines: pay attention to the visibility of a location for drivers and pedestrians from likely angles. An otherwise great location may be obscured from most traffic by trees or even a curve in the road. Depending on traffic, drivers may never see a storefront they pass every day unless it is visible from a quarter mile away.
The size of the local population is critical to your success for obvious reasons. Less obvious may be some of the nuances to analyzing market size and potential. Pay close attention to local demographics. You can find broad demographic data by zip code for free online, including population size, age, education, income, and more. Also investigate daytime vs evening population counts. In urban areas, you may find that the daytime population is several times that of the residential base due work and traffic patterns. A good commercial real estate broker should be able to provide this data.
A best practice in retail is to build an equation to estimate the addressable market size. For example:
|Local population 21+||Outside Traffic||Cannabis Consumers||Shop legal channels||Est. Market Share||Customers|
|30,000||+ 5,000||X 36%||X 50%||40%||= 2,520|
|= 35,000||= 12,600||= 6,300||= 2,520|
We could continue the back-of-napkin math by estimating that each customer spends $100 per month, which would give us $3 million in annual sales (a pretty average result across many markets).
In a market with a lot of competition, you may need to split the population further. For example, does your store target the 50% of consumers who buy their groceries from the big chain store, the 25% who buy from the natural market, or the 25% who buy from the discount grocer?
3. Traffic & Parking
Traffic is a key factor in location quality and retail performance. Many cities publish traffic statistics online, and a decent commercial real estate broker should be able to provide you with vehicle and/or pedestrian traffic counts for busier roads. More important than total traffic numbers, pay close attention to the type of traffic. Consider foot traffic, vehicle traffic, and accessibility (how easy is it for vehicles coming from either direction to enter your parking lot?). Commuters are typically focused on getting from point A to point B as efficiently as possible and are less likely to stop along the way than those running errands. Tourists may or may not be great customers, but they are definitely less likely to drive regular repeat business.
Parking is the single greatest predictor of success in cannabis retail. The only scenario under which I would open a store without convenient (ideally free) parking is if there is STRONG pedestrian traffic (e.g., an urban “high-street” retail corridor). Even then, you risk being out-positioned by a store that’s easier to access. We’ve watched urban cannabis retailers fall from over $700K per month to under $200K when competing stores with free parking opened nearby. A suburban store without dedicated or easily accessible parking is almost certainly a terrible idea.
Adjacencies refers to the other businesses surrounding your retail location. Restaurants and nightclubs attract traffic primarily on evenings and weekends. Empty storefronts nearby are more likely to attract homeless and graffiti artists. A budget pot shop in a busy gas station plaza with convenience and liquor stores is a very safe bet, but a premium cannabis retailer trying to be the Apple of cannabis may do surprisingly poorly in this same location. Similarly, pawn shops, convenience stores, and payday loan shops are poor neighbors for a cannabis retailer trying to create a premium shopping experience. When choosing a retail location, consider whether your target customer is likely to shop the other stores in your area, and whether the broader environment enhances your brand and business or distracts from it.
5. Size and Layout
Does the size and layout of the site support your intended use? The ideal size of a cannabis store depends a lot on your customer promise and planned shopping experience. In most scenarios, 1,500 to 2,500 square feet is ideal. Smaller stores force compromises (assortment size, inventory capacity, customer capacity, merchandising, staff comfort, etc.). Much larger than 2,500 square feet and you lose financial and operational efficiency, and disrupt the energy and flow of the store.
The final key to success for a cannabis retail location is local competition. Your primary goal as a retailer should be to become “the best” in your local market at delivering on your customer promises.
Plot on a map the logical outlines of your market. Which communities and trade areas are you a part of? How far do you reasonably expect customers to travel to frequent your store? Within your local market, where are the existing cannabis retailers, and where would zoning permit a competing retailer to open? Finally, what are the competitive differentiators and customer promises effectively delivered by your local competition? I encourage my clients not to shy away from competition, but rather to be intentional about tracking competitors and to allow that data to drive how they choose (and win) their battles.
7. Regulations (setbacks, buffers, and zoning)
The first six keys to success are universal to all retailers. Regulations at the state and federal level make finding good real estate for cannabis a surprisingly difficult task. Those same obstacles can also make well-positioned retailers extremely profitable. Most cannabis licensing regimes dictate strict setbacks or buffers, blocking off significant segments of most developed areas. In Washington state, cannabis retailers must be located at least 1,000 feet (about 3 city blocks) from schools, playgrounds, recreational centers, childcare centers, public parts, public transit centers, libraries, arcades, AND other cannabis retailers. In combination with city zoning limitations applied to all retail businesses, these regulations allow for the creation of local monopolies in select areas. It’s possible to secure a position as the only cannabis retailer in a trade area. That’s a competitive advantage not available to most other retail businesses.
Federal law prevents major financial institutions from providing services to the cannabis industry, and this dramatically complicates the real estate search. I’ve had eager landlords back out upon finding that their national bank is threatening to call all of their lines of credit if they lease to a cannabis business. Since most commercial landlords have multiple properties leveraged by mortgages, this obstacle dramatically limits the available real estate and complicates the search. I’ve had commercial realtors decline to support cannabis searches because of the degree of difficulty. That said, this space is quickly normalizing, and both the stigmas and the regulatory obstacles are falling quickly.