Cost and Complexity of Today’s Expansion Projects

Wireframe of a co-op's facade

You’ve got your goal set—the co-op is going to expand. The co-op needs more deli seating, an expanded meat department, rotisserie chickens, a juice bar, in-house bakery with multiple ovens and more. After getting a cost estimate on such plans, the thrill wears off when you find out by how much it’s going to cost. There is an unprecedented sticker shock that accompanies many current expansion plans. Along with increased costs is an increased complexity that requires a coalition of informed people to carry them out successfully.

According to expansion planning consultants, food co-ops are faced with expansion challenges of the sort that may not have existed five or ten years ago. Intensified grocery competition has increased rivalry for locations, and prime commercial real estate prices have increased sharply. Construction costs have risen dramatically in response to global demand. The necessity for strong food service operations has intensified, causing an added layer of intricacy to many projects. The desire for “green” construction and operational practices are important considerations for food co-ops with environmentally-friendly missions. Many of these pioneering technologies are costly, too.

CDS’s expansion planning and business development consultant Bill Gessner points out that the risks inherent in costly and complex projects, like the kind undertaken by food co-ops today, can be mitigated by balancing meeting the co-op customer’s needs, discipline in cost-containment, and forethought in decision making. “It’s really important to focus on what’s realistic because costs are increasing, stores are getting larger, and there are a lot of challenges with real estate,” Gessner said. He advises a sufficient feasibility period to weigh the risks and challenges and to make the right decisions. After feasibility has been determined, it is important to allow adequate time to work through the design process and prepare for construction or renovation. “As long as it takes to build it should be about as long as it takes you to plan for construction. Going too fast leads to mistakes.”

As part of the feasibility process on a complicated project Gessner thinks it is worthwhile to reexamine why the co-op is expanding. Beating the competition is certainly a proactive stance, but he thinks a more compelling business strategy is to focus on delivering the goods and services the members want from the co-op. Yet, it’s important to do it at the right time, because, “It makes a difference who is first in the marketplace,” he said.

The good news from Gessner’s perspective is that food co-ops are getting better at taking such calculated risks with their expansions. “All the stakeholders have to find their comfort level with it. They ask, ‘what’s standing in the way’ of seeing it through rather than just saying they don’t like risk. They are trying to address risk through careful planning and understanding people’s needs.”

That’s why the importance of pre-planning research cannot be underscored enough. CDS’s location research analyst Debbie Suassuna said consumer, location, and market research can help understand the potential of an expansion site. It can help you figure out the appropriate size for a location, a store’s sales and customer count potential. “Because co-op projects are becoming more complex and expensive, you can’t afford to make a mistake. You have to do the up-front research to help minimize risk,” Suassuna said.

She notes that a common issue for people is the cost of real estate. “People get focused on price, but second tier locations are just not as good. You don’t want to invest money in a certain location and then have the competition move into the better one.”

At Weaver’s Way in Philadelphia, Pa., the co-op is faced with a number of these issues as they attempt to grow. After doing a market feasibility study that supported a major expansion, they found the ideal site, but it is very expensive.

Philadelphia is a town ripe with opportunity for multiple food co-op locations, but real estate in the city is costly. General manager Glenn Bergmann is looking for alternate ways to finance the project through city grants to mitigate cost and risk to the co-op. The co-op is faced with a difficult question—how much is too much to spend? “We don’t want to risk everything on it,” Bergmann said, “But it’s the right thing to do for the city and our community.” He believes that with the help of people in Philadelphia as well as the greater co-op community Weaver’s Way members will be able to realize their dreams.

Store planning and design expert PJ Hoffman said one strong trend contributing to the cost and complexity of expansion projects is how much more thought and money retailers are investing in the physical plant. Not only is aesthetics a top consideration, but how environmentally or operationally efficient the space is for the users. “Now people are talking about green design, community involvement, and using architects,” Hoffman said.

These are good things, but Hoffman cautions not to lose sight that the shopping experience and merchandising should drive store design. Without that focus Hoffman said, “Essential decisions about that are often made after the fact,” costing the co-op a lot more in the long run. This is where he believes good project management can help. “To have professional project management is very expensive, but if it’s done well it pays for itself.”

Food service programs are also changing the nature of food co-op expansion projects. “What used to be a $2 million project five years ago can now be twice that or more,” Hoffman said. For example, a simple rotisserie chicken case needs adequate ventilation and fire prevention structures that include sophisticated plumbing and electrical systems. It’s not just a matter of plugging in a case and letting it do its thing. That’s why Hoffman thinks stores need to make pragmatic decisions. “If your deli is the primary draw, then you may need to scale back some of the other things you want to do,” Hoffman said.

Gessner said it’s not unusual for projects of any sort to start out with a vision that gets changed. “When what’s desired isn’t attainable, you pick up the pieces and start over,” Gessner said. As for what people can expect, he says the expansion process will probably take longer to plan and cost more than you initially expected.

Planning and communication are the keys to a successful process. “Expansion planning can become an ongoing process for co-ops that are growing. Expansion planning is not to be confused with making the final decision to expand,” said Gessner. “The planning process gives you a chance to consider your options and be smart about the final decision.”

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By |March 30th, 2008|Categories: Solutions|Tags: , |

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