Retailers continue spending on maintenance and upgrades of existing facilities

August 11, 2010

Not all is bleak on the retail construction scene. Though most retailers have scaled back their new store development plans (some considerably), many have redeployed staff to focus on upgrading and better maintaining existing stores to a degree not typically seen in the past.

It wasn’t that long ago that retailers like Wal-Mart, Target and others minimized their capital expenditures in existing store locations for the simple reason that they didn’t plan on staying long. From the 1970s through the 1990s, many retailers, including both large and small box owners, planned on staying less than 20 years. Now, the majority of these firms plan on being in the same location for twice that long.

This longer-term approach is evident by the increased time and investment that goes into site selection. Much more detailed studying goes into the process of selecting sites. Software is used to analyze existing and future demographics, competition and traffic patterns, along with other factors like planned public transit and projected changes to bylaws and zoning. Before sites can get approved, local municipalities now often require upgrades to the design and appearance of the store beyond the basic “box look” to blend in with local architecture and the surrounding environment, increasing construction budgets and pushing out the expected lifespan of the facility in order to achieve the desired return on investment.

Companies have long recognized that properly maintaining an asset can extend its useful life and reduce operating costs. Preventative maintenance has been proven over decades to be the single greatest contributor to extending a facilities’ useful life. In the retail sector, the reasoning and economics behind this axiom didn’t make as much sense in the past, due to the short tenure, as it does now. In other words, why incur preventative maintenance costs in year 12 of a facilities’ lifespan that could extend the remaining useful life of a roof to 20 years, if the occupant planned on leaving after 15 years? Having a longer-term vision for the lifespan of a facility means that more planning and expenditures will be needed for preventative maintenance. Key areas that once got the band-aid approach like roofs, pavements and energy systems are now being carefully maintained and analyzed along with proactive spending to extend their life.

Energy Usage is a Key Driver

Research has shown that energy costs typically represent more than half of retailers’ total facility operations and maintenance budgets. Bloated utility bills can leave little left for other areas of needed improvement. Most companies have traditionally spent three to four times as much on energy as they spend on other facility operations and maintenance items. Spikes in utility bills can indicate problem areas that left unchecked could drain operations and maintenance budgets. Until fairly recently, most retailers were ill-equipped to adequately measure and monitor energy usage on a grand scale, let alone at the individual store level. Many have invested in corporate-wide energy management systems to analyze performance, and can now make changes as necessary companywide, as well as at the individual store asset level.

These software systems incorporate maintenance planning and management, as well as “alert” tools to provide early notification of underperforming assets based upon their energy consumption. This has allowed corporate facilities managers to step back and look for common problems across multiple sites that could be related to certain materials used, installation problems or other factors. Though these systems require an additional investment in software and training, the resulting savings can be substantial.

In addition to energy management systems, sustainable or green design methods and materials are being specified for both new stores and existing store upgrades. These include more natural lighting, the use of compact fluorescent light bulbs (which use 75 percent less energy than incandescent bulbs), roofing materials that are less likely to absorb and release heat into the store, and much more energy-efficient heating, cooling and refrigeration systems.

Wal-Mart, the world’s largest private purchaser of electricity, has stated that their goal is to reduce energy usage by 30 percent in new stores and 20 percent in existing stores. They are currently spending more than $500 million per year to achieve these targets. Achieving this goal will not only save them billions of dollars in utility costs over the next few decades, some of which can be further reinvested to upgrade existing facilities, it will have a significant impact on reducing their overall carbon footprint. Other retailers are following Wal-Mart’s lead.

Roofs and Pavements Getting Attention

Many retailers have traditionally left maintenance decisions primarily in the hands of the store manager. How much was spent could impact a store manager’s year-end bonus, which in some cases led to very short-sighted decision making. That combined with the previously short lifespan of the facility (under 20 years), led to many problem areas that were poorly addressed and left to deteriorate further. Nowhere was this more apparent than with roofs and parking lots. Roofs in particular have always, to a degree, been considered “out-of-sight, out-of mind.” Unlike parking lots that people are walking and driving on, roofs cannot be seen from the ground. Most roofs don’t fail overnight. The failures are the result of years of neglect, allowing small leaks to turn into big problems. Research from historical roof life statistics can demonstrate that spending 3 cents to 5 cents per square foot per year in roof maintenance costs can significantly increase the chances of extending the remaining useful life of a roof from five years to ten years. Not having to spend several million dollars on a roof replacement for another five years or longer is a significant financial advantage, even when factoring in the yearly maintenance costs, especially when you consider the net present value of the money saved over that time period. Simple regularly performed activities like looking for tears and splits, clearing debris from drainage areas and checking flashings can go a long way towards extending the life of a roof.

Parking lots should last 20-30 years, but most do not. Many fail prematurely due to problems with the original design, construction or subsurface conditions (which will usually show up in the first few years), or lack of preventative maintenance. Like roofs, pavements have a tipping point, at which total replacement becomes the only viable option. This tipping point can be avoided for many years with proper maintenance. Most of the damage to parking lots over time is the result of water infiltration caused by a combination of traffic and the environment. Therefore, it is imperative that crack sealing, pothole filling and seal coating be done according to a regular maintenance schedule. Again, as with roofs, total replacement is a very expensive cost that can be put off for many years if preventative maintenance is followed. More and more retailers have learned that a sound maintenance approach is economically the best choice. It makes a lot more sense to pay a little now vs. a lot later.

Retailers are recognizing that a corporate initiative to manage roofs and pavements is a sound approach that can save millions of dollars when you’re dealing with hundreds or thousands of store locations, especially when the goal is to stay in them for up to 40 years. There are many software programs available to manage roof and pavement maintenance programs. Some are proprietary and some are off the shelf. Any of them, combined with the services of an experienced consulting engineering firm, can provide a window into current and future costs associated with roof and pavement maintenance, so that sound capital expenditure decisions can be made to address the neediest sites first.

Competition Also Forcing Store Upgrades

In addition to the need to extend the useful life of facilities, the other major driver of spending on existing facilities is the need to keep pace with the competition to meet customer expectations. Even in a price-driven environment, customers generally prefer an updated look to a beaten-down, plain store. This is especially true in the grocery business, known for its historically low margins. These companies know that shoppers have too many other options. They have to keep up with the times, or customers will go somewhere else. The battle for consumer dollars has never been greater, with companies constantly seeking a competitive advantage to take away market share. Traditional grocery chains like Kroger and Safeway have undertaken ambitious remodeling programs to try and create memorable shopping experiences for their customers, so as not lose them to companies like Wal-Mart or Target, who have moved aggressively into the grocery space with good results.

Maintaining Assets Pays Off in the Long Term

Many retailers are stuck with “dark facilities” that they continue to own. These are empty boxes that once housed stores, but have since been shuttered when new locations were opened. There are thousands sitting vacant around the country. In many cases, because they were not well maintained, they are not very marketable either for lease or for sale. By building and upgrading stores to a much higher level of energy efficiency, maintaining the higher cost components (like roofs and pavements) to a greater degree, and investing in the people and systems necessary for proper asset management, retailers going forward will reap the benefits of lower operating costs, higher property values and quicker disposal times. All are good reasons for spending money on preventive maintenance while continuing regular store upgrades to spruce up older stores and meet changing customer desires.


Kevin Langwell, CPSM, is the senior vice president for the Facilities Division of Terracon Consultants, Inc. He has more than 20 years' experience in the consulting engineering field, primarily in the area of client development and operations. Terracon is an employee-owned engineering consulting firm providing geotechnical, environmental, construction materials and facilities services from nearly 100 offices nationwide with more than 2,500 employees.

         
 

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