Now, contrast the locations of the McDonald's sites to the Herbalife locations. Specifically, McDonald's appears to limit the number of franchises it grants contingent on the viability of each location. However, there is an apparent calculus to the approach. As customers cross over from one franchisees trade area into another's, perhaps they see some cannibalization of their customer traffic. At the margin, each store competes with the other. It appears, visually, that each McDonald's franchisee enjoys some level of territorial exclusivity. What we don't see from the image is evidence of location overlap. Presumably, there are enough customers who desire to eat fast food on a daily basis to make each one of these locations economically viable for both the franchisor and franchisee. It is easy for investors to imagine the trade area that surrounds each of these locations. Pershing Square's diagrams in their presentation demonstrate the "rational" location of various McDonald's Restuarants in and around the Queens area. There are 4 microeconomic truths that we always had to contend with when doing our store proformas.ġ) The size of the total market in any given geography for groceries is finite.Ģ) There is only enough room for so much sales per square foot/so many stores per geographyģ) If an area gets overserviced/overstored in the short-run all market participants will suffer.Ĥ) In the long-run if an area gets overserviced/overstored the weakest market participants will fail. In each geographic location/micro-market we competed in we pretty much knew how much business was available (market size), how much volume the competitors were doing, and what our own opportunity set looked like. The exercise continued by mapping competitors on the map. We went through this process in detail cell by cell/block by block until we had a proforma. Multiplying the market share % by the # of people in the grid by the estimated weekly grocery spend allowed to us to work-up our revenue model. We then estimated the % market share we were likely to earn from each cell on the grid. Within each cell on the grid we knew exactly how many people lived there and what their weekly spend was likely to be on groceries. We mapped a primary trade area around each site in 1/4 square mile blocks. What was their annual income? How much were they likely to spend on groceries per week, etc. We started with a simple question: "How many people live within the trade area of our site?"įrom there we used government census data to assess the demographic information of the people who lived in the site's trade area. Specifically, we would model/proforma an income statement for a given retail location using bottom-up analysis. My summer job was to analyze potential sites for retail viability. When I was in college, I worked as a real estate analyst for Canada's largest grocery store chain. Investors would be wise to pay attention to slides 50,51 and 52. Last Friday, Pershing Square presented at the Robin Hood Investment Conference a summary of their pyramid scheme thesis for Herbalife ( NYSE: HLF).
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