In March, Toys “R” Us announced that they are going out of business, resulting in future closures of over 700 Toys “R” Us stores across the United States. This liquidation is opening up a mass amount of real estate into the US real estate market. Because many companies are downsizing on retail and warehouse spaces to save on costs, the need for large suburban retail spaces has significantly gone down throughout the past couple years. Additionally, Most Toys “R” Us locations are standalone properties that are in the hands of publically traded real estate investment trusts, making the value of these spaces even lower in the eyes of the current real estate market. According to research by CoStar Group Inc, Toys “R” Us is having this issue because of poorly chosen locations for their retail stores, making it even harder for them to sell these soon-to-be vacant lots.
The recent bankruptcy and liquidation challenges of Toys “R” Us can be viewed as a case to exemplify the importance of choosing suitable locations for facilities that optimize performance and efficiency. Because bankruptcy is a risk that companies should consider when making business decisions, it is important to carefully consider many different factors when buying new facilities.
First, companies should consider distance between the facility and their customers and suppliers. Companies should factor in the cost of transporting goods when choosing a new facility because this choice can lead to significant savings in both time and money depending on where a facility is located in relation to customers and suppliers. Second, management should consider either leasing or buying properties based on their long-term goals and budgets. Third, management should make sure that the location has access to the specific transportation network of the company. Some companies may need easier access to airports or major highways to cut down on transportation costs. Fourth, management should have a solid understanding of the labor market situation in the area of the new facility to make sure there is a sufficient availability of adequate workers. Fifth, considering synergies with service providers, for example a refueling site for trucks, can simplify operations and cut down costs. Lastly, risk levels in each area of consideration should be heavily analyzed. For example, changes in market demands and changes to transportation infrastructure should be researched prior to a location decision.
If Toys “R” Us would have considered these qualities before purchasing millions of square feet of large retail space, would they have survived longer? Would they have an easier time liquidating their assets if they had made better decisions about the locations of their facilities? Can you think of any other negative effects poor location strategy can have on a company?