how to avoid the $2.5 Million mistake

By: Mark Brandt

Introduction

One of the most crucial issues facing a growing financial institution is where, how and when to build new branch locations.  For many institutions this question is answered without the help of in-depth tools and research methods.  The bank may have a “good feeling” about a specific city, or the directors may know of a specific site available for purchase near a shopping center they frequent.  These are not viable ways of selecting locations, and more often than not result in the $2.5 million mistake.

Our experience shows us that the typical new branch facility can be built for approximately $2.5 million.  This number will obviously vary from market to market, but $2.5 million is a realistic estimate, assuming a cost of $1.0 million for land and $1.5 million for construction.  This is a large sum of capital to invest in a branch facility without any in-depth research or evaluation of the market.  Based on our in-house accounting profit and loss scenario that we run for our clients, it will take a bank approximately $20 million in deposits on average to break-even on a $2.5 million branch.  We also estimate, based on this same scenario, that it will take anywhere from 18 to 24 months to break even, that is if you have selected the correct market.

How does an institution avoid making the $2.5 million dollar mistake of building a brand new, full service branch facility in the wrong market at the wrong time, or with the wrong strategy?  The key is a combination of in-depth and quantitative research, demographic tools, personal market knowledge, anticipation and gut-instinct.  There is no substitute for personally evaluating a market and site, but this approach alone will not tell you everything you need to know.  This in-person evaluation must be supplemented with in-depth market data and demographics complete the picture.  Without combining these tools and approaches, the decision to build a bank branch can quickly become a mistake that wastes capital, time and resources.

3 Key Components

When evaluating a target market or specific site, there are three key components to consider that will help a bank avoid wasting $2.5 million on a bad branch.  These three key components are location, demographics and competition.  The best formula for success is a branch location that achieves synergy among all three of these components.  These three key components are made up by a great number of factors that all contribute to their importance, but for the purposes of this article we will define a select few as specific examples.

Location

Location is arguably the most important factor when deciding to build a branch, but it is also important to remember that location alone will not make a branch successful.  Location is crucial because on paper you could hypothetically pick the best target market, with the highest growth opportunity, and the greatest demand potential and all signs will point to success.  However, if your location within that market has no drawing power, has no visibility, if the customers cannot get into and out of the site, if traffic flows are a nightmare, and if nobody knows your branch is there, then success in that market is impossible.  A successful branch must be visible, easily accessible (by foot and by car), and have a substantial amount of drawing power (i.e. Wal-Mart, Costco, Safeway, shopping mall or commerce center.).  One method of helping identify the viability of a market is to create customer density maps of specific areas.  This will allow the bank to determine whether there are high instances of current customers, or potential customer segments around a specific site.  Without good location, a branch will never get off the ground. 

Demographics

Finding the right market is a must when expanding your branch footprint.  It is invaluable to have the detailed demographic information about market density, growth projections, business and household composition, and a variety of other factors that will tell you the composition of a target market.  The success of a new branch is greatly dependent on the market itself and how a bank approaches it. 

Marketing and messaging can only carry you so far in a new market, especially if you cannot identify or carve out a niche for yourself.  Prior to building a branch, it is important to gather the detailed demographic information about market segments, demographic profiles, average account usage, deposit and loan propensities, among others.  If there is no presence of the bank’s key success segments, then crucial decisions must be made.  These crucial decisions involve the possibility of selecting a different niche in a market, or pursuing a different market altogether.  Without detailed demographic information on the front-end, 24 months into the operation your bank might be wondering why it cannot garner the relationships it expected, and may be forced to consider branch closure.

Competition

Competition is increasing across the country.  This is true whether you’re a community bank, regional bank, national bank, or credit union.  Competition is a fact of banking life in today’s marketplace.  How your bank takes into consideration the competitive make-up of a target market is another factor that can lead to the degree of success or failure of a new branch.  Numbers and market share relative to the competition and deposit growth rates are important, however, niche testing is vital for long term positioning.  Assessing what the bank does well (i.e. its niche) and testing this value proposition against what the competition does is the only real measure of whether a market is over-banked or under-banked.  This method is also the key to whether there is “market space” for your institution to do what it does well in each new market.  Competition is always going to present itself, but it is how you prepare and position your strategy to face that competition that will determine the success of a branch location.

Conclusion

Combining these three key research components into one in-depth evaluation of a market is the most comprehensive approach to branch building.  Using only one or two of these components may perhaps be more helpful than doing no research at all, but it will not give a clear enough diagnosis of the market from which to make confident decisions.  In order to truly be prepared to enter a new market and spend the $2.5 million on a branch, a bank must combine these key components into one approach.  A popular saying that people often use in the business world is “you don’t know what you don’t know”.  This could not be anymore true than when entering a new market and building a new branch facility.  There are so many “x” factors that, if unchecked and undiscovered, can help lead to the $2.5 million mistake.

Market Insights Can Help

Market Insights can support your branching decisions to ensure that you avoid the $2.5 million mistake. 

There are hundreds of data providers out there that can simply provide you with various pieces of the puzzle.  Some can give you detailed demographic data to identify what the market looks like.  Some can identify property and sites within target markets.  Others can evaluate competition for you through tools like mystery shopping.  These approaches by themselves, while helpful, still do not provide you with all of the tools you need to make a confident branching decision.  What these providers lack is the expertise and ability to combine and analyze all of these aspects and provide quality information about what they mean to your bank.

Market Insights combines expertise and in-house tools to evaluate all of these key aspects, and provides your bank with a clear, concise and actionable strategy for branch development.  We use the latest demographic tools to obtain a detailed picture of the market.  We then combine this demographic information with a number of primary research techniques to provide your bank with the complete picture of a target market.  We visit the target markets in-person to help evaluate and select the best sites, corners and specific intersections for a possible branch.  We also use in-person field research and interviews with local authorities to identify growth opportunities that are not always reflected by the demographic data alone.

Services and Tools

We have a variety of services that can help your bank address the issue of branch expansion.  These include the following:

Market Scan

Market Insights’ Market Scan tool provides financial institutions with an overview of markets and locations that fit specific criteria for target markets, product penetration and profit objectives.  The program identifies and prioritizes the best markets for an organization based on the specific search criteria.

The Market Scan results serve as preliminary research that informs an expansionary growth program.  It allows for a broad geographic area (zip code, city, trade area, etc.) to be narrowed down to markets that possess more opportunity for an organization than others.  We use the latest demographic information available, in-house software tools, and our proven model to identify and prioritize the best markets for further evaluation.

Target Market Assessment

Target Market Assessment is designed to provide organizations with a comprehensive report identifying potential sites for expansion and/or acquisition within existing and/or into target markets. We combine in-person field research with the latest demographic data and in-house software tools to identify, evaluate, and prioritize potential sites within a market.

The combination of available demographic data, market information, and our own field research allows us to produce comprehensive analyses of targets and make unparalleled recommendations based on our findings.

Site Selection

Site Selection is the process of determining the exact location for a facility within a determined target market. It involves intensive research to identify real estate opportunities, contacting brokers and/or real estate agents, and collecting all additional information including pricing, floor plans, and site plans needed to finalize the purchase of property, space, and/or buildings.

Strategic Planning

Strategic Planning is designed to create a prioritized timeframe of action and accountability that supports an organization's objectives. We develop plans that address important issues that directly impact an organization's success including: growth and profit objectives, markets served, mission statement development, human resources and contingency planning.

Progress is monitored and measured for a predetermined period of time against the plan, and adjustments and recommendations are made accordingly.

Marketing Plan Development

Marketing Plan Development will ensure that marketing efforts are consistent, integrated, and will produce measurable results. Our Marketing Plan Developement program is designed to assist in the development, implementation, and evaluation of an organization's overall marketing efforts. We partner with organization to develop a comprehensive, fully integrated marketing plan that will impact the bottom line.