Destination: Retail

“If we had not gone into retail, I don’t think we would be here now,” says Bob McNellis, president of Peaks & Plains Medical in Spokane, Wash. Last year, sales from two retail stores helped the home care business recoup about 25 percent of gross sales that were lost to Medicare and Medicaid cuts.

McNellis moved into retail three years ago, and for the first two years, he lost money. But during the third year, his retail venture finally lived up to its promise. “Today, we’re on our way back to health,” he says.

With thousands of home medical equipment businesses feeling the pressure of declining reimbursements, many may soon face decisions similar to those McNellis wrestled with.

Between 14,000 and 18,000 HME businesses currently operate in the U.S., according to consultant Jack Evans of Malibu, Calif.-based Global Media Marketing. While a number have built retail showrooms into existing warehouse locations, Evans estimates that fewer than 10 percent of all HME operators sell products from stores in retail shopping locations.

But that could be changing, he points out, since more and more HMEs believe that retail may help solve their business problems.

Retail, however, is not for the faint of heart. Success requires commitment, cash — and more commitment.

Two years ago, one home care provider opened a 4,200-square-foot store plus a 2,200-square-foot warehouse and office nearby. He explains that he wanted a one-stop shop “with everything from soup to nuts” in a highly visible location with lots of parking and easy access. And he got it — but his rent grew from $9 per square foot in a warehouse district to $20 per square foot in a retail area.

The lease called on the new retailer to pay about $136,000 in rent per year. “When we opened, we were doing about $4,000 in sales per month,” he says, not enough to pay the rent (or any other expenses) by a long shot.

But he reasoned that he had a good location with lots of prospective customers nearby. So he swallowed hard, stuck with his commitment to the new business model and followed his pro forma until the store started to perform. Today, the business does $140,000 in sales per month, which comes to $1.68 million per year. The $136,000 annual rent now represents only about 8 percent of gross sales.

Brokers say that most retailers, as a rule of thumb, spend up to 10 percent of gross sales on rent.

Identifying Customers

For years, HME companies have flourished by filling orders for Medicare and Medicaid patients referred by physicians and other health care sources. But times and business conditions are changing. Today, home care companies must know the customers behind the government forms.

“We need full information about a retailer’s customer base to understand what will drive business at a location,” says Al Beery, senior manager of client services with MapInfo Corp. of Troy, N.Y., a highly regarded market research company that helps retailers and other businesses find appropriate sites. “Once you know who a typical customer is, you can look at demographic information to learn where you will find concentrations of those customers.”

Since most HME operations work with a majority of Medicare-eligible customers, Evans recommends locating retail stores in communities with higher concentrations of seniors. He suggests 15 percent as a threshold. He also prefers locations near communities where at least two-thirds of the residents own their homes.

“People who live in a home are older and will eventually need home medical equipment,” Evans notes, pointing to the trend toward aging in place. That means, he explains, “that fewer people are moving to nursing homes. Instead, they are staying in their own homes and making their homes accessible. Often, their adult children will come back to live with them.”

MapInfo’s Beery urges providers to find ever more details about customers. He suggests that those interested in increasing retail revenues begin by cataloging sales. How many calls come from which referral sources? How many from physicians? How many from nursing homes?

And, do you want to attract other populations, such as active but aging baby boomers (who may not have current medical needs) or children caring for elderly parents?

As providers build retail experience, they should continue to refine the knowledge of their company’s unique customer make-up — not only for the sake of future location decisions but also to strengthen decisions about product lines, inventory choices and floor displays.

How Big Should a Retail Store Be?

How does a provider who wants to increase retail sales figure out what size location to look for? A lot depends on merchandise mix, display needs and where inventory is kept.

The HME industry’s earliest attempts at retail failed because of a pro forma that called for superstores encompassing 20,000 to 30,000 square feet, according to Evans. “The industry tried stores this big in the early 1990s,” he says. “They didn’t work because the overhead was too high. To fill that much space with expensive medical equipment required several hundred thousand dollars in inventory costs.”

By the time these early retailers got out of the business, store sizes had shrunk to between 2,500 and 5,000 square feet. And Evans believes square footage should shrink even further.

“In our industry, we generate about $1,000 per square foot per year [in a properly merchandised store],” he says. “So a 1,000- to 1,500-square-foot showroom will generate from $1 million to $1.5 million gross sales per year in HME.

“The more product you show, the more you sell,” he reasons. “To show a sufficient number of products and categories you need a minimum of 1,000 to 1,500 square feet. Some independent HMEs have 2,000 to 3,000 square feet. They can show products in depth, perhaps 12 to 15 lift chairs and 15 scooters and power chairs.”

Up to some limit, the more space a store has the more products it can display. And displays lead to sales. According to Evans, a store that displays one lift chair will, on average, sell five to six lift chairs per year. A store that displays two to three lift chairs will sell one to two per month. Ten to 12 lift chairs in a store display will likely move two to three per week.

Evans urges providers to aim for a store that will gross at least $1 million with a 1,000-square-foot showroom and to keep any warehouse space they may already have. The warehouse becomes the service platform for the store, Evans explains. It can handle rental business, Medicare and Medicaid sales, store inventory, deliveries and provide offices for the staff and the boss.

Keeping the warehouse space makes it possible to downsize the store to a manageable size given the higher rent that retail space demands.

Most important, such a strategy enables a provider to diversify. “HMEs need to diversify their markets and include cash,” Evans says. “The healthiest HMEs that I visit are diversified into thirds: one-third is Medicare and Medicaid, one-third is private insurance and one-third is retail cash.”

Finding Store Locations

Once a provider has identified customers, figured out where those customers live and determined an appropriate size for the store, it’s time to start looking at property.

“There are two types of retail: ‘impulse’ and ‘destination,’” says Thomas H. Maddux, president of KLNB Retail, a commercial real estate company in Towson, Md. Impulse retail, he explains, involves products that customers buy when they see them. By and large, HME showrooms are classified as destination stores. The business is mostly generated through referral, so customers seek out these stores for a particular purchase.

“A lot of the HMEs that I talk to voice concerns about doing business in small towns of 40,000 and 60,000 people,” Evans says. “But a destination store can attract people from two or even three hours away. I look for a sales territory with a radius of a few hundred miles. You can build a million-dollar operation and earn a good living from a destination location like that.”

With a destination store, location may not seem so important. But growing cash business for HMEs requires additional considerations.

Where should an HME retail store locate? “First thing I would look for would be other retail businesses that serve your audience like drug stores, hospitals, assisted living communities and retailers that cater to older folks,” says Gary Ford, a senior associate with the Retail Services Group of CB Richard Ellis, the largest commercial real estate services firm in the world. “Start by finding out where people in your demographic category buy groceries.”

Grocery-anchored shopping centers make ideal locations for all kinds of retailers. But the rents can be high, around $20 per square foot and up. That doesn’t mean an HME cannot benefit from such a location.

“Commercial shopping districts typically develop around agglomerations of popular retail,” continues Ford. “A grocery-anchored strip center with national retailers — Safeway, Blockbuster, Subway — generates traffic. Other retailers grab onto that traffic by moving into spaces along the main streets leading to and from the grocery-anchored center.”

Real estate experts say HMEs should at least consider locating stores in shopping centers adjacent to or across the street from their grocery-anchored counterparts. Rents will be lower than in the grocery-anchored center, but the traffic counts will still be there.

Owners can ask a broker to show several potential stores fitted to demographic requirements including age, household income, home ownership and other relevant criteria, such as proximity to referral sources like hospitals, drug stores and nursing homes.

Car counts — the number of cars that drive past a location — can be important, too. They are of serious consequence to impulse retailers that expect to generate daily business. For a destination store such as an HME, locating along a street with a high traffic count is a way to raise visibility; signage and displays can make sure passersby know what kind of store is there. So, when potential customers need a bed or a wheelchair or a pair of crutches, they know where to go.

Negotiating Leases

McNellis recalls the lease negotiations for one of his Peaks & Plains showrooms. The store is located along a main thoroughfare in a small strip center. There’s no grocery store, although the location is next door to a big-box center with a Target. “It’s a very busy street, and we have a lot of visibility,” McNellis says.

But the original lease offered by the landlord would have negated some of those benefits. “There were restrictions on the use of the window space and the outside of the store,” McNellis says. “I wanted to design display windows and to park scooters on the sidewalk. The original lease would have prevented that. Fortunately, we got those provisions taken out of the lease.”

McNellis also recommends thinking about any problems that could arise with a triple net lease if that is what a landlord offers. “With a triple net lease you may be responsible for anything that goes wrong with the property,” he says.

“For example, the lease suggested by our landlord required us to be responsible for the heating plant if it wore out. I refused to be responsible for a piece of equipment that was 20 years old. We had that provision removed as well, although we are responsible for maintenance.

“The most important point about lease negotiations is to preserve your ability to use the windows and signage to advertise who you are and what you sell. We’ve put risers in the front windows, scooter displays on the sidewalk and [we have] high, high visibility signage.”

Building Your Own Destination

A home care company with enough capital (or access to it) can design and build its own store, or even its own complex. Primary Medical Supply of Midland, Texas, is doing exactly that.

The company started out as a small business operating in a 900-square-foot suite above the owner’s pharmacy. Eventually, the inventory, the store display and office requirements overwhelmed the space. Justin Rogers, the company’s general manager and son of the pharmacist, started talking to real estate agents about potential building sites. He found an undeveloped 2.5-acre parcel along a main thoroughfare.

“It’s right in between a large grocery store and a mall,” Rogers says. “We asked the real estate agent about traffic and found that 28,000 cars per day pass the site on the way to the mall or the grocery store. We also liked the site because it offers easy access for our older clientele.”

The company bought the land, designed two buildings to go on it, and Rogers also began talking to referral sources across Midland. He asked everyone what merchandise they would like to see in the store before completing his stocking plan.

With one building complete, the new Primary Medical store occupies a 3,000-square-foot end position. The store has an 1,100-square-foot showroom plus a storeroom, break room and offices with a separate shop equipped to install vehicle lifts and repair equipment.

“We formed a corporation to own the property, and we pay $16 per square foot,” Rogers says. He also leases a 3,200-square-foot warehouse at $1.50 per square foot.

Why didn’t the company lease space? Why go to all this trouble? “We couldn’t find a location we wanted,” Rogers says. “One would have too many requirements. Another wouldn’t have enough parking. Now we have a say in a long-term investment.”

Grand Opening

Once a store is leased (or built) and merchandised, there is one more step to getting started in retail. Beyond traditional referral business, retail stores require constant marketing to prospects. And retail marketing programs begin with real estate: a grand opening event inviting potential customers in for a look, or at least informing them that the store has opened.

“To promote a grand opening, mail invitations to all of your referral sources and customers,” suggests Colette Weil, managing director of Mill Valley, Calif.-based Summit Marketing. “If you’re smart, you’ll try Evites and also announce the opening with a newspaper ad.”

And that’s just the beginning of marketing a retail location. Weil suggests a trip to the bookstore to pick up a selection of marketing books from the business section. She recommends anything on small business marketing, grassroots marketing and community marketing. “You’re a community-based business now,” she says.

HME Retail Stats

According to HomeCare’s most recent survey on HME retail:

• 70% of providers have showrooms
• 55% have a front window display
• 17% have professionally designed stores
• 19% change store displays twice a month or more
• 66% do not separate walk-in retail sales from medical referral sales when tracking business
• 50% allot showroom space based on product profitability
• Most providers list mobility as their top retail category, comprised predominantly of wheelchairs, walkers/rollators and lift chairs. Respiratory is next with CPAPs and nebulizers. Bath safety is a growing retail category, and other top-selling products include compression hoisery, orthopedic softgoods, beds, diabetes supplies and shoes.

Moving into Retail

Professionals say there are six steps to finding the right location and opening a retail store successfully:

1. First, a provider must commit to retail. That means having a solid business plan with the capital to support it on a continuing basis.
2. A provider must identify the customers the business wants to attract. Do you want to increase cash business only from your existing customer base, or do you want to expand sales to other community populations?
3. Once customers have been identified, it is vital to find a real estate location close to those customers.
4. Fourth comes negotiating a lease. Make sure the trade-off between higher rent in a retail district vs. lower rent in an area with low visibility will be worth it, and that your plan includes an adequate start-up period for the business to grow into the rent.
5. Fit out the store. Pay attention to store design, flow and floor displays. Make it customer-friendly and easy to shop. Today’s consumers are used to clean, well-lit, well-merchandised stores with idea-generating displays. Do the products you plan to stock and display match the equipment your customers want/need?
6. Have a grand opening. Let the community know your store is established and ready to serve the retail needs of the population you are after. Set up a continuing marketing plan to attract those customers.

Average U.S. Rents For 2005 (per square foot)