By Dr. Gary L. Deel, Ph.D., J.D.
Faculty Member, Wallace E. Boston School of Business
Every business must decide where its offices, production factories, warehouses, distribution hubs and stores must be located in order to optimize strategic advantages across revenue channels. However, smart business owners realize that there are several very important factors that must be considered when deciding where a business will be positioned geographically.
Business Markets and Geography
One of the most intuitive factors is market geographics. If a business’s key consumer demographics are all located in certain areas, then physical proximity will be key to serving customers and maximizing sales.
For example, suppose you run a company that manufactures and sells lawnmowers. Where do you want your stores?
You’ll probably want them as close as possible to areas where grass commonly grows, including the East Coast, the Midwest and the Pacific Coast. However, a huge chunk of the American Southwest – including New Mexico, Arizona, Nevada, Utah and parts of Texas – are mostly barren desert without a blade of grass in sight, so these places won’t be the ideal areas for selling lawnmowers.
Naturally, not all businesses and markets are location-specific in this way. What about restaurants or supermarkets? Where are the markets for these kinds of businesses?
These markets are everywhere because everyone needs to eat and buy other household necessities. So for these types of businesses, there are still market considerations concerning variables such as population density and disposable income, but there aren’t huge swaths of the country that have no need for their offerings.
Business Location Also Depends on Talent Availability and Operating Costs
Some other factors in considering location include the availability of talent and costs of business operation. Where are the people you need to run your business located? Where can you find the necessary skills and abilities to run your operations? Furthermore, if there is more than one option for talent, where can those employees be found the cheapest?
Business Location May Be Contingent on Property Expenses and Taxes
Suppose you own that lawnmower company I discussed earlier. A place like Arizona would obviously not be great for a lawnmower store.
However, it might – all costs and logistical concerns considered – be a decent option for a manufacturing facility. For instance, you could potentially build your products in Arizona and then simply ship them to wherever they need to be sold. So a business location should not necessarily be discarded as an option simply because the end users of the company’s products are not located there.
But there are several questions that must be answered in order to determine if any particular state is an attractive option for a business. They include:
- What is the cost of real estate in the area?
- How cheaply can land and sufficient buildings be bought or rented?
- What are real estate taxes like?
- What is the ongoing cost of property ownership?
Generally, major road frontage for stores or showrooms comes at a significant price premium over other real estate that is off the beaten path. But again, the property’s purposes determine whether major road visibility is even important.
For example, a production factory or warehouse that does not sell directly to consumers does not need to be located on a main street and visible to everyone. Consequently, cheaper farmland in rural areas is often attractive for this type of business development.
Also, ecommerce businesses today can place their operation centers almost anywhere, so long as they can ship products out to consumers as needed. The increased freedom concerning ecommerce business locations is one of the reasons why Amazon has been developing their warehouses largely in rural areas and offering their own delivery services direct to their consumers.
Labor Costs and Business Location
Another question that business owners should be take into consideration when deciding where to place a business is employee salaries. Business owners should ask themselves, “What is the minimum wage we should offer? And what salaries must be offered to employees so that we can be competitive, attract talent and retain the kind of talent we need to be successful?”
Complying with minimum-wage laws is one thing (and obviously necessary). But if paying a minimum wage means workers will quickly leave as soon as they find other better-paying jobs, then it isn’t really an accurate measuring stick for assessing labor costs. This fact is especially true if the jobs in question can be filled with remote personnel or replaced with technology.
Instead, businesses need to look at what costs will be realistically necessary to hire and retain competent, reliable labor. And as I’ve written in a previous article, the total costs of labor are extremely nuanced and complex.
How Taxes Influence Business Location
Additional expenses that must be considered for any business are the state sales and income taxes. All businesses in America are subject to federal income taxes, and most states have their own income tax and sales tax.
But there are in fact a few states with no income tax and a few states with no sales tax. Usually, these states have significant economic industry hubs within their boundaries, and the influx of business activity offsets the need for statewide taxation.
For example, Florida and Nevada have no income tax because of the tourism industry. Similarly, Texas has no income tax because of the petroleum industry. Consequently, business owners should carefully consider the tax implications of planting roots in different states.
In the interest of creating a better economy within their borders, some states may even be willing to offer incentives to large businesses that can create many new jobs and catalyze supply chains within a region. Obviously, a state isn’t likely to bend over backwards for a small business like a single new coffee shop or gas station. But extremely large factories, warehouses, or corporate headquarters – the kind that become home to thousands or tens of thousands of employees – may be enough to provoke some special considerations from governments.
For example, in 2020, Travis County was able to persuade electric car maker Tesla to put its next billion-dollar automobile factory in Texas in exchange for millions of dollars in tax breaks. The factory will employ several thousand locals when it is built, so the county saw this as an opportunity worth making some concessions for – and their offer was ultimately enough to tip the scales.
Access, Supply Chain Logistics and Weather
For a business, other considerations include access and logistics in an area, which are especially important for operations that necessitate an inflow of raw materials for production and/or an outflow of finished products for distribution and sale. Business owners must consider their proximity to railways, highways, waterways and airports to maintain regular production and shipping schedules. A lack of convenient routes in and out of the business area can be a significant hindrance, especially as production volume ramps up.
On the same note, weather considerations can be important. For example, suppose the lawnmower company we discussed earlier finds some cheap, attractive real estate in Michigan. The property those business owners want to buy is conveniently located near highways and airports to facilitate logistical needs.
However, it turns out that the characteristics of the region mean roads and airports are frequently shut down throughout the winter months due to snowstorms and ice. Suddenly, a location that seems ideal at first becomes catastrophically inconvenient.
While it might be snowing in Michigan, the grass will still be growing in places like Florida. Lawnmowers will still be needed for other markets, and therefore the business cannot afford to close up shop every year for an entire season.
Is There Room for the Business to Grow in Its Location?
Finally, a business should consider its growth projections in deciding on a new location. Initially, a property may be sufficient in terms of size, space and supply chain access for the current needs of the company.
But if the business is on an upward trajectory and it is reasonable to anticipate significant continued growth into the future, then business owners should plan accordingly to ensure adequate growing room in the coming years. Immediate needs might be filled by a smaller, more affordable option in the short term. However, if a business will have to move its operations again within a few years due to growth, then the costs and headaches that come with those multiple relocations may outweigh the upfront savings.
Ultimately, any decision over business placement and location should be predicated on significant deliberation and an intelligent analysis of all the relevant variables. That will allow business owners to avoid sabotaging their current operations and future growth with shortsighted moves.