Credit Union Journal Readers: Ask The Experts

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Reader Question

To what degree should the location of my competitors' branches influence where I choose to site my next branch? What are the pros and cons of locating a branch close to my competition versus far away from them?

Gene Lock, Executive Vice President,

Design Build Concepts, Atlanta.

Your competition should be a small factor in your decision. Ultimately, your target market and the growth patterns of your community should determine the location of your credit union. While locating near your competition provides you with a chance to create an identity that clearly differentiates you from your already established competition, it may not be the optimum location for your members. Consider where your members live and work, and where the community will grow over the next five- to 10-year period.

If you choose to locate near your competition, it is important to establish ways to set yourself apart from them. For example, by offering a more convenient banking experience, you will stand out from the crowd. This can be accomplished through flexible hours, a location on the "going home" side of the street and a site that is easy for members to enter and exit. In addition, by providing a superior mix of products and services, you will become a more attractive financial institution to your target market.

The main disadvantage to opening a branch near your competition is that you may be competing for the same share of the market. It is harder to steal business away from an existing financial institution than it is to attract new accounts generated through community growth. Examine where new roads and housing developments are being built in your area and explore how they may impact the dynamics of your community and your business. A newer market that is underserved may present a greater opportunity than a more established area of town.

John Nicola, SVP-Sales, International Banking Technologies, Centennial, Colo.

The proximity to a competitors' branch should not be the primary factor in determining branch site selection. The first step in evaluating location should be to determine the needs of its members. These are multifaceted. The credit union may find that they need to place a branch near the members' home, work or someplace in between to handle the convenience demands of its members. They also need to discover the financial needs of the members, existing and potential, in the area. Blending these two factors will help the credit union establish the mission of branch. After the members' needs have been established, the credit union now has the criteria to determine optimum site locations.

Placing a branch near a competitor's location has its advantages. The credit union's employees will have a natural basis for differentiation in which to compare their products and services. Also, since many financial institutions offer similar products, the true market share leader will be determined by the service level provided to the consumers. Lastly, consumers already accustomed to taking care of their financial needs in a market area typically welcome the competition. It enables them to ensure they are getting a "fair deal" along with exceptional service.

However, challenges can occur due to the increased competition. If the credit union's products are not comparable to competitors' products and services, this strategy could backfire. Furthermore, the increased competition may create a price sensitive environment causing the credit union to have to "buy" members' relationships.

The crucial element is defining specifically, who your competition is. It's imperative to know the difference between wealth management banks; commercial banks; thrifts; savings & loans; national, regional and community banks and which clientele they serve. The same can be said for credit unions and the various market segments they target, be it educators, a seg, or community members in general. Applying this knowledge correctly when selecting a market helps to position your site for long term success.

Ralph La Macchia, President,

The La Macchia Group, Milwaukee, Wis.

Once you know who your competitors are, and are not, (and have plotted them geographically on a map), the next step is to use demographics as a tool to see which consumers most closely match your target audience. For example, you know that your credit union's best PFI relationship is with a customer/member that is between the ages of 35-40 years old, with an average household income of $42,000 per year, who has 3.3 accounts with you and a debt load of 18%. Ask yourself, which other competitor targets these same customers/members? Just because the sign on the building says Credit Union or Bank or Savings & Loan doesn't necessarily mean that they are your competition or they want or can acquire your ideal customer/member. Conversely, you may see many financial institutions located in a specific area. Are they all competitors with each other, as well as you? Where are they? Great site, but not too great of a market? We need a great market first to target our specific customer/member, then a great site. The location is just one element in the overall decision to site a new branch. Equally important are future growth and potential, existing membership, commercial activity, etc.

In addition, as the competition for the consumer escalates, the higher the level of competency you should demand from your consultants.

In answer to your question: The best site for your branch may, indeed, be next to a competitor and still be your best solution. In fact, it can be a good sign when there are other competitors, as this may signal that this is a successful location.

Kevin Blair, President, NewGround, Inc.,

St. Louis

When examining branch positioning in a competitive market area, retail strategies have to be consistent with the credit union's overall strategic initiatives for its service delivery. In the earlier days of the credit union movement, most credit unions were established in sponsor space or were provided a location on the sponsor grounds to develop their retail presence.

As the competition grew and regulatory legislation allowed expansion into "community" markets, new retail service delivery networks began to unfold. The current strategy for retail locations is to be located "where members live, work, or shop." With the advent of community charters, extended family membership, dilution of SEGs, and the growth of women in the workforce, branches now need to be located where members live and shop.

This service delivery strategy causes the "gloves to come off" between once friendly credit unions now competing with each other for a share of the member's wallet. For example, in one Midwest community there are five CUs that have built new branches over the past 12 months all within two miles of each other. One of these CU's is opening a branch across the street from another CU's primary SEG. These credit unions are now competing head to head with each other. The once-friendly competition is long gone.

An advantage of locating within these retail developments is the close proximity to where members live. Thus, these coveted branch sites are situated ideally to meet two of the three criteria, where members live and shop.

Certainly disadvantages of these retail developments include the increased competition and the cost of land is usually higher.

Credit unions have to be acutely aware of competitor's service delivery plans, especially in highly active retail and residential growth markets. These areas are where the future membership will come from and accurate and timely analysis of the market will assure making a good expansion decision.

John Hyche, Director of Consulting Services, KDA Holdings Inc., Atlanta

Your competitors are looking at a variety of market factors in determining where to locate their branches. While we don't advocate a herd mentality, you should be looking at the same factors, not just your competitors, to determine where you should locate your retail outlets. Factors such as population, growth, income, retail and commercial development, traffic patterns, and consumer profiles enter into the decision about where to locate your branches. Because everyone is looking at the same data, the preferred locations are preferred by almost everyone, leading to a "herd" of financial institutions at some spots in the market. It is important to choose your sites based on an understanding of your objectives, members, field of membership, and marketplace and then make decisions based on optimal opportunities. You've got to be aware of your competitors and what they're up to, but simply avoiding them by locating far away from them will not necessarily meet your objectives and could actually be detrimental to your purpose.

Scott Florini, Strategic Planner,

HBE Financial Facilities, St. Louis

Site selection is one of the most important issues for credit unions planning a new branch. Many aspects of location must be evaluated. The presence of competitor branches may or may not be a consideration, depending on a particular credit union's charter, growth potential and overall objectives.

A strategic planning study is often an important first step in addressing key market factors that will influence the decision. These include demographic and population growth trends, income and employment levels, prevailing traffic patterns and retail activity, in addition to competitive factors.

The credit union must also identify its own expansion goals. For example, is the new branch needed to better serve existing members, or to broaden the membership base? Often, what seems at first to be the most logical site may not be the case following a thorough analysis.

When Fort Knox Federal Credit Union decided to relocate its headquarters facility off base, Elizabethtown, Ky. was initially considered to be an optimal site. However, a strategic planning study suggested that nearby Radcliff, Ky. would be more advantageous, even though Elizabethtown is a stronger developing market. This recommendation was based on new highway development that would result in economic expansion, and because the Radcliff location was more strategically situated between the credit union's two major concentrations of members.

Every facility expansion program is unique. Credit unions must therefore carefully analyze which site will best meet the needs of current members and support future growth.

Jim Caliendo, EVP-COO

PWCampbell, Pittsburgh

There are many issues to consider when selecting a site for a new retail branch. The first step in the site selection process is to translate the strategic business goals of your credit union into retail strategies. You can then better define your market area and your strategies for growth. In the research phase, key market and demographic data should be gathered and analyzed. This relevant market data includes market demographics, economic indicators, product propensity, traffic patterns and growth potential. An analysis of the competition should also be performed. Critical issues here include current deposits and loans, market share, projected deposits and loans, community involvement, as well as the physical location of all the area's financial institutions' offices.

Many credit unions have found it helpful to have their member accounts geo-coded so that they know the location of their current members in relation to competitive retail facilities. Geo-coding is based on a zip code analysis. There are several other factors to consider when evaluating the advantages and disadvantages of selecting a site in close proximity to your competitors. These factors include:

* The concentration of your ideal member profile.

* Member penetration of a specific market area.

* How your members compare demographically-i.e. population, household growth, employment, income and age.

* Potential for product sales in the market.

* Area growth potential in a three-, five- and 10-mile radius, according to the Census Bureau and local planning authorities.

* Signage, visibility and accessibility.

* Drive-up and stacking.

* Parking, lighting, entrances and exits.

* Building placement based on site topography.

All of these factors, when analyzed together, should give your credit union a comprehensive analysis and a clear direction as to the success or failure of placing a facility near or away from your competition.

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Lisa Freeman at lfreeman

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