Target Market Strategy for Transforming Business Practices · Retail/small bus. 20% Owner Occupied Integrated Office/Industrial Retail Apartments National REIT 25% Regional Partially

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Alliance Commercial BuildingsInitiative (CBI)

Target Market Strategy forTransforming Business

Practices

November 7, 2002

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Target Market Approach

• Focus is on sustainable change in businesspractices

• Market segmented by asset ownership andbusiness decision-making structures

• Research and analysis directed towardscharacterizing these market segments

• Goal is to develop MT strategies for toppriority market opportunities during the nextyear

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Market Segments

• Real Estate: Privately owned and leased,institutionally owned and advisor managed,REIT, owner occupied, small office and retailproperty

• Chains & Franchises: national and regionalgrocery chains, national and regional retailchains, retail franchises, restaurants andlodging

• Institutions: Universities and colleges, K-12schools, State/local government, healthcare/hospitals

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Real Estate

PartiallyIntegrated

Large OfficeLarge RetailSmall Buildings

GovernmentCorporationsRetail/small bus.

20%Owner

Occupied

IntegratedOffice/IndustrialRetailApartments

NationalRegional25%REIT

PartiallyIntegrated

OfficeRetailIndustrial

Pension FundsInsurance Co.sForeign Invest.

30%InstitutionOwned -Advisor

PartiallyIntegrated

OfficeRetailIndustrial

National FirmsRegional Co.sInd. Owners

25%Privately

Owned andLeased

BusinessModel

Real EstateHoldings

OwnershipDetail

MarketPercentage(square ft.)

OwnershipCategory

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Real Estate – Research Findings

• The real estate market is consolidating and becomingmore vertically integrated

• Large nationally based companies are buying morePNW real estate, either managing it themselves orcontracting with others

• Property managers play a key role, influencingowners and asset managers, while handling day-to-day business matters

• Real Estate Investment Trusts (REITs) are growingrapidly. Equity Office Properties now owns 15 millionsq.ft. regionally

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Real Estate – Research Findings

• Distinguish between real estate owners with avertically integrated business model and those thatemploy property management companies

• Vertically integrated owners include REITs, somenational and regional privately owned companies

• Property management companies representinstitutional owners, some national companiescompanies and local real estate owners

• Natural pts of market entry given owner/agentbusiness strategies, property portfolio and leases

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Real Estate – Research Findings

• Key messages include energy efficiency impact onNOI or FFO, impact on asset value, and quality workenvironment

• Key issues include who pays energy costs, leaseprovisions, property O&M responsibilities

• Sustainable change in business practice requiresconcrete steps and interaction with owners/agents

• MT opportunity includes developing and promotingbusiness process, support tools, service options

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Chains & Franchises

Complex,Fragmented

60% C&F40% Indep.

Mix of Chainand

Franchise

LargelyChainOwned

LargelyChainOwned

BusinessStructure

Top 100= 50%

Top 200= 50%

ChainDominated

N/A36,36,28%Intra-Market

Sales %

N/AN/A32%38%22%% RetailSales

Full ServiceLimitedService

TableService

Fast Food

Big BoxSmall

Specialty

Dept. StoreDiscountWH Club

Supercenter

National &Reg. Chain

SmallChain/Ind.& C-Stores

OwnershipCharacter-

istics

LodgingRestaurantSpecialtyRetail

GeneralRetail

GroceriesBusinessSector

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Chains & Franchises – Research Findings

• Mergers continue to increase the concentration ofownership

• The top 5 chains in many retail sectors now control50% of their respective markets or more

• Franchises continue to grow, representing 35-40% ofall retailing, but are complex and fragmented

• Chains and franchises are interrelated, manycompanies have both chain and franchise stores

• REITs own a significant amount of retail real estate,from large shopping malls to strip malls

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Chains & Franchises – Research Findings

• Unlike real estate, each chain and franchise marketsegment operates very differently

• All are subject to intense competitive pressures,emphasis on operating costs

• Many have some experience in energy management andutility EE programs

• Some retail chains are turning to third party energymanagement firms to control energy costs

• MT needs to focus on segment specific market channelswith tailored messages

• MT strategies require segment specific business focuswith technology/service options

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Institutional

Largely non-profit,with a service and

business focus

Small %, but verydependent on

federal $

Public and PrivateHospitals/Health Care

Independent, butpublics subject toState policies/$

Varies, avg. of 30-40% funding from

State

Public and PrivateUniversities/Colleges

State control ofpolicies/$, local

control ofO&M/construction

Varies by State,from less than 50%to close to 100%

Public and PrivateK-12 Schools

Owned & leasedfacilities controlledby central admin

agency

Up to 100%depending on

agency

Public and PrivateStateGovernment

AdministrativeStructure

% OperationalFunding from

StateOwnership

InstitutionalSector

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Institutional – Research Findings

• Institutions own or lease a significant amount ofproperty, including offices, multi-purpose facilities,schools, campuses, and health care facilities

• Given the political nature of publicly ownedinstitutions, it is appropriate to speak in terms of“institutional” rather than market transformation

• Private non-profit institutions often operate in acompetitive market environment, and are subject tothe same pressures as other businesses

• Both public and private institutions exhibit a numberof common trends related to policies, decision-making and budget constraints

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Institutional – Research Findings

• All of the institutions examined are subject to intense andincreasing budgetary pressures that result in an emphasison operating cost control

• Most of the public institutions are now subject to statemandated energy efficiency policies and initiatives

• Nearly all institutions have had some experience withenergy management through utility and governmentenergy efficiency programs

• Any successful market transformation strategy has totake into account the unique budgetary, often publiclyopen and fragmentary institutional decision-makingprocesses

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MT Development Approach

• Develop market transformation (MT) hypothesisbased on initial research– Business practices component– Technology/operations component

• Validate hypothesis and develop potential MTinitiative features– Expand market research, address specific questions– Interview market players, stakeholders– Develop potential MT features

• Develop detailed MT plan– MT action plan– Schedule– Budget

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Target Markets – Common Themes

• Promoting changes in business practice requires anintervention strategy supported by effectiveapproaches, tools and techniques

• Business advisors working in concert with utilityrepresentatives and market actors can initiate thenecessary intervention

• Effective approaches, tools and techniques must bemarket specific, yet can draw on existing resourcesand rarely need to be developed from scratch

• Technical solutions support changes in businesspractices, with Alliance sponsored activities such asBPS, BOC, and the use of technical advisors

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Example: Hospitals and Health Care

• Over 5% of regional commercial sector energy use isconsumed by hospitals and health care facilities

• There are over 250 hospitals located throughoutOregon, Washington, Idaho and Montana

• These hospitals are primarily community based, non-governmental not-for-profit hospitals

• Hospitals range in size from hundreds of beds to afew dozen beds

• Many hospitals are part of a multi-hospital system(MHS) or an integrated healthcare network (IHN)

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Hospitals – Business Practices

• Hospitals operate in a competitive market, and aresubject to the same pressures as other businesses

• Hospitals benefit directly from actions taken tomanage and reduce energy related costs

• Savings in operating costs give hospitaladministrators the opportunity to re-deploy capital toother pressing needs

• In addition, better operating systems can help assureregulatory compliance and patient comfort

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Hospitals – Interview Findings

• Hospitals are in a financial crisis, with EEopportunities competing against other hospital needswithin the capital budgeting process

• Urban/rural split significant, impacting hospitalbusiness environment and facility operations

• Urban hospital systems have access to moreresources and technical expertise, rural hospitalfacility managers are largely on their own

• In either case, need to work through facilitymanagers to get things done

• Hospital associations are a strong marketing channel,with change possible by working within specifichospital systems or networks

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Hospitals – Market Barriers

• Facility managers and staff have many competingpriorities for their time

• Most lack the internal expertise needed to identifyand implement EE opportunities

• Many facility managers are not well equipped to pushthe business case for EE with hospital executives

• Capital is constrained due to fixed capital budgets,and trade-offs with competing hospital capitalrequirements needs

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Hospitals - MT Hypothesis

• In partnership with regional utilities, work throughstate associations and hospital systems and networks

• Awareness building with executives. Opportunity tomanage energy related costs, explain businessimplications. Goal is to empower facility managers

• Position facility managers to talk effectively withexecutives from a business perspective

• Promote approaches, tools and training tosuccessfully identify, sell and implement energymanagement activities

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Hospitals – Potential MT Features

Business Perspective

• Communication strategy to reach hospital executivesand financial managers with appropriate businessmessages

• Business advisors work in cooperation with utilityrepresentatives to analyze and support changes inhospital energy related business practices

• Financial tools and financing alternatives foranalyzing and presenting the business case tohospital financial decision-makers

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Hospitals – Potential MT Features

Operations Perspective

• Promote best practices for considering projects orcontracting for EE services (new construction, majorrenovations, existing operations)

• Access to outside technical resources for projectspecific advise when warranted

• Training for in-house facility staff responsible forfacility operations

• Linkages with local utilities and other organizationswith technical or financial resources (rebates, loans,leases, tax credits, etc.)

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Hospitals – Development Tasks

Business• Communication strategy to reach hospital executives• Blueprint for effective hospital energy related

business practices (urban and rural)• Financial tools and financing alternatives for

preparing and presenting the business caseOperations• Design/construction best practices• Building Performance Services for hospitals• BOC training tailored for in-house facility staff• Database of utility and other technical or financial

resources

1Example of Master Slide