Market Analysis
Gaining Market Understanding.
Adaptive Branch Trade Areas
The first step in understanding the markets you serve is understanding how much of a market each branch actually covers (i.e. branch “trade areas”).
TerraStrat has developed programs to create and analyze branch trade areas and the markets they serve. Our approach uses your actual customer behavior to define these trade areas in a consistent fashion.
This serves as the foundation for answering many important strategic questions, including:
How well do my branches cover this market?
Do I have excessive branch overlap or redundancy?
Am I reaching my target audience?
Are there gaps in my coverage that warrant a new branch or remote ATM?
Branch Coverage & Overlap
Branch coverage can be determined by evaluating the total reach of a market’s collective branch network. You may operate in great growth markets but if you only reach 20% of the population are you really ‘serving’ the market? You’ll likely never cover 100% of a market as the fringe neighborhoods may be so lightly populated that it doesn’t make financial sense to build there, but you can get a measure of how much ‘infilling’ is required to fulfill your mission to ‘serve a market’.
In addition to measuring coverage extent, trade areas can be used to measure branch overlap as each one is created independently of each other. Your customers decide the extent of each trade area so you may have neighborhoods served or ‘covered’ by multiple branches. Some level of branch overlap is desired as that defines a convenient network - customers have options. But too much overlap identifies wasted expenses where little benefit is provided. Those situations yield optimization choices and the potential to save a larger percentage of the closed branch’s annual expenses.
Competitor Analysis
While banks report branch-level deposits annually through the FDIC, credit unions do not, making it harder to assess their local impacts. Competitive saturation or intensity measures how much local competition is pursuing the local opportunity. We’ve found it a key factor in projecting future branch deposit levels and growth.
When entering new markets, whether locally as infill points in existing markets, or in a Greenfield new market entry play, you will want to understand not only the level of competitive intensity but baseline branch performance both in baseline deposit levels and annual deposit growth for the existing bank branches. Their performances are indicators of future branches performance and could indicate ‘red flag’ warnings about a local market if current performance is weak.
Demographic Analysis
Full-throated demographic analysis is necessary to gain an understanding of the overall opportunity (i.e., mass or scale), the growth potential (key drive of deposit growth), income levels (indicator of deposit account size and loan demand), business potential, and target segment presence (if you have narrow targets).
There is no one factor that is solely critical to the decision of whether you build a branch or not. Multiple factors influence those outcomes, and they may change from market to market, so a comprehensive examination of factors is critical.
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