Shurgard Self-Storage: Expansion to Europe
...ble, accessible locations within a 3- to 5-mile (4.8 kilometers to 8 kilometers) retail corridor. When entering a market, Shurgard preferred building its presence to a critical mass of 10 to 15 stores before moving to the next city. Barbo explained, "Clustering stores increases brand awareness, maximizes advertising effectiveness, and creates managerial efficiencies." For each new facility, Shurgard handled the facility design and financing in-house but subcontracted the actual construction out to a third party. Thanks to 30 years of lobbying by Barbo and his industry colleagues, the construction and operation of self-storage facilities were regulated by a network of national legislation, individual self storage acts in each state, and local-building zoning ordinances that contained language specific to self-storage facilities. Maintaining good relations with local communities was important-each time a self-storage operator sought a building permit for a new facility, residents might object that a warehouse-type facility would bring down neighborhood property values, or local authorities might fear that self-storage tenants would store illegal or dangerous goods in the units. The self-storage industry estimated the market potential of an area by the number of residents and the average amount of self-storage space (in square feet) that each person in the area was likely to rent. In the 1970s and 1980s, the early years of the industry's development, Shurgard and its competitors used active marketing campaigns to explain the notion of self-storage to the U.S. population. However, by the late 1990s, this was no longer necessary, as all 280 million U.S. residents were characterized as "aware of self-storage," and a "5% rule" was usually applied to calculate the percentage of the population that would become active self-storage customers at anyone time. The number of customers was then multiplied by the size of the average rental space, which ranged from 80 to 100 square feet, to determine market potential. Shurgard had 175,000 U.S. tenants, averaging 500 to 600 customers per facility, typically split between 75% residential and 25% commercial tenants but with up to 80% commercial clients at some facilities. Barbo commented, "When we started this business, we could never have guessed the crazy things that customers would do with the space." For corporations, storage units offered a flexible place to store inventory (off-season greeting cards) and product samples (pharmaceuticals) or to use as an intermediate distribution point (local newspapers). For small-business and home-based craftspeople, storage units offered an extra workspace. For example, at a Seattle facility close to Lake Union, we (the casewriters) saw narrow, long, coffin-shaped units that local apartment dwellers used for storing racing kayaks. By the drive-up units, in one unit we saw an antique Ford automobile, whose owner kept it parked there, in another the local Red Bull microbrewery truck, complete with beer-product samples that were distributed in the neighborhood for promotional purposes. In one unit, a cabinetmaker was assembling furniture; in another, a fruit merchant was unpacking bananas for delivery. To accommodate customers' needs, Shurgard developed various size units, features, and services. For commercial customers, Shurgard offered dedicated salespeople, centralized billing, and air conditioning. The minimum length for a Shurgard unit rental was one week, with an average rental for 10 months. "We are like a hotel, we don't have many long-term tenants and our price structure discourages it. That being said, we do have some customers who have been renting with us in the Seattle area since we opened over 25 years ago," commented Grant. Instead of fixed prices, Shurgard had a flexible, airline-type, demand-based pricing system that charged higher prices for popular features and size units or at full facilities. In 1999, the average U.S. industry occupancy rate was 86.9%. Every month, between 7% and 10% of Shurgard's tenant base moved out, with more fluctuation in the summer. Rents were due, in advance, at the beginning of each month. If a customer did not pay on time, in addition to charging late fees, Shurgard had the legal right to foreclose the contract and sell a customer's goods to recover some of the lost revenue. In the United States, if a customer's rent was more than 30 days overdue and Shurgard had notified the overdue customer by mail, then Shurgard could begin selling the goods within 45 to 60 days after the last rent payment, without a court hearing. Only 15% of Shurgard's customer base failed to pay by the fifth of the month, and the company wrote off less than 2% of revenues. Financial Issues Although the self-storage business was relatively easy to enter, because the business concept was very different from the standard real estate investment, obtaining financing to grow had proven a constant challenge for Barbo. In 1985, Barbo gave a recruiting presentation to the MBA students of the Young Entrepreneurs Club at Harvard Business School. Recalled Barbo, "As soon as they found out I was in the storage business, they were off going in another direction. It was clear that self-storage wasn't people's dream career." Self-storage was a capital-intensive, long-term business, requiring investment for several years before a store would rent up (reach a high enough occupancy rate to generate a stable cash flow). When a store reached an 85% occupancy rate (usually after two years in the United States), Shurgard considered the store stabilized. Grant explained: Self-storage is the most stable real estate business-as an industry, except for the 1988 recession, we've had steady, solid growth. A self-storage facility breaks even [before financing charges] at approximately 35% occupancy. It has a low-risk cost structure and doesn't require much maintenance. But real estate investors require long-term tenant leases for five years into the future. So when we show them just week-long rental contracts, the investors freak out. In its first 20 years of existence, from 1972 to 1992, Shurgard funded its growth through 24 separate, limited real estate partnerships, in which 80,000 individuals invested $600 million. Barbo added, "In the 1970s we were building properties with money we raised through private limited partnerships-each deal had its own financing. In the 1980s we followed the lead of our competitor Public Storage and created public partnerships to fund our expansion. We raised money in so many different ways that we came to refer to it as 'just-in-time financing.'" In the early 1990s, Barbo decided to roll up (consolidate) the limited partnerships into one company, incorporated as a real estate investment trust (REIT). Commented Barbo, "At the time, the political climate for roll-ups of limited partnerships in the United States was not favorable. I had to go to Washington, D.C. and repeatedly testify before the Senate before we got approval to do the roll-up." In 1994, Shurgard was able to consolidate most of its partnerships and went public as a single REIT on NASDAQ. In 1995 Shurgard moved its stock listing (SHU) to the New York Stock Exchange. Shurgard Expansion to Europe As the U.S. self-storage industry became increasingly saturated and competitive, Barbo began to look elsewhere for opportunities. In 1985, he graduated from the Owner/President Management Executive Education Program8 at Harvard Business School and several years later traveled to Monte Carlo to attend a class reunion. Barbo, whose grandparents had emigrated from Norway, reminisced: It was my first trip to Europe. On a whim, I asked the desk clerk at my hotel for a phone book and looked through the Yellow Pages for the words "self-storage." We couldn't find any listings. When I thought about the possibilities to expand our business into Europe, I thought I was living my life all over again. If the per capita demand propensity for self-storage in western Europe is even half that of the United States, then I can see about 25,000 self-storage facilities developing there in 20 years. However, at the time, combining the many partnerships and going public were taking all of Barbo's time and resources. In 1992, Michael Fogelberg, a Swedish undergraduate business student at Seattle University, was moving back to Europe for a year to work in his family business and needed a place to store his belongings. Michael recalled: So I went around to a couple of self-storage companies in Seattle, including Shurgard, and they were full. But Shurgard called around and found me another Shurgard location. My Norwegian friend, an MBA who was helping me move, said, "This is just a fantastic idea that doesn't exist in Europe." We went back out to the car, and stayed up all night researching, and wrote a paper for class the next day on how we were going to develop self-storage in Europe. Michael's father, Ake Fogelberg, a civil engineer and real estate investor, was looking for ways to invest abroad. He had moved his family from Sweden to Seattle in 1984 to form a real estate consortium with several Swedish banks. Then in 1987, he moved back to Europe, to Belgium. In 1990, the European real estate market collapsed, and Ake formed Grana International, a holding company, with Patrick Metdepenninghen, a Belgian tax lawyer. Ake explained, "Our Company’s mission was to help Swedish banks clean up and get out of investments down here in Brussels. Patrick could help them solve their problems." In 1992, Ake sold off his last building. Ake recalled when 22-year-old Michael arrived back in Brussels, enthusiastic about the selfstorage opportunity, "We were out of real estate, we were looking for new businesses. Of course we knew what self-storage was, but Michael was so enthusiastic. I gave Michael one year to prove this business concept." Through a connection at the Norwegian Chamber of Commerce in Seattle, Michael's friend met Barbo, and soon the Fogelbergs and Shurgard, whose executives had been eyeing Europe, were talking. In September 1993 Shurgard USA and Grana International formed a joint venture, SSC Benelux & Co SCA (Shurgard Europe). The Fogelbergs would do the lion's share of the work to develop the self-storage business in Europe and have 90% of the equity. Shurgard USA would contribute its name, knowledge, and licenses for 10% of the equity. After spending some months learning the business working at Shurgard's stores in Seattle, Michael returned to Brussels, where his research revealed promising market potential for self-storage in Europe. The European population size was comparable with that of the United States, and on the Continent, self-storage was virtually nonexistent. Most Continental Europeans used the furniture storage services of 35 moving companies like Allied van Kamp (Holland). However, moving companies did not give customers direct access to their goods, offered only one-size-fits-all containers, and required advance notice to retrieve goods from their warehouse. The second option for Continental Europeans was more expensive specialty movers, whose "moving consultants" managed the packing and storage of corporate office contents and fragile goods. In the United Kingdom, there were 50 established self-storage facilities around greater London, owned by both small mom-and-pop operators and one or two corporate players. These facilities, usually rough, low technology buildings converted from industrial uses, were in run-down, inconvenient locations with limited opening hours. The Fogelbergs concluded that the Shurgard product-defined as "conveniently located, well designed and functionally flexible, accessible by the customer at all times, secure, and climate controlled" -would be superior to European offerings in quality, service, and price. Nonetheless, the unfamiliarity of the self-storage concept in Europe was a mixed blessing. While it could give Shurgard a preemptive, first-mover advantage in the European markets, it also made European banks, already shaken by the real estate bust, reluctant to lend the Fogelbergs money. Metdepenninghen, executive director, capital markets, was talking to the banks while Michael was conducting market research: We thought it would be easy to raise money and leverage the business, because we had banking relationships with Belgian, Dutch, and Swedish banks. In the late 1980s, Swedish deals had 90% debt, so we thought we'd need only 10% to 15% equity. But the banks' reaction was "Who will ever use this? If this were a real product, a real need, it would have obviously happened here." So we realized we'd require much more equity than we had hoped. By 1994 Barbo was becoming impatient "to get Europe going." Finally, in February 1994 both sides renegotiated the terms of the venture, reversing the equity split-Shurgard USA agreed to put up 90% and the Fogelbergs 10% of the equity capital for SSC Benelux & Co. Grant commented, "For Shurgard USA this was a serious commitment. In 1994 we decided to invest in Europe even though the cost of the money was high and we only recently had become a public company and were still expanding rapidly in the United States." Between 1995 and July 1999, Shurgard USA and its other joint-venture partners invested a total of 120 million in the European joint venture, with the first three Shurgard facilities in Europe 100% equity funded. Shurgard in Belgium Forest and Molenbeek The Fogelbergs and Metdepenninghen decided to locate Shurgard's European headquarters and first country operations in Brussels, Belgium, where Grana International was based. Besides convenience, the Fogelbergs also felt that Brussels would be a good starting point because of its central location and relatively mobile, cosmopolitan European Community staff. Commented Metdepennighen, "I originally thought self-storage was a simple business. But if you really want to execute well, it isn't that simple." In planning Shurgard's first three properties in Belgium, the joint-venture partners encountered an important philosophical difference. Instead of building or acquiring new self-storage sites, as was Shurgard's standard practice in the U.S., the Fogelbergs planned to convert existing industrial real estate, which was plentiful and reasonably priced. Commented Grant, "What you're seeing in the first few stores is the European/American debate. Our position was that they don't have enough drive-up spaces-but Europeans think it's cheaper not to buy as much land. We decided to try both models." Not knowing which approach would work, the joint-venture partners agreed to follow the "European" approach in the first two stores and the" American" design in the third. Shurgard's first two Brussels facilities-Shurgard Forest, opened in April 1995, and Shurgard Molenbeek, opened in September 1995-were conversions of brick industrial facilities (one a parking garage) in densely populated, lower-income, immigrant neighborhoods on the outskirts of Brussels. A train regularly clattered by the Molenbeek facility, and the Forest store stood next to a highway exit ramp. Both facilities were within walking distance of apartment buildings and local merchants. Both facilities were multistory buildings with four levels, elevators, and a loading dock that the Fogelbergs thought would be good for drive-up customers. To minimize the risk of having the wrong unit mix (how many units of which size a facility contained), according to standard U.s. practice, Shurgard delayed construction of self-storage units in half of the facility until the first half rented up. Instead of a three-dimensional lighthouse tower, the Shurgard trademark, both stores had only a flat lighthouse painted on their exterior wall. Customers could access their facilities from 10 a.m. to 6 p.m. during the workweek and from 10 a.m. to 4 p.m. on Saturdays. However, the conversion strategy turned out more expensive than planned ("both Forest and Molenbeek were way over budget," explained Grant), and the stores did not rent up as quickly as anticipated. (See Exhibit 4 for European facility performance data.) Waterloo experiment To boost the European expansion team, in January 1996, Grant, a U.S. expatriate, moved from Seattle to Brussels to take over as president of European operations. Grant, with bachelor's degrees in business and accounting, was a former Touche Ross consultant who had joined Shurgard USA in 1985 as director of real estate investment and had been traveling over to Brussels since 1995, when the first stores were being built. For its third Belgian store Shurgard Europe decided to do things by the U.S. book-build from scratch. An empty plot of land in Waterloo, a well-to-do suburb about 15 minutes' drive out of Brussels with a high concentration of American expatriates, was purchased. The real estate site was located across from a major shopping center but not directly by a highway. On the land, adjoining Napoleon's battlefield, Shurgard built a new, modern-looking facility modeled after Shurgard's typical U.S. store design, with a "real" Shurgard lighthouse tower. The square footage of the facility was much larger than that of the Forest and Molenbeek stores combined. One innovation over U.S. construction methods was the use of Belgian prefabricated concrete parts, which the Fogelbergs turned to after discovering that U.S. self-storage materials were not familiar to European installers. The floors/ceilings of the facility were from concrete, with walls/doors of corrugated iron. However, as Grant commented, "We over engineered our Waterloo design to follow European building codes so much that, although it was within budget, the facility ended up costing more than U.S. facilities would." The Waterloo store, which opened in October 1995 along with the Molenbeek store, took 34 months to rent up to stable occupancy. After renting up in August 1998, however, it remained a high 96% to 98% occupied. After conducting focus groups, Grant learned the reason for the lukewarm response: the outside, drive-up units, so popular among U.S. customers, were perceived as unsafe and unappealing to Europeans. To 70% of Shurgard's Belgian customers interior units signified luxury, compared with 30% of U.S. customers who felt that way. Furthermore, the focus groups revealed that the lukewarm Belgian response to self-storage was not surprising. For Europeans, Belgians had large houses, with less need for self-storage; they were known as slow to adopt new products, and the dual languages, French and Flemish, made advertising and promotions difficult. Wim Van Beveren, Benelux country manager, explained, "Among American companies in Europe, there's the consensus that if you can make it in Belgium, you can make it anywhere. But on the flip side, just because a new product fails in Belgium doesn't mean it can't succeed elsewhere in Europe. For example, McDonald's does much worse in Belgium than elsewhere in Europe." As Shurgard Europe was learning, not only did rent-up periods last longer in Europe due to product-awareness issues, but European customers also exhibited a different price elasticity than U.s. customers. To speed up the initial rent-up, in 1997 Shurgard cut rental charges at all three Belgian stores (Forest, Molenbeek, and Waterloo) by over 50%. Once the three facilities had reached stable occupancy rates in 1998, Shurgard raised the rates back up to the original level and continued raising them by 15% to 20%, with no impact on occupancy. Multistory facilities After the Waterloo experience, Shurgard switched its standard European facility design to a compromise-a modern, compact, multistory building with a gated courtyard accessible by car (interior drive-through) and interior units accessible by elevator, with some exterior units. This design was first used in the fourth European facility, Brussels Zaventem, near the airport, and opened in October 1996. (Because local authorities were worried that incoming pilots would become confused by Shurgard's lighthouse tower, they required Shurgard to lower the tower's height.) Commented Grant, "Zaventem is the result of the European/American compromise where we finally got our facility design, location, and unit mix right." By this time, Shurgard's simpler design also made more efficient use of the prefabricated concrete materials, speeding up construction time. By Shurgard's sixth Belgian store, the first opened close to a major highway, in Aarstselaar in May 1997, Shurgard was finally getting some name recognition. (See Exhibit 5 for photographs of Shurgard's European facilities.) Multiple-story facilities with a smaller unit mix had several advantages. In the expensive European real estate market, multiple-story facilities, which required only 1.5 acres of land, economized on land costs and opened up the possibility of using more downtown locations. They were also more visible from the highway and served as an important consumer education and marketing tool. The design director commented, "Using cutaway marketing, we design our buildings with some transparent windows and units on the ground and upper floors. So if you are walking by on the street or driving by on the highway, you'll see oversized, sample crates and belongings or paintings of them visible through a window. Our European managers' offices also have small, sample storage units. It's important to show Europeans what self-storage can be used for; just seeing a facility doesn't mean anything to them." Europe Phase II France, human resources, and regulation In September 1997, Shurgard Europe expanded into France by taking advantage of a competitor's bankruptcy. A French mom-and-pop operator had opened a self-storage facility, in Nice, when it ran out of money. The bank took over the project and was in the middle of constructing two facilities in Paris when it was approached by Shurgard Europe. By assuming the existing 70% debt on the facilities, Shurgard was able to buy the three facilities at a very good price from the bank during the foreclosure process. The design director explained, "Building from scratch gives us more control over the cost and image of a building but if we are forced to choose, then location is our first priority. In fact, our Paris Varlin facility isn't the most upscale it's inside the city, not outside but because of its central location in a space starved city, we command a good occupancy rate and one of our highest rental rates anywhere." In France, Shurgard began to learn that not only was the ideal unit mix of a European facility different from that of a typical U.S. facility but that there were significant variations within Europe. While Belgians rented self-storage units of a similar size to those of Americans (110 ft2 to 120 ft2/unit), in France and other European countries Shurgard found that consumers preferred smaller, 70 ft2 to 90 £e units on average. In downtown locations, the French wanted even smaller units. While Shurgard could charge more for the small units, they also required Shurgard to attract more customers per facility to generate the same amount of business. Explained Grant, "We initially made the mistake of focusing on the square feet, not the number of customers we could get at a facility." Over time, Shurgard Europe developed a thorough site-selection process, involving the market's real estate development team, the board of Shurgard Europe, and the Real Estate Committee. In this process, one of the challenges was the unfamiliarity of European regulators with the self-storage concept and lack of any specific legislation. To help educate French authorities about self-storage, Shurgard's executives would show U.S. building codes as well as pictures and tours of existing European facilities. Nevertheless, Shurgard found that in Europe many legal processes took longer or were more complicated. With operations in two countries, Grant began devoting more time to human resources issues. Because self-storage expertise in Europe was nonexistent, to head up country operations, Grant hired several country managers from an American brand with similar real estate characteristics McDonald’s. For example, Van Beveren had been responsible for the launch of 70 McDonald's stores across Europe. While the skills were transferable, he saw important differences: "The biggest problem I see for Shurgard in Europe is that the awareness of the self-storage product is not there. Furthermore, a McDonald's generates cash flow immediately, whereas a self-storage facility takes a while to rent up, so it's harder to get financing. Finally, the McDonald's brand has instant name recognition, while the Shurgard name is unknown." Grant's approximately 140 employees were divided into three functional groups: store operations, new-store deve...