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THE SIGNAGE FOUNDATION |
The Economic Context of On-Premise Business Signs and How to Establish Value in the Marketplace
Footnotes
[1] Traffic safety is also impacted by business signage regulation. The professional consensus of most traffic engineers and state departments of transportation is that the lack of readable, conspicuous roadway signage (or signage deficiency) may be a significant cause of roadway accidents. For example, a study of tort claims filed against the Pennsylvania Department of Transportation concluded that signing deficiency, both public and private, was a factor in 22% of the serious injury cases. See Pennsylvania Tort Claims Study; Gittings, 1985.
[2] All economic figures used in this chapter are based upon reports by Robert Coen, an executive and expert economist at McCann-Erickson Advertising Agency. Mr. Coen's figures are routinely published and relied upon by the Wall Street Journal, Advertising Age, and other such respected publications.
[3] Comparisons between certain economic systems is impracticable, e.g., countries dominated by Marxist economic theories are entirely production based, unresponsive to either market forces, business exigencies or consumer preferences.
[4] The average new car in the United States travels 15,000/year, as opposed to 5,000/year in Japan. Total travel miles for American consumers are 1.5 trillion annually. New car sales average 15 million annually resulting in total sales volume of $350 billion. Auto insurance sales, averaging $150 million annually, exceed total cigarette, soft drink and beer and toy sales combined. Additionally, trucks (both heavy and light) account for nearly 85% of the $450 billion annually expended on transportation and freight delivery costs in the United States; rail accounts for only 15% of these expenditures. In contrast, European nations spend the reverse -- 15% for truck transport and 85% for rail.
[5] Virginia Pharmacy v. Virginia Citizens Consumer Council, Inc., 425 U.S. 748 (1976).
[6] See, Linmark Assoc. Inc. v. Township of Willingboro, 431 U.S. 85 (1977); Ohralik v. Ohio State Bar Assn., 436 U.S. 447 (1978); Central Hudson Gas & Electric Co v. New York, 447 U.S. 557 (1980); Metromedia v. City of San Diego, 450 U.S. 490 (1981); Board of Trustees of State Univ v. Fox, 492 U.S. 469 (1989).
[7] During the early implementation stages of the 1965 Highway Act, the Federal Highway Administration (FHWA) found it impracticable to define, for regulatory purposes, a sign's function. One concern was that attempts to control message or copy content might infringe on Constitutional free-speech guarantees. Efforts to provide definitive guidelines were finally abandoned.See Principle and Procedure Memorandum 90-1 (abandoned regulations).
To use a "personal experience" example illustrated by a movie theater, one may believe that the primary function of a movie theater is to make money for the owners by showing movies. In economic terms, however, profits are realized through concessionaire sales, particularly popcorn and soft drinks. Therefore, the primary economic function of a movie theater is impossible to determine without intensive study of all economic variables involved. The primary function of theater signage is equally difficult to establish, i.e., which on-site business activity does it primarily serve or support? While this example may appear singular, it is characteristic, nevertheless, of many business activities, such as a gasoline station which also offers a car wash facility or a “convenience” store.... and illustrates the problematic nature of regulating on the basis of "primary function" designations for either a business or its signage.
[8] Information concerning the visibility requirements for on-premise signage is excerpted from a study by Richard N. Schwab, entitled Safety and Human Factors:Design Considerations for On-Premise Commercial Signs (1998). Mr. Schwab is a former Federal Highway Administration program manager for research on highway visibility and night driving safety. See References.
[9] According to U.S. Census Bureau figures, in the years 1995-96, 16.33% of the U.S. population of 260,406,000 moved. Of this percentage, approximately 8.0% moved either to a different county in the same state or to a different state.
[10] In 1997, Gulf Industries, Inc., a producer of custom-designed internally illuminated pole signs and wall signs located in Torrance, California, conducted store traffic surveys of 45 established, independent retail and service sites across the United States, including, for example, car washes, muffler and transmission repair shops, beauty salons and chiropractic clinics. The surveys were conducted 30 to 45 days after installation of a new on-premise sign, and were designed to determine what drew first-time customers to the store. Of the 840 customers who participated, in response to the question "How did you learn about us?", 54% (452) stated they became aware of the business when they saw the sign; of the remainder customers, 29% (248) became aware of the location through word of mouth, 11% (92) through newspaper advertisements, 4% (32) through the yellow pages, 1% through TV (9) and 1% via radio (7). According to Gulf, all 45 businesses involved in the survey experienced increases in gross business, some as much as 50%, after installation of a custom on-premise sign visible to the street.
[11] According to the Urban Land Institute, the ideal location for a regional, community, or neighborhood shopping center requires consideration of trade area characteristics, the income level of households in the area, competition, highway access and visual exposure (ULI 1985). Other essential factors in locating a retail site include population density, growth, regional exposure (e.g., the site is adjacent to a street or highway traveled by consumers from outside the immediate trade area), operational convenience, safety, and parking (Salaneschi 1996).
[12] To the extent any city is brought up as a prime example of a chaotic sign environment, the planner should encourage further investigation and research. A city most often accused of "gaudy", "tacky", i.e., undesirable "chaotic" signage, is Las Vegas; however Las Vegas' sign code is carefully structured to respond effectively to a broad range of resident and visitor aesthetic sensibilities and expectations...and in its history, the city has never suffered either urban blight or flight.
[13] Ibid. FN 9
[14] In a mobile, consumer-oriented economy, a retail site's visual exposure and access are particularly important in providing a driver time to react quickly and safely. A site and/or on-premise signage with good visibility is one that a consumer can see and comprehend from as far away as possible. A site with good accessibility is one with clearly marked entrances and exits that allow people to move safely and easily into the parking lot and into the store. Specific sites that are considered preferable from an access standpoint are far corners on main roads, and sites to which entrances are not hampered by median strips. Sites that are considered less than ideal in terms of location are those on the insides of curves, at oddshaped intersections, and some midblock parcels. (Salaneschi 1996)
[15] Although not typical throughout the chain, a Wal-Mart "trade area" may encompass as much as a 30-mile radius. Further, Wal-Mart's point of purchase (or "in store") commercial communication system is such that up to 85% of its sales occur on impulse. Therefore, total consumption on any given day cannot be predicted for any given store, or for that store's trade area, whatever its size.
[16] McDonald's has approximately 12,000 retail sites in the United States;Subway, 10,800; Burger King, 6,900; Dairy Queen, 5,800; and Wendy's, 4,600 (of which 900 are company owned). While occupying only 3% of the quick service food segment of the market, McDonald's enjoys 7% of the segment's total volume. As an example of the role of "cross over" shopping in retail dynamics and the control of product franchisors over franchisees, Wendy's recently named Coca-Cola Co. its exclusive soft-drink supplier. As a result, Wendy's will no longer allow franchisees to choose either Coke or Pepsi products for their stores, and hundreds of franchisees that serve Pepsi have been ordered to eventually switch to Coke. (Fountain-dispensed drinks account for about one-fourth of the U.S. soft-drink industry's overall volume; it is a segment of the industry where Pepsi has long trailed Coke, holding a meager 25% share to Coke's 65%.) See The Wall Street Journal, ed. August 24, 1998, p A3.
[17] However, by numbers of commercial sites, independent or non-affiliated small business or proprietary enterprises comprise at least 60% of all commercial activities conducted in the United States.
[18] The importance of on-premise signage to successful corporate identification advertising/marketing programs was recently demonstrated by Burger King, which spent over $300,000 on research to learn if minor changes in its logo colors and form would confuse customers to the point that sales would suffer. The results convinced Burger King that any logo changes should be very minor indeed, if it wanted to preserve its share of the market. Information provided by R. James Claus. See References.
[19] Demographic data demonstrates the difference between average American communities and Coral Gables. According to 1998 population demographics, 90% of Coral Gables' population is white viz a viz 78% nationwide. Income demographics disclose that 29% of Coral Gables' population enjoys income levels above $100,000/year (16% above $150,000/year). The average Coral Gables' household income is $84,468/year; per capita income is $33,107. Nationwide, only 9% of the population realizes income above $100,000/year (3% above $150,000/year). The national average household income is $48,952/year; per capita income is $18,423/year. By age, 45% of the Coral Gables' population is above the age of 45 viz a viz 31% nationwide. Information obtained from CACI Marketing Systems, 1100 N. Glebe Road, Arlington VA 22201. According to The Wall Street Journal, [edition to follow], the median price for a home in Coral Gables is $1.2 million; nationwide, the median price is $135,000.
[20] For readability/legibility guideline principles, refer to the Federal Highway Agency's Manual on Uniform Traffic Control Devices, and companion literature.
[21] As recently as a decade ago, the conventional wisdom in Las Vegas was that visitors didn't want to shop. The first mall erected on the city's "strip", the Fashion Show, followed the typical suburban shopping center model, but its owners soon discovered that people did not want a respite from the glitter and glamour. After a remodel which give the mall a 'glitzier facade and theme restaurants', sales immediately rose by 10%. Using the same strategy, the Forum Shops recently opened a 250,000 square foot expansion featuring Roman mythology and is planning a 450,000 square foot third phase called Caesar's Maximus, a re-creation of a Roman hill town. In 1996, sales at Forum Shops averaged $1,300/square foot, while the typical mall rang up only $278/square foot. The Wall Street Journal, issue August 27, 1997, article "Extravagant Themed Malls Enthrall Las Vegas Shoppers".
[22] Planners should avoid knowingly recommending or supporting regulations that seek to encode discrimination in the guise of "aesthetics." Of particular concern should be the very real possibility that demonstrable intent to exclude outsiders violates the Commerce Clause.
[23] 44 Liquormart, Inc. V. Rhode Island, 517 U.S. 484 (1996). In this case, influential members of the community disapproved of a retail liquor store, located within a commercial zone adjacent to a major arterial. Because the zoning ordinance did not forbid the activity, the governing body attempted to force out the business by enacting a sign code which essentially prevented all signage visible to the street. The court found this to be impermissible content control, stating, among other things, that dissatisfaction with the sale of a product (in this case, liquor) could not be resolved through imposition of sign codes designed to discourage or terminate otherwise legal activities within the zone.
[24] If the reader wishes to review a sign code that might generate a national model, the Cleveland, Ohio sign code is recommended. Cleveland is an excellent representative example of Middle America cities, and its sign code reflects recognition of the signage required by retailers if they are to survive in a competitive market, where generally inexpensive retail space is amply available.
[25] Certain professional services, which depend on consumer expenditures of discretionary income for success, may increase consumption within the category by a sign which includes notice of a "specialty" that the consumer may not expect to be available at the site. For example, a veterinary clinic may provide pet grooming as an add-on service. Too, the recent trend toward franchising of traditional service or professional businesses, such as dental practices, veterinary clinics, and real estate agencies, has made the standardized, on-premise sign an essential component of the total corporate media advertising package.
[26] Wal-Mart's success is significantly prompted by a marketing strategy that relies on a [mass] merchandise base which is unaffected by cyclical variables; its goods are consumed in predictable patterns on a regular basis. Because a Wal-Mart trade area may exceed the traditional trade area by 20-30 miles, it is far less susceptible to traditional trade area consumption, i.e., if job or employment opportunities decrease in the local 5-mile radius trade area, Wal-Mart may continue to draw from its larger trade area as well as the infrequent passerby.
[27] Although generally when a mass merchandiser such as Wal-Mart enters a community, other merchants lose volume nearly proportional to Wal-Mart's gain, the losses may be offset by introducing "specialty" items not carried by Wal-Mart. In addition to regaining former sales volumes, specialization or scale economics can also increase consumption throughout the community's retail system. For example, a Sac's customer may find a Wal-Mart irresistible and spend dollars there that he or she might not have otherwise spent. Conversely, a Wal-Mart customer may spend additional dollars at a shop offering "tall men" apparel -- a specialty niche usually not filled by a mass merchandiser.
[28] There are two general rules in retailing. Rule 1 is that one must cut sales price by at least 15 percent to overcome brand awareness, e.g., if a business wishes to increase sales of a store brand in the soft drink retail category, to offset brand marketing advantages enjoyed by Coca Cola, the store brand must be offered at a consumer cost at least 15 percent below that of Coke. Merchants who carry a large selection of goods similar to the one reduced in price generally will be able to maintain total sales volumes because of cross elasticity in the market, i.e., volume losses in one segment of the category may be made up by sales in another segment. However, as with all rules, there is the exception. Rule 2 is that Rule 1 doesn't always work to overcome brand identity, i.e., major brands will maintain sales volumes sufficient to offset up to 15% price reductions in competitive brands. Most retailers cannot maintain net profits of 2.5-10% absent consumer brand "loyalty" and cost effective advertising. Since the small merchant lacks the volume which would permit discounts from major producers and enable point of purchase price reductions, he or she is much more dependent than the mass merchandiser, for example, on cost effective advertising to build a clientele and compete in the marketplace.
[29] Section 5499 of the Code states: ".... no city or county shall require the removal of any on-premises advertising display on the basis of its height or size by requiring conformance with any ordinance or regulation introduced or adopted on or after March 12, 1983, if special topographic circumstances would result in a material impairment of visibility of the display or the owner's or user's ability to adequately and effectively continue to communicate with the public through the use of the display. Under these circumstances, the owner or user may maintain the advertising display at the business premises and at a location necessary for continued public visibility at the height or size at which the display was previously erected and, in doing so, the owner or user is in conformance.
[30] In response to the City's argument, the trial court stated: "Just how commercially effective signs may be at other locations is not directly relevant here.... vigorous business and healthy sales [of third party businesses]...may be generally true [b]ut that is not the statutory test."
[31] Plaintiff Agoura Restaurants, Inc., dba McDonald's, is located adjacent to a freeway off-ramp and signaled its potential customers via a 75-foot pole name and logo sign. The trial court found that the restaurant was heavily dependent on freeway traffic for its customer base, and that no sign or display conforming to the City's ordinance would be visible to freeway motorists "at a safe and reasonable decision point for the off-ramp". Further, the trial court found no reason to question or examine plaintiff's research in detail, because research provided by the City's expert alone disclosed that removal of the pole sign would result in a gross revenue loss to the restaurant of 35% of present revenues. Similarly, predicted losses for the freeway-oriented Texaco station, according to the City's expert, were 35% of present revenues.
In Texaco's case, the predicted loss in dollars amounted to $336,000 the first year of sign takedown. The record is silent on predicted dollar losses for the McDonald's restaurant after takedown of its pole sign, but R. James Claus, Executive Director of the Signage Foundation for Communication Excellence, Inc., assisted the litigants in analyzing data. Dr. Claus estimated the gross revenues loss to the franchisee at minimally $900,000/year, based on a 35% reduction of present gross revenues averaging $2.7 million/year; the corporation calculated the first-year loss at $1.3 million (or 50%), rising to $2.3 million (or 85%) within 5 years as non-local motorist recall of the site diminished. Such losses would force the restaurant to close.
[32] The trial court determined that the State code's statutory language minimally required "a circumstantial analysis of not only the simple visibility of the sign, but also whether the sign will be noticed [emphasis in original], and the message imparted to the viewer's brain.... [t]he additional circumstances bearing on noticeability or perceptibility, would include the origin and nature of the customer base and buying motivation, general visibility in the area, the high speed, high volume nature of the freeway, location of decision points for motorists along the freeway, identification time and reaction time, and time to make safe lane changes."
[33] Regarding the research provided by the affected businesses, the trial court said, "...[although] plaintiffs are entitled to prevail based on...material impairment [alone]...if more were required, it would be a showing of a material impairment of effective commercial communication, which is...generally shown by the [City expert's] report...without a need for an in depth study of plaintiffs' own figures...[however] it should be quickly added that plaintiffs' own figures and related information are supported by logic...." (Emphasis added.)
The trial court went on, "[t]he evidence clearly establishes that...special topographic circumstances would materially impair the noticeability, or perceptibility, of conforming signs for each plaintiff....[and] as to each of the plaintiffs, there would be a material impairment of the commercial effectiveness [emphasis added] of a conforming sign... [because] each of the businesses relies on its existing sign to attract customers...substantially...from the freeway." Significantly, none of the trial court's findings, including those regarding plaintiffs' research, were overruled or otherwise accepted by the appellate court.
[34] Subsequent to the appellate court's decision, and following presentation of the cost bill to the City Treasurer, the Agoura Hills Mayor and City Counsel were recalled by the town's citizens.
[35] Advertising, coupled with marketing, annually generates in excess of $250 billion in revenues. Major media advertising expenditures at the local, regional and national levels equal more than $175 billion. In comparison, more dollars are spent per year on advertising than on the following sales:local and long distance telephone calls, ($170 billion), toy sales ($20 billion), tobacco sales ($51 billion) and soft drink sales ($55 billion). Only categories such as new car/light truck sales at $350 billion or retail food sales at $450 billion produce significantly larger revenues.
[36] The cost-per-thousand comparable examples are provided to acquaint the reader with calculation methods based on cost variances within various media. The cost of radio advertising was recently addressed in a Wall Street Journal article discussing the New York radio market, which is the largest in the country. The Hispanic radio station WSKQ is one of this market's two most popular stations. It commands $500 - $1,200 per minute for ads -- an amount about 25% less than English-language stations of similar size. (Worries of possible bias prompted the Federal Communication Commission to study whether major advertisers discriminate against Hispanic and other ethnic-minority radio formats; study results are due by the end of 1998.) The Wall Street Journal, ed September 10, 1998, p. B1.
[37] For more information, a report undertaken by Donald Sutte on behalf of the National Academy of Sciences is recommended. (Donald T. Sutte, Jr., The Appraisal of Roadside Advertising Signs, Chicago, Illinois: American Institute of Real Estate Appraisers of the National Association of Real Estate Boards, 1972.) Other sources are the Outdoor Advertising Association of America, Washington D.C.; the Institute of Outdoor Advertising, New York; and Traffic Audit Bureau (neutral rating service), New York.
[38] General advertising purposes can shift from situation to situation. In the past General Motors, Inc. dominated the North American automobile market, and GM feared federal action for restraint of trade if their market share increased above 50%. Consequently, for a number of years GM's advertisements were not designed to increase or expand market share, but instead were aimed at retaining "old" customers and reinforcing customer decisions to purchase GM's existing lines.
[39] Local governments also lease space to outdoor advertisers. This space is found, for example, on buses, bus shelters, transit stations, and sidewalk kiosks. Although public advertising space is generally much smaller than that offered by traditional outdoor structures, in recognition of the intrinsic value of such exposure, rental rates of $500/month/poster face are not uncommon. Street-based exposures represent a valuable municipal resource, and are successfully implemented by many communities such as Edmonton, British Columbia, Canada and Cleveland, Ohio.
[40] The Research on Signage Performance by the University of San Diego School of Business Administration was sponsored by the California Electric Sign Association, the International Sign Association, the Sign User Council of California, and the Business Identity Council of America. A summary of the findings appeared in The Economic Value of On-Premise Signage, a compendium of research results and articles on sign amortization and copyright and trademark protection. The booklet was published jointly in 1997 by CESA and ISA.
[41] University of San Diego researchers note that multiple regression analysis relies on variation in data to illustrate relationships. Given the standardized types of signage used by a national franchiser, there is not a lot of variation in the independent sign variables. Furthermore there is not substantial variation in the site's sales performance because common business sense dictates that poor performing sites will be eliminated.
[42] Richard Wolf, Senior Counsel, Cendant Corporation, 1997. See References.
[43] Ibid. FN 7.
[44] Valuation of an outdoor advertising structure, which constitutes a primary land use, proceeds more in accordance with traditional real estate evaluation/valuation methods than those used for on-premise signage (an accessory use). Market sales data for these structure are very reliable because they are routinely bought and sold, or marketed, based upon established measurement criteria (e.g., reach, frequency, readership and cost per thousand exposures).
[45] For example, in the Portland, Oregon metropolitan area the typical square footage rental for buildings lacking street or frontage visibility is $.50-$.70/sq ft, while for "in-line" buildings it is $.90-$1.00/sq ft and $1.20-$1.50/sq ft for free standing buildings.
[46] When capitalization analysis using rental rates and income reach differing results, the results are reconciled with the figures established by other appraisal methods to arrive at a final determination of value.
[47] As a general reference, see A Sign User's Guide: A Marketing Aid; R. James Claus, ST Publications (1988).
[48] Beaver Dam Raceway, Inc. v. Town of Beaver Dam, 315 N.W.2d 727 (Unpublished opinion, Wis.App. 1981).
[49] This information was obtained from a presentation and handout made by Jess Ruf, Chairman Do-It Center, Inc., based in Van Nuys, California, at a meeting of sign industry and APA representatives in Cleveland, Ohio, in February 1996.
[50] If more than one variable between the compared sites exists, the sites cannot be used in a matched pair analysis.
[51] In the context of this chapter, the word "omni" is used as a term of art to describe an inclusive or comprehensive approach specific to signage appraisal.
[52] This case was summarized from an unpublished paper submitted by Richard Bass, MAI/AICP/EAP, to the APA in response to a call for presentations for the APA National Conference in 1998. Bass is a certified appraiser in Sarasota, Florida.
[53] Taxes associated with business revenues generally are the most productive for a municipality, i.e., with the exception of street improvements; the revenues generated are not funneled back to the business community. For instance, the writer’s study conducted as part of a sign variance request by Pier 1 Imports in Germantown, Tennessee, disclosed that although the commercial district comprises only 3% of municipal land uses, the district generates 17% of the town’s tax revenues, most of which go toward funding infrastructure and schools -- expenditures generally unrelated to business activities.
[54] See Appendix 1; Best Buy appraisal.
[55] Appraisal Institute, The Appraisal Handbook.
[56] The customer survey referenced in footnote 9 (Gulf Industries, Inc., 1997) provides documentation of a sign's ability to increase customer base and sales volumes -- in some cases as much as fifty percent. Although the survey was not conducted by an independent researcher and was limited to small, non-affiliated (or independent) business, it gives us strong evidence that a custom-designed sign can overcome the competitive disadvantages that accrue when sign codes regulate only traditional signage and not "signature" signage. Absent a well-designed, placed and legible sign, it appears that a sizeable segment of the mobile and newcomer market will be lost to small business. More research in this area is indicated, particularly if a community wishes to avoid regulations which discriminate against the small business person who generally cannot afford extensive trade dress in lieu of the on-premise sign. Additionally, a community should strive to implement signage regulations that compliment federal programs designed to encourage small business.