Pay Less Rent?  Make Less Profit?

In my many years of retailing I would have rarely seen a successful ‘fit’ retailer, moving from a primary position in a shopping centre to a more secondary position lured simply by a lesser rental.

I have however witnessed one such occurrence.  The particular retailer, in a prominent regional shopping centre relocated from a prime retail position to a clearly inferior position. 

Now this was a very established retailer, with strong in centre positioning and good trading history.  Most importantly they had strong brand equity by virtue of their location, history in the location and a good business model.  Noted, their sector had undergone some fairly significant changes in recent years, however their decision to relocate to a lesser position could realistically only be as a consequence of a lesser rental offer.

In my experience, this type of move can have a dramatic influence on the sales line, regrettably to the negative and the multiplier effect on rental can be as high as 10 times.  In other words, any savings on the rental line, is immediately negated by the decline in sales.

In most cases, my advice would be to not make this type of move.

Firstly, even if you had been enjoying success, customers won’t really bother to find you.  Unless you are some type of monopoly destination retail offer, the fact is that customers simply won’t find you.  From the example above, after trying to find the relocated retailer, I had to ask directions and even then found it difficult.  I went to this trouble as I was curious to see for myself what effect their move might make.  Most customers would simply give up and go elsewhere.

“Retail is about putting yourselves where customers shop not expecting customers to find you.”

Of course any leasing manager will be delighted to lease you a secondary site, budgeted at a lesser rental (in most cases anyway) and release the prominent site at a higher rental.   Leasing these ‘dog’ sites is the bane of any leasing manager, and their task gets even harder as the traditional service ‘destination’ businesses such as banks and insurers get ‘fitter’ in their retail offer and increasingly demand quality retail locations.

In some cases, owners’ capital is offered to sweeten the relocation.  Again there is a reason for this, as it doesn’t typically impact the owners’ income line, whereas it will impact yours.

At our recent Fit for Business Breakfast, Bernie Brookes, M.D. of Myer said,

“The goal of every retailer is to make sales.”

This is the first goal of all fit retailers.  Never relocate thinking you will benefit from lower rental.  There are very good reasons why the rental offer is lower.  The leasing manager will know this so don’t be misled.  Invariably, sales will be much harder to make in this location.

So how do you ascertain whether a site will pay its way in the sales needed?  Here are some fitness tips that might assist.

• Understand the location (centre or strip) and all its dynamics. 
• As a minimum make it your business to understand moving annual turnover, customer traffic, where the traffic enters and leaves the centre and the performance of the category your business is in.
• Know the ratio of speciality vs major sales and the averages of all retail in your centre.
• Understand the competitive positioning of your offer and know how many competitors you have nearby!
• Know what are comparable businesses are paying. 
• Be aware of the desired benchmarks your business needs to achieve to firstly, breakeven and then, to make profit.
• Be prepared to negotiate – if this is difficult for you, hire someone to do it for you.   The leasing manager is a professional and your negotiation needs to be too.
• Know what you can afford and, if you can’t get it, move on.
• Be clear on all parts of your lease, have all negotiations in writing.  Make sure your lawyer checks over all documentation.

(Contact us for a copy of our ‘Driving Down Occupancy Costs’ article for more detailed business fitness tips.)

In summary, know how to build your sales and get fit for business.  Taking the reduced rental offer just simply does not work in most cases.

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