Location, location, location?

So goes the oldest axiom in retail business. Location should form one of the many variables any operator looks at when formulating an analysis and business plan for a retail store.

Location depends on the type of business and of course the cycle of development relevant to that business. A highly developed franchise system will seek high profile sites as the brand recognition will, in most cases, ensure the performance of the business and the premium rent the site requires.  

A developing business needs to choose more carefully. There is a lot of value in the form of cheaper rent by identifying locations that are developing or have been overlooked. In the case of shopping centres softer deals with leasing incentives can be achieved as they rely on good retailers to strengthen their tenancy mix. 

This in turn increases Centre sales, and the Centre’s valuation which in turn increases the rent. The key is to request a longer term to allow your business the opportunity to grow before worrying about a lease re-negotiation.  

Five (5) year terms are inadequate and self serving to the Shopping Centre Industry. 

Proper assessments and good independent advice before making any decision is paramount. Property experts these days have access to rental information for most key shopping strips and all shopping centres.  

Accurate models can be built that will determine sales, rent ratio and cross checked to existing comparable rents. The key to any location is ‘what is it really worth and what can your business realize out of that worth?’ 

A simple rule of thumb is to project your sales, divide the amount of Gross Rent (most people forget outgoings which can be substantial) and make sure the occupancy cost percentage is within a range your business can sustain. Fresh food needs to be between 7-9%, prepared food from 12-14%, fashion and services 16-18% and so on. 

Strips can be judged by reputation as many of the iconic strips command rents as high as some of the larger Shopping centres. Saturation of retail is the problem in today’s market therefore choosing the correctly priced location and then building in the correct incentives is more important than ever.

Further, protection clauses such as “if sales do not reach $800,000 per anum in Years 1 and 2 the Lessee will only be levied 14% of Gross sales as Gross Rent”. This limits the risk of a sizeable investment and can ensure the business has the best possible prospect of making it through its formative years particularly in a new shopping centre development.

Case Study 1 

Start up Patisserie offer that specializes in a European product and compliments the offer with value added goods and coffee. 

This operator has decided that apart from high density CBD sites with heavy foot traffic there is a need to roll out the stores in strategically selected Shopping Centres. Position must be thought of in terms of being visible as a new brand and offer however there is no point in jostling for positions that are saturated by competitors or established brands that are likely to have the recognition advantage. 

As touched upon earlier there is also the question of paying premium rent for the established high volume sites. With careful consideration and expert advice the system looks at alternative sites that are not the usual corner sites or densely populated and competitive food court. The advice from the Leasing consultants is that the position in a Regional Centre of a higher demographic can provide equal amount of foot traffic within the day to day non-discretionary convenience areas. What this effectively means is that the business is placed as an oasis within an area that has a higher/more frequent visitation area for daily food and convenience. The footprint creates and Oasis for the shopper to try the product and sit within this traditionally mobile area to regroup and graze on product.

The advantage with the Leasing and risk liability is that this area did not provide and income or add value to the area previously therefore rent or occupancy cost is minimal (by today’s standard in a Centre that has $400 Million is annual sales). The Leasing incentive is also generous given that the Centre has bought the idea and can see the big picture.

The business then only needs to produce a very low sales base to sustain itself and although this is not a form of promoting mediocrity is about absolutely reducing risk and allowing the business to control its own destiny by them having surplus funds for correct staffing and service, extra marketing to promote awareness of this position outside the normal allocated amounts which will ensure growth and more importantly more profit.

Case Study 2

A multi-site street-wear/surf-wear chain is to establish a large footprint in a ‘green-field’ brand new shopping centre. This might sound familiar however the reality is there are not too many ‘green-field’ new sites in the major Capitol city fringes these days as most owners have captured and expanded already existing centres within these catchments over the last 5-8 years.

The best possible position in this scenario is a corner site adjacent to the main entrance facing the food court. Exposure wise and to make a design statement and presence are guaranteed here. What is not guaranteed is the performance and ability to sustain this business for the term of the Lease. A 400 sqm footprint in a Regional Centre will command a rent in the mid to high hundreds of thousands in rent, but also command a fitout investment upward of 500-600K. By the time the store is stocked a million is conservative. 

Choosing the site and position has not been the challenge in this instance. This selection off a new plan does not come any simpler or more conservative, the numbers and exposure of the investment backing this judgment are the risk. Particularly since everybody needs to always consider all major Landlords do not expect these start up ‘green-field’ sites to become profitable for 2-3 years. Therefore at the point of negotiation any brand that can command such a site and is vital to the tenancy mix has real negotiating power.

In this instance the Leasing representative/consultant to the business negotiated a strong leasing/fitout incentive that reduces the risk/investment so that it is shared with the major owner but more importantly puts performance clauses in the Lease to protect the business in its formative years.

Every informed business has a breakeven number or threshold before it affects other stores or head office. In this instance a percentage rent clause is put in place for the first two years whereby if sales do not exceed a minimum sales threshold the entire rent is reconciled for the year as a percentage of the sales. Major retailers have been doing it for years. Smaller business and certainly Franchise multi-site groups who are in demand need to recognize this power and think about such insurance when choosing yet to be proven premium sites.

Case Study 3

A Major Lottery Franchise is located on a strip whereby there are essential services neighbouring the store such as, Chemist, Baker, Banks, small variety stores and fast food, however parking is not convenient, therefore the performance of the business will always be limited to the already taxed resources supplying traffic to these stores.

The independent owner in such a strip site commands a rent of $35-40K for such premises 20 Kms outside CBD. At lease renewal a rent of $60K is asked for by the owner. Now we already know that sales will not grow anywhere near 100% over the term of the Lease given the very limited car parking so the business will either become unprofitable or finance this increase straight from Profit.

In this case the Leasing consultant/representative did not have a lot of property to work with as the 20-30 stores in the precinct were quite tightly held. However each business does have its very own little challenges and needs. This particular business needed a simple format whereby 1 or 2 operators can sit behind computer terminals and issue Lottery tickets. The answer was found in the adjacent Supermarket. The Supermarket after all is still the major draw card to this particular strip therefore traffic would be higher that the store previously held. The Supermarket recognized its customers would appreciate the convenience of the service in its front end previously housing parked trolleys.

A deal was struck under a sub-lease arrangement whereby the rent charged for this small footprint was less than $20K and the business not only held its previous sales, it doubled them.

Case Study 4

Efficiencies and Exigencies.

The first word makes sense, be efficient or minimize the cost of doing business by choosing sites that do not have large unproductive areas as all rent is for area so area must be productive. By exigencies one can make use of existing environments to create efficiencies and reduce risk and increase rewards.

This example has been used beautifully in premium sites whereby an existing ice-cream vendor Franchise can reduce their normal layout and share the space with a complimentary business usage such as cookies and coffee. Doughnut operators with Hot Dog vendors, Juice Offer with a Yoghurt operator etc.

We have seen national book retailers take space within large newsagents; international coffee vendors take space within large book stores, cafes within large furniture stores, service providers within other service providers, beauticians within hair-dressing salons etc.

In closing there is not one particular rule in choosing the best site for any particular business. There are a myriad of considerations and most of those can be measured and factored into any business model. The information and case studies used in this article were sourced from the Leasewise Group which specializes in providing information and representing the interests of retailers and Franchise groups within the retail industry.