Committing to a new retail store lease is one of the most important decisions a retailer can make in setting up or growing a business. There are many pitfalls that are not that obvious at the outset for the untrained retailer who goes through this process, sometimes for the first time.
The total value of the commitment is often not realized, especially in shopping centres. In the below example of typical commercial lease terms, consider what the commitment will cost over the period of the lease, which is usually five years.
So let’s look at what you are committing to when you put pen to paper both at the upfront stage and over the term of the lease.
Based on the above calculation, the typical commercial lease terms add up to almost AU$ 1.5 million. That is a serious commitment for anyone. Yet we see retailers committing to a scenario like this without doing quality research and investigation into all aspects of building a five-year scenario for the business.
This is becoming more and more important as we enter a phase of lower bricks-and-mortar sales growth, yet we are locking ourselves in for significant annual increased costs.
The recent ruling that landlords now have to provide sales per square metre data for their centres helps, but that is only part of the equation in trying to assess the likely sales potential of a site.
We need to know that, but also how our business is likely to perform against that metric, and why we think we can match or exceed it, if that’s our forecast.
The most common mistake made by retailers is over-estimating the potential sales of a new store. This is one of the most important metrics that needs to be considered and understood why the business will succeed in that location.
In addition, we should consider the demographics and psychographics of the prime catchment areas, the level of competition within that catchment area, the average spend in the centre, any future developments in the centre and area, and the level of vacancies.
In terms of how your business will shape up, you should plan on the conservative side and know what occupancy cost percentage you can afford. Do not be tempted to exceed that as a percentage to sales. As a rule of thumb, a specialty business can afford a percentage to sales that is circa one third of the gross profit percentage. That is, if your gross margin is 45 per cent of sales, you can afford an occupancy cost of around 15 per cent. An occupancy cost percentage of 20 per cent will likely erode all your profit.
Few people ask for help in the lease negotiations because they do not know, what they do not know! Remember, you are up against leasing executives that are doing this every day and are trained and paid to get the most for the ‘space’ they are selling. It can be likened to a professional against and amateur. As retail gets tougher, their rental targets will also get tougher to achieve. If you are a ‘soft touch’ they could exploit that, and you could end up with a worse deal than was necessary.
For a relatively small investment in getting assistance in the negotiation, there is often significant money to be saved. If the base rent can be reduced by say 10 per cent, and a contribution of say 50 per cent of the fit-out costs can be negotiated, then the saving over five years would be circa AU$ 165,000, using the example above. People who know what and how to do it are achieving this on a regular basis in today’s retail environment.
Here are some tips to consider when negotiating for a retail premises:
Settling on the right lease for your business could have the biggest impact on your retail business. Don’t risk making a mistake, as it lasts a long time and has a serious impact on how your business will perform and could make or break your business.