There are many different ways to set up shop, from mobile retailing to a raft of lease options.
Location is crucial; mistakes are expensive. Stephen Spring sets down the major considerations for serious research and planning.
In retail, few mistakes are as permanent or damaging as the wrong lease or the wrong location. Most retailers are anchored to their premises, and location and lease are the major factors in business success.
A good retail business fills a gap in the market, but needs a written business plan before choosing premises, a task that’s mostly science, part art and part experience. If you need to lease premises, negotiating the right lease terms is mostly a matter of experience, so if you’re not sure, get advice before dealing with landlords or agents.
The first consideration is, do you really need to commit to retail property at all? Retail leases are typically for five years, and average specialty shop rents will cost at least $250,000 over that term. Shop fit-outs are often hundreds of thousands of dollars or more.
This is where mobile retailers can save. Many retailers save rent and reallocate it to advertising and marketing. Their van signage, brochures and catalogues, become their ‘shopfront’ as they visit customers in their homes, offices, in coffee shops or anywhere. Mobile coffee, sandwiches, carpets, juice, auto, promotional, household appliances, soft/hard furnishings can all operate this way, and storage or manufacturing are usually low rent industrial parks or home garages. Many are supplemented by the internet, now a powerful force in retailing. Without expensive retail rents, pricing is more competitive and the range more expansive. The major drawback is immediacy; customers can’t touch and feel the offer. Apparel and hardware, for instance, have difficulty marketing on the internet but some home delivery food retailers have had tremendous success.
Location Planning
If the less risky options don’t appeal and setting up shop is required to get you started, caution is paramount. Signing a shop lease or purchase contract is the last step in a long process of planning, research, questioning, observation and negotiation. Protecting yourself from being suckered into a bad deal means investing time and money self-educating and seeking advice.
Beware of retail property professionals well versed in traps for the unwary. A few unethical ones don’t play by the rules despite specialised, descriptive and detailed retail leasing law designed to bring an even hand at the negotiating table. Any underhandedness by the landlord or oversight by you can cost time and money, so work closely with an adviser if inexperienced. Lease terms and conditions protect the landlord’s legal and financial interests and narrowly define and limit the rights of tenants, so be careful.
Before contemplating locations, you must know your retail concept inside out otherwise it’s impossible to finalise a realistic business plan. Fully understand cost of goods, labour rates, controllable and uncontrollable expenses, stock turns, facilities and space needs and financing. See your local trade association and retail consultants and speak to suppliers about what makes the industry tick. Only then start looking for a location.
Location Options
There are many types of shopping centres or malls, from neighbourhood centres (supermarket and few specialty shops) to bulky goods centres (homemaking and big box shops) to regional or super regional, with department store, discount department store, one or more supermarkets and hundreds of specialty shops.
Regionals are retail powerhouses, drawing from a wide trade area. In general they have the greatest sales per square metre than other locations, but the price of entry is high. Mall management dictate costs and fit-out quality, lease terms are complex and renewals can also be difficult to navigate. Lease lengths are generally five years and management require your monthly sales figures to work out your profits, to maximise the rent you pay. You will likely pay part of the centre’s upkeep, management salaries, and contribute to a marketing fund to advertise the centre. Super regionals are normally high traffic, high rent, and extremely competitive environments often with lawyers, management and leasing teams that can seem quite ruthless.
Many super malls dominate large parts of regional retail, but some of their retailers struggle for profits while others do well. In recent times specialised centres have become popular—factory apparel outlets, speedy drive-through, auto-only, furniture and hardware—and each has its place, but be aware that retailers within them take on the characteristics of that mall and if it isn’t a good one, retail success will be harder.
Street-front or strip shops are normally leased by real estate brokers on behalf of local owners and also require very careful evaluation. Overall, as well as less foot-fall and tighter council zoning restrictions, you rarely get mall-style car parks (read: customer lifeblood), all-weather protection or a critical mass of retailers enticing large volumes of shoppers for high impulse sales. Despite obvious charm, street-fronts are normally older and will generally attract only local trade, thereby making them suitable for only certain types of retailers. However, lease terms are usually more flexible, rents and other charges are generally much less expensive, and seaside, tourist, and high street town centres can be thriving retail hubs.
Location Details
Assessing the details of every location type is beyond the scope of this article so if in doubt, get help. List your needs and set out objectives before onsite inspections and property negotiations. For example, do you need special council permission, grease traps, loading areas, parking, waterproof and secure storage, large display areas, long and deep windows, high ceilings, signage space? Ask probing questions about the property’s history, neighbours, development plans, underlying condition of premises, what’s provided, what’s not. Get proper answers and take detailed notes, even photographs, establishing a file on each property. For your business plan, you need to know the rent/outgoings; the term in years and any options; the usage; the rent escalation mechanism; any proposed rent based on turnover; any demolition clauses; hours of trade; security deposits or bond; when the lease commences; any incentives or inducements; and anything the agent knows about the property that is likely to affect your business that you should expect to know.
Keep your business plan firmly in mind and bargain hard to get what you need, and be prepared to walk away if you can’t.
* Stephen Spring is a consultant for Australian Retail Lease Management. He can be contacted on (02) 9968 4775 or visit www.retaillease.com.au
Golden Leasing Rules
1. Know your target customer. If you don’t truly understand your core customer, you will fly blind.
2. With a geographic region in mind (likely to be close to home), get a detailed map and determine the trade area. It’s impossible to know where customers will be come from without knowing the area you will serve.
3. Recognise market st
ructure. Every suburb has one, including physical and psychological barriers, socio-economic characteristics, roadway patterns, commercial and industrial concentrations, among other considerations.
4. Analyse factual demographic data within the target trade area. Get hard evidence on population and pedestrian traffic data. List population, households, age, ethnicity and income expenditure levels over time. Test it all with field work by driving, walking, and sitting and observing.
5. Ensure adequate accessibility. Customers must have access to an area, to a particular site, mall or suburb. Unless the business is highly specialised, poor access is rarely overcome by reputation or promotion when competition is plentiful.
6. If employment dynamics are a key driver of your business, check time-frames very carefully. For example, many food retailers rely solely on breakfast and lunches, usually related to employment in the area.
7. Identify and document all major and minor activity areas. Activity is people and people are potential customers. Detail all characteristics of commercial areas, malls, office concentrations and other drawcards such as transportation, drive-times, vehicle densities and entertainment hubs.
8. Study local habits and patterns because people are habitual. Take your time, observe the people movement carefully and chat to local traders, it is surprising how much they will talk about an area. Conduct a survey. Find the ’ant track’ and get into the pattern!
9. Evaluate competition properly. Most retailers think they are unique, but the majority are not. Your new outlet must impact the competition enough to draw sales away from them and make yours profitable. In our over-saturated market, competition is such a significant hazard factor, determining and measuring its effect is critical.
10. Understand visibility and exposure. Become skilled at recognising what’s critical to your type of retailing.
11. Realistically estimate potential sales by day, by week, by month and, importantly, by seasons.
12. Start evaluating retail property economics. Note that this is the last task in the location hunt because unless all the above is adequately met and costed, leasing and fit-out expenditure is irrelevant.
