Real estate is one of the key components to a successful retail business. The cost of owning or renting shop and/or warehouse space can take a big chunk out of businesses bottom lines.
So, to maximise the profits of a business, it is important to get the property side of things right.
We have seen many mistakes by sound retailers over the years, where they took sites that we rejected, only to close a relatively short time later.
Choosing the right site needs to take into consideration many factors including:
- Location relevant to the target market.
- Structure and layout of the shop.
- Lease proposition.
Failure to get any one of these right can lead to business failure. And there has been an increasing number of news reports about shop rents as the factor that killed many successful and long established businesses.
So with this article, we hope to help readers improve their retail site selection and improve their businesses.
With respect to choosing the right location, many business operators have an idea where they want to be. It is important that they spend time in their chosen locations and look for things such as which side of the road has more foot traffic, what is driving that foot traffic, if there is anything in the pipeline that could affect foot traffic to the site, and what are the permitted trading hours to the site. There can be many drivers of foot traffic, and the amount of foot traffic in an area and the sides of the street can vary throughout the day. Moreover, whilst some ites have huge amounts of foot traffic, the foot traffic may be “transient”, which may not translate into being the right site for certain businesses. So, operators not only need to ask is the foot traffic sufficient, but also is it the right type of foot traffic for them.
Factors that may affect foot traffic to sites include road works for rail, tunnels and new highways that bypass urban streets, and building works to the building the tenancy is in or to surrounding buildings. So it pays to find out what government works are happening in the area. With respect to permitted trading hours of a tenancy, one needs to consider whether they match the hours you want to operate. For example, you wouldn’t want a day-trading only site if you want to trade nights. On the flip side, if you only want to day trade, for example you have family commitments etc., there is no point taking a night-trading site and having to fork out rent for trading extended hours.
Other site considerations include what services does the premises come with, is storage included, will you need to do any works to the storage area to comply with any code, is there any licenced area you can get with the tenancy, what outgoings are applicable, what delivery access is there, and the term of the lease contract.
The structure and layout of a shop can have a significant bearing on the performance and viability of a business. For example, I used to work for Easy Way, an international tea franchise that had over 700 stores. They wanted to have a store on Hercules Street, Ashfield. At the time there was a convenience store that sold bubble tea – the category of product Easy Way specialises in, and there was a bubble tea store being fitted out in that street. Over a period of months, I inspected two shops on that street. I rejected both those shops on the basis of tructure and layout, even though the shops were in the desired precinct and both had high visibility and foot traffic. Interestingly, Happy Cup and Lucky Cup, other bubble tea operators took the sites. So now there was three direct and one partial competitor to a would-be Easy Way store. But I found a shop that was better than the competitors and explained to the franchisee why their business would succeed in the location I recommended and why the competitors would fail, leaving the bubble tea market to Easy Way. As I predicted, the other businesses failed and Easy Way is still in that shop today.
Given that our job is to find the best sites under the retailer’s parameters and avoid them having to waste time looking and possibly taking inferior sites, it goes to show from the example above how important it can be to have a professional tenant representative on your side. Interestingly, years later I represented Gong Cha – another bubble tea operator. There was another site available to lease on Hercules Street, Ashfield. I did not submit that site to Gong Cha as it did not tick all the boxes for me. Gong Cha took the site anyway. Ultimately that store lasted only a short time. So the cost to the franchisee of a failed business far outweighs the nominal cost of a tenant representative that puts the retailer first.
Furthermore, the design of a shop can impact businesses performance. We have assisted clients with ideas on how the design of a shop should be to maximise patronage, and how to get your desired design approved by the landlord.
The lease proposition is also important in choosing a site. And lease propositions extend far beyond rent alone. The proposition needs to take into account the location and other factors that affect business performance of the site. Some operators go for the cheapest site within a precinct, but then are unhappy with the turnover. So depending on your business, for example, whether it is destinational, such a strategy might work. And sometimes, operators have to go for the prime locations with rents to match. Some retailers get carried away with a great
site and end up paying exorbitant rents. Retailers need to have an idea of what their expected turnover would be, and then work back from there, working out their expected operating expenses to see what rent they can afford. To get a better deal on the lease, it helps to know what recent deals other tenants got in comparable locations.
Another part of the lease proposition are clauses in the lease. Lease documentation should always be checked by a solicitor. We generally review lease documentation and negotiate on the lease terms and conditions in an endeavour to protect our clients, before the lease goes to the client’s solicitor.
We always advise our clients that if the lease terms are not viable for their business, that it be better that we keep searching for a site where the terms stack up.
For retailers with existing leases, there may be scope to reduce your rent at lease renewal. So it is important to keep abreast of market rates so that when it comes time to enter into a further lease term, you are armed with comparables.
A lot of operators think by saving on the cost of a tenant representative that they will be in front, but we have seen so many examples where the cost of not engaging a tenant representative costs the retailer a lot more.
Jason Malouf has over 20 years of property and financial markets experience, analysing and negotiating leases up to $1,000,000pa in rent and has a reputation for getting the best deal.
Property & General was established in 2007. The agency provides premium Sydney property acquisition and national retail tenant representation services to get clients better returns on their businesses.
02 9387 7082
jason@pgcapital.com.au
www.pgcapital.com.au