The 5 Golden Rules of reducing your occupancy costs: Rule #1

A neurotic is a man who builds a castle in the air. A psychotic is the man who lives in it. A psychiatrist is the man who collects the rent. – Jerome Lewis

Let me be honest: this piece is not about the 9 per cent of retail on average that is done online, and it’s a bit bereft of sexy buzzy terms. It’s about pure implementation strategy for the physical shop or channel retailer looking to grow, renew or even just renegotiate their lease

On average 91 per cent of retail is done in physical shops, and approximately 85 per cent of shops nationally reside in shopping centres. Talk of their demise is somewhat exaggerated, but they do have to adapt, and many are doing so.

In fact, we know that average sales are generally higher when there is a physical presence within an omnichannel offer, and interestingly, physical shop openings across the US, UK and Australia are rising again as a ratio against closings over the last three years .

There are 1338 shopping centres in Australia, predominantly located on our eastern seaboard attracting 85 per cent of overall shopping visitation from a national population of 24 million consumers. That is approximately one shopping centre per 17,937 Australian consumers. By comparison the US currently has 320 million residents with 1100 enclosed shopping centres.

As you can see, we have a very concentrated retail trading environment with a multitude of space available and high concentration in our capital cities. So how do rental levels get so high, and what can we do as retailers to lower these costs?

A tale as old as time

Since the beginning of time there have been landlords and tenants with both parties looking to maximise their investment. Centuries later this basic principle of the landlord-lessee relationship still exists, and in today’s retail economy the topic of occupancy costs, being the ratio of rental paid to sales generated, achieves more focus than ever.

As a tenant, there are a number of opportunities to drive down the occupancy cost to achieve a more sustainable business, which is of benefit to both the landlord and the lessee.

Let’s examine two potential scenarios. As a retailer you might be:

  1. A prospective tenant at a shopping centre
  2. About to enter into a lease renewal as an existing tenant

Regardless of your situation, there are five Golden Rules for driving down occupancy costs that are applicable in both circumstances. Here is the first one.

Golden Rule #1: Research, research, research

Gather as much knowledge as you possibly can about the centre’s performance, category and customer profile. As simple as it sounds, I am often intrigued to hear of leases been signed without the research occurring. Some possible research methods include:

RBWA: Research by wandering around

Stand outside your prospective tenancy and watch the quantity, type and patterns of the customer flow to find out who is in the area and how they behave.

Are these customers on a mission and racing past the proposed tenancy, such as moving to the car park, food court or to a major? Or do you see them genuinely shopping in the area of your tenancy?

Talk to existing tenants and watch the “peel off” of customers into their tenancies to see how many customers are actually entering and shopping nearby stores versus just passing by.

Make sure you observe all segments of the week. For instance, check out Monday mornings, mid-week afternoons and late night shopping night, as well as the weekend.

Know the demographic profile the centre draws from

Are the proposed position of your tenancy and the surrounding tenancy compatible?

This data is available through online census data or from the centre marketing manager. This information will highlight the origin, shift, age and disposable income profile of your primary and secondary customer catchments. In addition, councils can provide useful information in this regard.

What type of centre are you proposing to tenant in and what are the anchors? Is the centre anchored by majors or is it a food-and-convenience centre?

Understand the centre’s performance

Understanding the performance of the shopping centre that you are about to occupy is another critical component of the research phase. The centre manager and marketing manager are knowledgeable sources of the information you require. As a contributor to the centre performance, you are entitled to fully understand the centre in which you are about to do business.

Here are the key performance indicators you should discuss in a pre-tenancy meeting to help you determine the centre’s performance:

  • GLA: gross lettable area of the centre
  • MAT: moving annual turnover and per cent movement on a PSM basis
  • PSM: sales per square metre for both the centre and the respective category
  • Customer traffic per annum and per cent movement on prior year
  • Average spend per customer: Note that a high average spend may be an indicator of affluence in the primary demographic or low customer traffic and the reverse applies.
  • Category performance and per cent movement PSM on prior year

Align your marketing calendar with the centre

Now that you know more about the centre and category performance, the following should be covered in discussions with the marketing manager.

  • What is the centre marketing plan? (including the demographic profiles)
  • How can you fit into this marketing plan and what specific marketing promotions are relevant to your business? Incorporate these into your own marketing plans. Remember that you pay a marketing levy and are entitled to utilise part of this investment within the centre marketing plan
  • What category promotions have worked and how were they measured?

Being an active part of the centre’s marketing calendar should increase sales and in turn drive down occupancy costs.

Further questions to approach the centre and marketing manager with include:

  • What is the centre car park capacity and proximity to public transport? How close will you be to an entrance and what percentage of the centre traffic does that entrance way attract?
  • What, if any, are the proposed extensions to the centre and could your tenancy be affected in any way?
  • What is the history of the previous tenant and why did they leave?  It is worth mentioning that previous leases are registered and held as a public record with the *Land Titles office.

*Generally speaking leases are often registered some 12 months after commencement and provide an indication of previous or current rentals being paid within a shopping centre.

Come back next week to learn about Golden Rule #2, which is all about gaining a comprehensive understanding of your lease proposal.

Brian Walker is founder and CEO of Retail Doctor Group, a retail advisory and consultancy group and the Australian elected partner  member of the global retail expert’s alliance Ebeltoft Group.

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