How important is it to choose the right site?
Over and above all the ways the right site can influence the success or failure of your business, lease agreements are even tougher to break than a marriage. Once you sign on that dotted line it is very difficult to walk away before the lease is up. You need to be 100% sure that the site you choose is the right one and that your business can afford it.
What should a business owner think about before signing the contract?
There are a number of important factors to take into account, but if we break it down, the core factors to consider are target market, where your competitors are situated (and fellow franchisees), rent vs location, size of the store and geographical area. More often than not choosing a location is a compromise between the ideal and what you can afford, and all these factors play a role in how much rent you can pay each month.
What impacts rental costs?
The geographical area, target market, size of a shopping centre, how large the store is and where in the centre it is situated – all these factors influence how much rent the landlord will charge. A store tucked away in the corner of a shopping centre will see far less foot traffic than one at the main entrance. Being situated next to one of the centre’s flagship stores will also ensure high foot traffic.
What happens if the store does not meet expectations?
There are always risks involved when choosing the right location, but it’s important to evaluate what those risks are and include them in an exit clause when signing a lease. If you haven’t got an exit clause and a major change occurs that leaves you dead in the water you have no re-
compense – you are still locked into your lease.
What types of scenarios could be included in exit clauses?
For example, if you are choosing to lease a store in a centre because of a particular anchor store, and that store leaves, you could stipulate that without that particular brand in the centre your lease expires. Another example is store positioning. If the centre does renovations or changes and your position – without you moving – is no longer as desirable as it was, an exit clause can protect you. Finally, how many similar stores are there in the centre? Three coffee shops are fine, four might be too many. Your landlord cares about rent, not how well your store does. If you want to limit competitors in the centre you have to insist on this point.
How many competitors are too many?
That’s an interesting question, because competition isn’t always bad. ‘Accumulative attractiveness’ refers to the grouping of similar stores, but that grouping brings you customers. They might not always come to your store, or buy your product, but they are attracted to the choice that a number of brands grouped together offers. You need to overlay your competitors with the size of your market and its buying power. Even a big market can be too small if there are too many competitors, but if you are isolated are any potential customers going to find you?
What does ‘complementary attractiveness’ refer to?
This is slightly different to accumulative attractiveness. Complementary products allow consumers to get everything they need at one centre. A large mall or a moto city are good examples of this. Moto cities will have a range of different brands that all cater for motorists, and even if some of those brands overlap, the abundance of choice will attract consumers.
What do the terms micro and macro location mean?
A macro location is the shopping centre. The micro location is where you are in that centre. When choosing a location you need to take both into consideration. You need to think about which target market frequents the centre you are considering, how close it is to main roads and freeways, which brands make up the flagship stores and how big the centre is. The micro site’s rent will largely be based on the size and positioning of the store, and the fitments it has in place.
How important is the size of a centre?
Very. You get three types of centres. Convenience centres, large malls, and centres that are in between. Anything that is not either very large or a convenience centre is high-risk. It’s too big to have a big open parking lot and be quick and easy for shoppers, and too small to offer real variety.
What should a tenant pay for a site?
Before you can make a judgement on how expensive rental should be, you need to understand your industry’s optimal ratio. Every industry has one: the trading density you need per square metre to make a profit. The expected performance versus production that dictates how much space you need and what your turnover will be. Again, it’s a case of compromise. Find the best spot for what you can afford. There is no point finding a cheap site, if you don’t get feet through the door. Similarly, you don’t want to pay more rent than you can afford.
How much research should prospective tenants do?
Research is essential. You need to understand your area, target market, competitors, the centres in the area, the size of the store you need, what you can afford to pay, and the percentage of market penetration you expect to get. But, and this is important, when you find a site, don’t wait too long to make a decision. If it’s a good site there will be other prospective tenants waiting for it and if you snooze you will lose.
What red flags should immediately warn a tenant off?
The first is failed tenants. Yes, stores fail, but not everyone is wrong all of the time. If stores keep failing in the same location, there is probably a reason why. Unless you know what that reason is and you are absolutely certain your store will be different (based on facts, not confidence) don’t take the space.
Second, if the centre as a whole has a high number of vacancies, don’t take a lease – even if the rental appears cheaper. There is a reason tenants are leaving or failing. Rather pay more for a good landlord or busier centre. And finally, look out for any potential site killers. A good example is how much money the site will cost you. If you need to refit the store, fix the airconditioning or put money into the store that you won’t recoup, rather look elsewhere.
Is it better to take a store that isn’t first choice or to wait?
Obviously you don’t want to wait too long, but don’t lock yourself into a lease that isn’t right either. In the long run it will cost you money or even hurt your business. You will need to compromise, sure, but compromise doesn’t mean settling for the wrong site.
How important is the micro site if you have found the right centre?
The actual site you choose is more often than not a compromise. You need to balance what you want with what you can afford. However, often for a bit more rent, you get a much better site and generate a far higher turnover. Nando’s in Sandton City recently moved to a better site. The centre is excellent, so any site would be good, but the micro site is still a key factor. For marginally higher rent that store has doubled its turnover.
For more information, contact Stephen Walters on +27 (0)11 712 1739 or visit www.fernridge.co.za