Retail Portfolio Management: Renegotiating Your Rental Contracts

This is the second installment of a short series that dives into a few uncommon KPIs for successful retail portfolio management. Learn how traffic cost and footfall per hour can help you renegotiate rental contracts.

For many years, retail expansion was the main growth strategy in the brand retail world. More recently, however, brands increasingly face an under-performing retail portfolio. Realising that retail expansion doesn’t work without like-for-like growth of existing stores, brands are busy assessing their retail portfolios in order to focus on profitable stores and stores with potential for improvement.

One such improvement is to work on reducing rental cost. That’s of course easier said than done, particularly if you are subject to a 10 year contract without any early termination options. Nevertheless, many brands are currently taking this path and are in the process of renegotiating rents with their landlords, not only at renewal of expiring contracts.

In the first post in this series I wrote about the Footfall Utilization Index (FUI) and the Manning Factor (MF), two not so common KPIs that support retail portfolio management by helping you understand what issues an individual store within your portfolio might face. Here, I turn to two additional KPIs that help assess a store portfolio’s location quality and inform your decisions on whether to close a store, renew a rental contract or renegotiate rents with the landlord: Footfall (traffic) per Hour and Traffic Cost.

Retail Portfolio Management

Footfall in Shibuya, Tokyo (Photo: cegoh)

Footfall per Hour (FpH)

FpH measures how many consumers are entering your store on average per opening hour. It helps to assess your retail portfolio in terms of location quality within a defined store cluster. And it provides fact-based arguments when discussing appropriate rental cost with your landlord.

A lot of brands compare occupancy cost per m² and/or the ratio between occupancy cost and turnover. And sure, both of those KPIs are an important part of retail portfolio management. But they are not particularly useful for negotiating occupancy cost with a landlord. That’s because they have multiple dependencies on other (not location-related) factors, such as brand desirability, assortment, customer journey, logistics or store ops efficiency.

When renting a retail location, you don’t pay for the building as such or even the floor space you rent. Instead, you pay for the footfall potential a certain location offers. And that’s exactly what you need to measure in order to assess whether a location fulfills its footfall promise or not, respectively, which location delivers better or worse on its footfall potential.

Retail Portfolio Management

(Photo: Cam Morin)

Traffic Cost (TC)

A location’s TC measures how high the occupancy cost of getting one single consumer into your store is. It’s calculated by simply dividing your total occupancy cost by your footfall over a given period.

Landlords will often argue that it is up to you and your brand’s desirability to generate footfall in your stores. But comparing traffic cost of similar locations (1A locations with similar visibility, shopping center locations with similar adjacencies, etc.) can help counter this argument. In recent retail portfolio management projects, we found differences of up to 500% in terms of traffic cost between comparable locations and similar store sizes. If you want to take precision to a maximum, you can even calculate and compare traffic cost per square meter.

Retail Portfolio Management

All KPIs I’ve mentioned here (FpH, TC and TC per sqm, occupancy cost per sqm and occupancy cost in % of net sales) will help you assess whether a location is worth its occupancy cost or not. Add the traffic development index to the mix, and you will have all information needed to make fact-based decisions about every single one of your retail stores.

Retail Portfolio Management

(Photo: Burst)

You will know whether a store is too expensive for the footfall potential it offers, whether it’s perhaps too big, or whether it may even be worthwhile to look for a larger store in the same location. You will also gain clarity on whether to extend or renegotiate a rental contract, add a sublease clause, or terminate the contract.

Including such less common KPIs in your retail portfolio management will also help determine whether you and/or your landlord need to invest in better visibility (fascia design and far distance visibility) and accessibility, or whether the store should move to a different location (e.g. to a different floor or to a more relevant adjacency within a shopping center).

Many brands are currently engaged in these discussions with their landlords, to varying degrees of success. Using these KPIs will definitely add a level of objectivity and facilitates a fact-based negotiation with the landlord.

About the Author:

Heike Blank has worked for big organisations such as VF Europe and s.Oliver but also for niche brands such as Ecko Unltd. and Zoo York in top executive positions. Her extensive experience with opening and managing own retail, partner stores, concessions and shop-in-shop in 23 countries in Europe, the Middle East and Asia make her an expert in retail portfolio management and expansion. Get in touch with her via e-mail or read more from her here.

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