There is a part of the Retail industry that is suffering and as reported by many newspapers and online channels, retailers are experiencing a difficult moment with their current Brick & Mortar business model. There is no denying that the e-commerce evolution in the last few years pushed retailers to “modernize” their strategies and quickly try to revolutionize their in-store experience. The change and adaption to the new consumer era didn’t happen as quickly as it should have.
To be clear, the e-commerce evolution is not the only reason why some retailers are struggling keeping their Brick & Mortar locations alive. The current business model on which landlords do business with retailers is old and must be updated; it just doesn’t work anymore. It is the same model used since the birth of the Shopping Centers and it must be changed.
Every business needs to evolve and adapt to natural and inevitable changes.
In today’s retail business, having fixed operating costs with a 10 year lease and no option to exit, is like being stuck in a marriage that doesn’t work and you cannot divorce. If a marriage doesn’t work, you need to exit and find one that does or understand if you even want to get married again. Maybe you just want to date for few years and see how it goes.
This is what Retailers and Landlords should do, date for a year or two and then get married.
I’m in contact with many retailers that have an extremely successful business in Europe with more than 700 stores opened in the past 10 years. They want to expand in the US and they are approaching the market trying to understand if their model can be successfully replicated here as well. It definitely can but, based on the current model, what are the parameters that determine if a location can even reach breakeven?
Based on my experience, the occupancy costs need to be around 15-20% of the annual revenue in order for the store to reach breakeven or even profit. Assuming a retailer gets a 1,000sf location with a rent around $200/sf in a prime Shopping Center (let’s forget for a moment street locations), the retailer needs to sell $1.3M probably just to breakeven. It means almost $4,000 a day. If you are not selling hi-end jewelry and your average sales price is low, it is very difficult.
The concept around street locations is a little different. There is a “Marketing/Advertising” factor that in many cases is important. A location in Soho or 5th Avenue in New York or Lincoln Rd in Miami, is an opportunity to showcase the brand to millions of customers every year. A new store concept creates a “buzz” that brings a line of customers outside their doors. These locations can “afford” to lose money at the end of the year. But the others instead, must reach the projected budget or the business doesn’t survive.
Retailers must be offered the opportunity to “try their model” first. Open a pop-up, keep costs low, see how it goes and then expand. If they have already hundreds of stores and many of them don’t perform, convert the rent from fixed to variable based on sales until they are back on track. Landlords must provide flexible solutions, alternative locations and have an open minded approach especially with newcomers.
Do you think the retailers inside the newly open World Trade Center Mall are satisfied? Unless you are Apple or Eataly (not quite sure if they meet their sales budget at this location though) the rest are suffering paying rents in the $500,000 plus a year and paid an unreasonable amount of money to build their stores. The rules & regulations imposed by the Port Authority and Westfield delayed and dramatically increased the construction schedule and costs. Unfair for the retailers.
On top of high occupancy costs, retailers also need to consider the capital needed for building or remodeling their locations. Costs vary between cities or malls, Union or non Union and of course the design. Many landlords impose the tenants to use Union labor. I believe tenants should be free (since they are the ones paying) to use the Vendors they prefer based on costs, reliability and quality. Landlords, most of the times, require in the lease the design to be top of the line. I understand landlords want to make sure the image of each store, especially in their high-end centers, matches with the one of other tenants and in many cases they provide a tenant allowance for the build-out, but the overall investment for retailers that want to expand their successful business in the US is still too high.
E-commerce giants like Amazon, that sent book stores out of business, are now opening physical stores in major cities. Warby Parker, Bonobos and Indochino have been expanding in the physical space.
Brick & Mortar locations have been the core business for decades for every single retailer and they will continue to be; but we need to adapt to natural and inevitable changes. The Landlord/Retailer relationship must be revolutionized, shaken up and disrupted.