How to reduce the rental rate

Moscow. October. Expocenter. Business forum on children's retail. To the speaker’s question: “And who has the crisis about which so many have already touched personally?” No more than 15% of the participants answered in the affirmative. The judgment “Fortunately, not more than 15%” or “So far not more than 15%” is a strategic, tactical and political issue. But just in case, it is better to lay straws and calculate the pessimistic scenario of trade development. And that means possible actions to reduce costs. As one of the options, the CEO of Retail Solutions, Alexei Baranov, offers to "work" with landlords to reduce rents. In his opinion, this is possible both at the conclusion of a new lease agreement, and with the extension of the old one.

Alexey Baranov - CEO of Retail Solutions. For more than three years, he has developed a network of stores of a foreign sports brand in Siberia, has extensive experience in developing retail business in the fashion sector.
www.retail-solutions.ru

- Alexei, please tell us how you can negotiate with the owners of retail space to reduce rental rates?

- You need to understand the pricing system of shopping centers. They have their own rate of return, according to which they plan to recoup the shopping center in 5, 7 or 10 years. Much depends on the location, conditions and volume of investments in the project. In shopping centers built on good transport interchanges with attractive infrastructure and favorable consumer traffic, rental payments are higher, and therefore the return on investment is shorter. Accordingly, one must understand that each developer has its own "floor" and "ceiling" for the rental rates at which they play. First, he gives you the highest price, and if you are a small retailer, you are less likely to knock it down. How can I do that?

If you get into an existing shopping center, then first of all, find out the composition of existing tenants.

It’s good if you have a store that successfully fits into the pool of tenants represented in the shopping center. This means that a particular shopping center wants to see you at home, and you can play it.

How to make you want to see?

I’ll tell you about the stores of the Italian clothing brand Marina Yachting, with which we work. In Europe, it is positioned as a brand for the category of people with an income above the average. In Russia, the situation is still different, with us Marina Yachting is considered a premium brand. Therefore, we try to get into the corresponding shopping centers (for example, Metropolis on Voikovskaya) among similar brands. To get the rental rate we need, we held a detailed presentation for the management company of the shopping center, showing the quality of products, brand features, premiumness and positioning.

At the same time, you need to draw up a business plan for the store in a particular shopping center.

Let's assume that retailers are trying to return their investments for 1,8 – 2 years. The net profit for clothing retail can subsequently be about 15% of the turnover (of course, a lot depends on your margin, the quality of staff work, etc.). At the same time, the costs of personnel, utilities, security, light within the same city will not vary greatly. Knowing the statistics of sales for stores opened in similar shopping centers, owning retail indicators (service ratio, average check, number of units in a check, window capture rate), you can easily predict the turnover in a new one.

Using these data and including different rental rates in the business plan, you can draw up several development options with different payback periods and show these options to the owner of the retail space. Often, after comparing these options, people are ready to engage in dialogue and set an adequate rental price.

The retailers consider the percentage of turnover to be the optimal comfortable rental rate (for one of our objects we achieved a rate of 18% of the turnover). Some stores are heavy, but operate with a rental to turnover ratio of 30%. But remember that the owners of retail space lay in the lease and annual indexation at the inflation level.

- What are the benefits of such a practice?

- In one of the cities of the central region of Russia, we have a client who, three years ago, owned only one jeans store. Today he manages a retail network of more than 40 stores with 16 brands (sports, fashion, accessories). In the newly opened shopping centers, he stands up with a line of 6-8 monobrands on each side of the pedestrian corridor, which allows him to receive a rental rate at the level of anchor tenants (the total area of ​​monobrands reaches 2500 sq. M). The brands he manages correspond exactly to the needs of the target audience of shopping centers, and only with his stores does he attract the traffic of customers to his “oasis” (in our case, these are middle-price brands). As a result, if ordinary stores open at 630 y. e., then he enters the mall at the rate of 350 y. e. per sq. m per year.

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One more example. Shop area of ​​259 sq. m in a large shopping center on an urban scale. The room is on the ground floor (good traffic and proximity to the escalator). Condition at the time of delivery - under the finish. The option of renting for 5 years with annual indexation of the 20% rate was discussed.

At the first stage of negotiations, the rate was:

• 1 year: 13 500 rub. per sq. m per year
• 2 year: 19 000 rub.
• 3 year: 27 000 rub.
• 4-5 years: 29 000 rub.

As a result, we managed to achieve the following rates:

• 1 year: 10 000 rub. (Savings for the year 907 536 rub.)
• 2 year: 12 500 rub. (Savings for the year 1 683 496 rub.)
• 3 year: 15 000 rub. (Savings for the year 3 108 000 rub.)
• 4-5 years: 17 500 rub. (Savings for the year 2 978 492 rub.)

Total savings for 5 years - 11 656 016 rub. With an annual indexation of no more than 20% on average per year for five years of rental.

The second important point where you can save is an insurance deposit. The standard conditions for the deposit are equivalent to the amount of a three-month lease (in our case, 647 241 rubles). We managed to agree on one month, which allowed us to keep a significant part of the money in circulation. No less delicate issue - terms of payment of the deposit. As a rule, the landlord requires a deposit of money one year before the opening of the shopping center. We were able to agree on a deposit three months before opening at the time of transfer of the premises for finishing work. You can calculate the profit from the amount of 647 241 rubles during the turnover of 9 months yourself. A competent presentation, a real picture of the economy of the store, and statistics of nearby shopping centers helped to achieve such results.

The third important point that needs to be discussed “ashore” is investments in terms of inseparable improvements. On the one hand, the repair of the premises is the tenant’s concern, and on the other, these investments increase the lessor’s capitalization, since upon termination of the contract, floor tiles, display cases, fire extinguishing systems, and the installation of ceiling and partition walls will automatically become the property of the lessor. If we take into account the shop window with a length of 8 m, then such a shop window can cost about 1 million rubles. Therefore, I propose to insist that a showcase, ventilation system, etc., should be provided to the tenant upon entering the territory, especially since all this is an inseparable element of the store. Upon termination of the lease, they in any case remain to the next tenant.

It is worth discussing in advance the timing of exit from the project subject to a negative budget.

In case of losses resulting from trading activities, we must reduce the exit time at the stage of signing the contract. This was achieved by agreeing on a clause on leaving the project at the initiative of the tenant. As a rule, the owners of shopping centers are interested in a long exit period, in our case it was nine months.

Loss 150 000 rub. per month for 9 months turns into 1 350 000 rub. 

- So far, we have been talking about concluding an agreement with a new landlord. When extending a lease, will the action plan be similar?

- It is better to initiate the issue of reducing rental rates even before the moment of re-signing the contract. I would appeal with the figures of the real economy of the store (% of visitor acquisition, traffic in the shopping center, average bill,% of service). This must show that the economy of the store cannot be positive at the current level of rental rates. Naturally, everyone considers% of turnover to be the most interesting option.

We conclude: in order to achieve a rate reduction, it is necessary, firstly, to prepare a high-quality presentation for the managers of the shopping center and, secondly, to develop a business plan, to make several forecasts of turnover and payback for different rental rates and deposit conditions, and thirdly, prove with numbers that the current rental rate is high.