30 Aug 2019
In Sydney, Chemist Warehouse is renowned for retail site locations outside major malls, typically on the main streets at the hub of the suburbs. There are many reasons for this obvious retail site selection strategy - firstly, the rent is lower. And Chemist Warehouse is a destination store, meaning customers will travel out-of-the-way to get there. There is no need to be in a mall. For retail businesses that require foot traffic, shopping centres are more suitable. This is because large shopping centres have massive foot traffic and these businesses rely on it. Cafes, fruit shops, food-court vendors are examples of businesses that rely on this retail site selection strategy. However, for Chemist Warehouse, the number of customers they attract each day is massive. So much so that they need multiple stores on the same street to cater to the demand. They don't need traffic from shopping malls. They generate their own "gravity of traffic" by their sheer pulling power. Chemist Warehouse is an anchor store in their own right.
Anchoring your small business next to a large retailer is a great idea...but expect to pay more in rent (Photo: Pixabay.com)
The Importance Of Anchor Stores
Shopping centres know the power of anchor stores to attract traffic. Anchor stores such as David Jones, Myers, Woolworths, Coles, Aldi, K-mart, JB Hifi, cinemas and the likes attract traffic. That is why shopping centres will do whatever it takes to get them into their centres. These large retailers are on very special lease terms. I once saw the lease terms for Myer at this particular shopping centre in Sydney. In this centre, Myer was paying around 1/10 of rent paid by other retailers per square metre. The cafe owner at the food court was paying almost 10x more rent per square metre. This answered my curiosity on how these larger retailers are able to turnover a profit despite the purported massive rents charged by these centres. Other savvy franchise retailers uses retail site selection strategy that that feeds off the anchor store. For example, a health-food franchise store that is located next to Woolworths knows that it should achieve around 4% turnover of what Woolworth is doing. If a Woolies does $25 million turnover a year (which is very normal for a Woolies store), then the health food store should turnover $1 million per year (4% x $25 million). While this is a little piece of useful trivial for small shop owners, shopping centre bosses know this too, and they will charge you premium rent for it. So this kind of cancels out the benefits of this retail site selection strategy. But what if you could get next to an anchor store without paying a premium?
Little Known Retail Site Selection Strategy
I walked past a Chemist Warehouse on a main street and saw the crazy traffic that permeated around the store. Next to it was a newly opened beverage outlet. Unbeknownst to most, this beverage outlet had the perfect retail site selection strategy. It had attached itself next to Chemist Warehouse and its turnover can be assured against the sheer volume of traffic that gravitates toward Chemist Warehouse. Commercial properties outside the major shopping centres are typically held by different landlords. Landlords rarely understand the implications of the external retail environment except to collect rent that they feel is fair for their own property. Unlike shopping centres, there is no science to retail site selection and rent. This means that you can get yourself next to an anchor store like Chemist Warehouse without paying any premium rent that a shopping mall will charge you. Generally, rent outside the major shopping centres are lower because there is presumably less traffic. If you are a business that depends on heavy foot traffic, you might be better off in a shopping centre... but that is of course if you can get yourself next to a Chemist Warehouse (or another anchor store).
The Risks Of Anchor Store Retail Site Selection Strategy
What if the anchor store decides to leave? In a shopping centre, large retailers generally sign very long leases of perhaps 10-25 years. However, their lawyers will ensure that there are always exit clauses to terminate their leases. As a small retailer anchored to a large retailer, the risk of an anchor store leaving suddenly is small but real. I have seen it happened. I saw a Coles closed in the Western suburbs of Sydney after decades. Anchor stores may leave abruptly due to distressed financial situations too (case example: Plans To Close 30 Big W Stores As Profit Tumbles ) But this risk is present regardless of whether the anchor store is in the shopping mall or outside the mall. I'd rather take my chances outside the mall given the immediately pay-off in lower rent.
Anchor stores can close abruptly. They are not immuned to market forces. (Photo: Pexels.com)
As a small business retailer, you should calculate your initial investment against the profits you will earn by the terms of the lease, not by the price you will get when you sell. (This is because nobody will know what will happen in the future and you cannot bank on the possibility of selling your business in the future as a mean to recoup your initial investment)
For example, if your initial setup cost is $250,000 and your lease term is 5 years, you should anticipate enough profits in the 5 years to cover this initial investment. If your net profit over 5 years is $1 million, then you would have made $750,000 over 5 years (less the initial investment of $250,000).
Why is this important? This is important because while the anchor store may sign a lease of 25 years and likely to stay for 25 years, you'd only need 5 good years to make your profits, and every year after that is a 'bonus'. If and should the anchor store suddenly pack up and leave, you'd have had a good run.
Therefore, if given the option, a savvy retailer should take a location next to an anchor store with the lowest rent possible because this will maximise the profits over the term of the lease.
The next question is, what if the anchor store leaves within your lease term? This is a risk you take as a small business owner, but this risk is real whether you are in a shopping centre or not. However, if the anchor store is a public company like Woolies, you can obtain publicly available information and assess their performance (and draw conclusions about their likelihood to stay to the end of their leases)
If you decide to station your business outside a shopping centre in your retail site selection, your concept should prosper without traffic from an anchor store anyway. Thus even should the anchor store leave, your business should still remain profitable (albeit less profits). You should not bank your entire business strategy on traffic from the anchor store.
The Trap Of 'Balanced Retail Mix'
There is the argument that large shopping centres will consider a proper retail mix within the centre and thus protect small retailers. And small retailers should stay in the 'relative safety of the mall' because 'it's a jungle out in the streets'.
The argument goes that the centre management will not allow two fruit shops or multiple cafes near each other because this is not 'good retail mix' and 'detrimental to customer experience'. Well, I have not personally seen a recent lease contract where the shopping centre has agreed to a clause that restrains the centre's ability to lease.
In fact, the opposite has been true. I have seen a lease renewal contract where the centre management has withdrawn a clause that would have protected the retailer from other competitors within a certain distance. Small businesses should not be lured into a false sense of safety from competitors by a 'balanced retail mix'. The mall is still ultimately about tenancy and profits.
And I have definitely seen multiple competitors in extremely near proximity of each other in a mall.
While you can never be quite sure who your neighbour retailer will be on the streets, the same can be said of a shopping centre. I would not want to pay premium rent if there is nothing enshrined in the lease contract that protects the business from competition.
All things being equal, I'd take my chances next to an anchor store on the streets when I make my retail site selection.
Josh Foo contributed to this post.
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