Foodco on the shopping centre versus the retail strip debate for franchises

James Fitzgerald, managing director of Foodco , operator of the 270-store Muffin Break franchise and Jamaica Blue franchise , is building the business to include more retail strip franchises.

“As a coffee maker our business is a mix of low average sales per head and high volume output. We thrive on high footfall and shopping centres certainly offer this, however over the past couple of years the tenancy mix in retail food has slackened, with no cap on the number of coffee businesses in centres,” he says.

“The rationalisation that has been occurring in the managed retail property market has seen some players pay more for shopping centres. This has put enormous pressure on them to recoup their investment by increasing rental streams. With existing contracts already locked in, the only way to get the rental stream up has been via kiosks, which often mimic existing tenants’ offerings.

“Real market forces will eventually bring sense back to centre managements and retailers in our niche are now being more careful when renewing leases.

“To be fair, the major centres realise their mistake and are genuinely trying to get this right again. The difficulty is that property managers have yet to appreciate that retailers have a choice when renewing their lease and that some centres will have a lot of space to fill.”

Shopping Centre Council of Australia executive director, Milton Cockburn, contends that people assume rents always incline upwards. The reality, he maintains, is that shopping centre rents are determined by the forces of supply and demand. For example, if a centre has a 10 percent vacancy rate, demand for leased space will be limited and rents are likely to fall. If there is less than one percent vacancies then demand for leased space is high and rents are likely to rise. Predictably, Westfield spokesperson Julia Clarke agrees with Cockburn, who adds:

“We have done a study in Victoria and found that 29 percent of renewed leases were less than the previous rent or the same. In Western Australia a similar study found 24 percent of lease renewals were less than the previous lease. These statistics do not support the view that landlords are charging excessive rents.”

If franchises were to try and address issues such as rent reductions by bargaining collectively, the Trade Practices Act would prohibit it, Milton claims.

“Retailers would need authorisation from the ACCC and even then they would still breach the Trade Practices Act,” he says.

Significantly, shopping centres have set a benchmark in terms of creating an attractive selling environment and strip shops have improved considerably in the face of this competition.

“A lot of people are tired of the ‘sameness’ of shopping centres. Retail strips offer variety and a personality of their own,” Fitzgerald notes.

Huntingdales Advertising managing director, Ross Kilpatrick, adds that shopping in a large centre can also be a half-day affair and people mostly find it hard work. Paying for $20 parking after a shopper has only spent $100 can be a major deterrent.

Debora Kapsiotis, managing director of Belly Button Maternity , says that street shopping is a “slow” shopping experience, perfect for her pregnant customers.

“We find locations that have cafés and are high in fashion, which are both inviting attributes for women. Since we’re a destination store, we can afford to locate on the fringes of major shopping strips. This reduces rent by almost 50 percent,” says Kapsiotis.

Belly Button has five stores in Sydney and Melbourne and has been approached by Westfield to take up space. While Kapsiotis is examining the option, she will only accept it if completely convinced by research currently being conducted by her property consultants, and only then to test the concept with a company store before offering it to franchisees.

Ella Bache CEO, Karen Mathews, says that while it is, of course, important to be cautious when choosing either a centre location or strip shop site, at the end of the day it comes down to the individual franchisee and their financial and risk threshold.

“Everything about shopping centres is extreme. Expenses are huge, the upfront capital invested is large, the rent is high, the hours are long, but the revenue potential is enormous. If a franchisee is a ‘growth junkie’ and risk adverse, then the shopping centre model is a perfect fit,” she says.

“We always encourage our franchisees to consider both options. We help them make the decision right for them. Our most profitable salon is in Chermside Shopping Centre outside Brisbane, yet our salon in Mosman, Sydney, which is a strip shop, is one of our more popular. In our business, both can work and work well.”

Pizza Haven director, Evan Christou, traditionally a strip shop advocate, now views parking facilities as a high priority in his business, and says only shopping centres can adequately provide this.

“Our business has seen a sea change in customer buying behaviour over the last four years – something experienced across all 120 stores. A large number of people are now coming in to pick up their pizzas. In the era of home delivery it didn’t matter what we looked like or really where we were located. Now that customers are coming to us we want to make it easier for them, as well as create an inviting ambiance while they wait,” he says. “New Pizza Havens are now located on the outside of shopping centres and we may even look at going inside food courts.

“Rent on strip shops might be cheaper but now that we do not have the cost of paying drivers, the two – rent versus wages – balance out. I think mini-shopping plazas with car parks will come back into fashion. They offer the convenience of parking, the appearance of a shopping centre, but with a neighbourly and friendly atmosphere.”

Holy Sheet franchising director, Edmund George, concedes that operating in shopping centres (half the total number of Holy Sheet outlets are centre-based) has substantial advantages, but in accepting that centre leases will always be more draconian than strip shop leases, admits some franchisees are put off.

“The location of our stores drills down to pure demographics. We sell to an affluent inner-city market and we need to be in the best locations to cater to that market. If a location and associated costs comply with our criteria we will recommend the site to franchisees. It is not a matter of whether it’s in a shopping centre or not – we assess both options against the same criteria,” he says.

It remains, however, that older shopping strips in the eastern suburbs of Sydney are suffering from the emergence of the new, glitzy Bondi Junction revamp.

Kilpatrick of Huntingdales Advertising believes it is something strip shops can and should learn from.

“Strip shop owners should mimic the shopping centre model, collectively work together and create their own marketing and PR team. Each shop owner has a job whether it’s building databases, creating promotional ideas or writing a newsletter. Together they can make their strip an attractive place for customers and even tourists to shop, just like Paddington in Sydney has with its Saturday market, which is a nationally recognised shopping destination,” he says.

In summary, it is probably fair to say that each individual franchise system is its own trendsetter. Certainly, franchises will not easily be seduced by industry rhetoric or glamorous shopping towns. Instead, they are sticking to their blueprint. More than ever before they are acutely aware of what best fits their business model and most effectively reaches their customers – be it inside a shopping centre, on the street, or both.

The Franchise Council of Australia is a not for profit membership organisation that is the peak body representing the franchising sector in Australia.