The success of retail business owes much to site location and rental costs. So what are the experts seeing in the market and how can franchise buyers best approach the gnarly subject of landlords and leasing? 

 

There’s now a better leasing sentiment in the market place, more activity and demand for space according to Gavin Nixon, development manager at Hairhouse Warehouse. That’s in part due to a major shift in the demand for space with international brands such as Zara and H&M coming in to the Australian market. Their appetite for space is on the increase. Add to this the concentration in shopping centres on the specific retail mix that brings in the customers.  

 

As Ange Kondos of Leasewise explains, “There is a huge push toward food tenancies and creating ELP areas (entertainment leisure precincts) by the shopping centres as food and lifestyle is the single most important category that is showing growth. Every new development is based on ELP and many existing malls are remixing fashion and general merchandise to introduce this.  

 

“Franchises in this category have never been better placed to take advantage of the demand the market has for what they have to offer. We have seen double digit growth for Degani and Schnitz in this space,” Kondos says. 

 

Competition is going to remain fierce, Nixon believes. “There is no back-off or let-up in sight. There are a lot of publicly listed companies and they are measured in terms of how profitable they are, and organic growth. That means expanding their retail reach.” 

 

In order to meet demand, rather than building greenfield venues, shopping centre owners are redeveloping existing centres. And while that creates extra space to bring in new tenants, there remains pressure on square metrage, Nixon says. He emphasises that for any franchise buyer, when looking at leasing space the key consideration it that it is all about supply and demand. “When space is in demand you will find rentals are stronger than when demand is low and leasing vacancy levels are high.” 

 

The reality is that not everyone is getting same store sales growth and in most systems there is a focus on increasing customer traffic and basket spend through marketing campaigns. 

 

But there is “bullish optimism” says Nixon, because low interest rates are helping access to finance to develop franchise networks. 

 

“Franchise brands accredited with the big four banks can have a cashflow lend on the capital cost of the business,” he says. “It’s easier for more franchise brands to lease because of the cost of funding, though the cost of entry remains the same.” 

 

As landlords have kept a tight rein on the rents, so franchisors have adapted to find alternatives to the high cost sites. Kiosks are a typical response but even these mini locations are now in high demand and consequently, have seen prices rise, says Nixon. 

There are advantages of course to being in a franchise system when it comes to lease negotiation but the big brands can still lose a location to a competitor happy to pay above the market rate for a site.

 

“Landlords are in the rental business, their job is to maintain and increase rent and increase value,” Nixon says. “Another common fact is that they can offer a nice soft deal to open up a site, but they will claw back the money at renewal,” he suggests. 

 

Once a franchisee is invested in the business and the location it is hard to pull out. That’s something that franchise buyers need to be aware of before signing up to a high priced location. 

 

It isn’t all doom and gloom at retail because there are signs that there’s a consumer spending revival, he says, but financial decisions such as lease agreements should be approached with a realistic understanding of what can happen down the track. 

 

“A lot of landlords will say, the space is worth $250,000. But don’t worry about that. What you say is “our model works off a 10% rent to turnover cost [for instance] and that fits, or doesn’t fit the model”.  

 

“Always start with what you believe sales are going to be, then work backwards when evaluating what level of rent you can afford to pay. In others words start with expected sales when looking at any space in shopping centre and consider what rent you can afford to pay, then equate that to a suitable occupancy cost to then start negotiating the rent.” 

 

Nixon advises franchise buyers to be on the front foot when it comes to dealing with landlords. “Always ask the landlord what the rental expectation for space is, never have them ask you what you can afford to pay, as this may not work in your favour with the landlord taking advantage of greater rents per square for space than is the actual market rate for the total area.” 

 

It is also important to question franchisors about the site selection criteria they used to determine their site and what comparable evidence they obtained to ascertain that the rent and incentives are within market, says Kondos.  

 

“The power of the ‘good’ retailer has never been greater in my experience. Are they aware of good information available on the net such as the Rentwise report? This tells you what rent each category should be paying in each shopping centre across Australia as well as customer traffic info, average spend, spend per square matte and whether car parking is available.”