Armed and serious
What does the year ahead hold for franchisees looking to lease retail sites? Certainly 2010 has been less turbulent for franchise networks as we move on from the global financial crisis and settle into a positive economic outlook. As such franchise businesses have had to work harder to stay on target and negotiate stable rents, including larger networks like Bakers Delight which has a specialised property team to manage lease negotiations on behalf of its franchise network.
As the Australian economy stays strong the percentage of vacant retail outlets is reduced. There is a risk of landlords taking advantage of the opportunity to capitalise on this demand for space by introducing significant rent increases. This is why it is so important to ensure that when leases are negotiated clauses are included to protect the franchisee from such an increase.
Australians have also experienced a number of interest rate increases in 2010 and as advised by the RBA, this is likely to continue. This can present a tough trading environment for the retail sector and anything that affects
business can affect lease agreements. Rent reductions were possible in the last financial year; in 2009/10, Bakers Delight experienced many like-for-like rent reductions in a number of shopping centres and high street locations and this trend has continued into the current financial year.
As shopping centres are generally managed by larger corporations, negotiations can be more challenging and so it is important that retailers equip themselves with all the information they need about the site to make informed and strong arguments on lease negotiations.
It is important to constantly evaluate market conditions and ensure you keep on top of quality up-to-date data for your site or sites.
Researching is essential and this can include comparing the rents of other tenants in the vicinity; it is important to take the time to get to know neighbouring retailers to ensure that you can support each other when proposed rent increases take place. It is also recommended to review the flow of traffic past the site on a weekly basis and keep going back to compare this with previous data as this can provide strong arguments for negotiating rent reductions.
Finally, ensure you keep a close eye on sales growth over the term of the lease agreement as this provides some strong data that can assist with keeping eases competitive.
But how do you approach negotiations? It all starts off with a good plan, ensuring you enter a negotiation with all the correct information and detail for what you are prepared to compromise on. Intelligence gathering is vital and if you don’t know the landlord it is best to try and find out as much as you can from neighbouring tenants, to prepare you for the negotiations you are likely to have to go through. Have a clear walk-away price in your mind before you even start negotiations and make sure you stick to it. Most importantly, make sure you don’t over-estimate your sales figures as you need to allow yourself room to move if your sales figures don’t reach this estimation.
Once the negotiation has occurred and a lease is drawn up, then comes the time to evaluate all the aspects in detail to ensure it concurs with everything discussed throughout the negotiation phase. It is also best to remove any emotion around the relationship you have built up with the landlord to this point and ensure you get a solicitor to review the lease on your behalf. This will not hinder your relationship as any respectable landlord will appreciate that the retailer cannot enter a lease agreement without ensuring it is foolproof.
All this advice also comes into play at lease renewal time. With a franchise business like Bakers Delight about 125 leases expire annually, so the property team’s time is spent primarily on looking at renegotiations across the network. The first aspect is ensuring a lease-analysis report is compiled, which is similar to the initial research conducted prior to signing up to the property but also includes an evaluation section that compares the data to the previous 12 months to draw on any changes in the trading conditions that may help counteract the landlord’s proposed rent increase.
It is also recommended to look at whether any competitors have opened in the last 12 months which may impact your sales and whether your fit-out is likely to last the length of the new lease and be ready for the landlord to ask you for an upgrade.
Gerry Gerrard is general manager for property at Bakers Delight Holdings and manages a portfolio of over 630 bakeries across Australia.