REAL ESTATE

The Numbers Game

BY Jeff Green

Believe it or not (and I can barely believe it myself), the critical back-to-school period at the end of summer is right around the corner. While back-to-school is always big for retailers, this year’s period could be an especially important one, as 2014 has been underwhelming so far.

As I started to consider the issue, what I stumbled upon may have brought up a more interesting question: What numbers would define a strong back-to-school season? I got to thinking about the big picture in terms of retail sales, and about just how confusing — and perhaps even misleading — so many of the numbers can be.

The first problem is just that: there are so many numbers coming from so many different sources. If you’ve kept up with this column over the years, you know that the retail figures that come in after the holidays can vary dramatically depending on what entity is doing the reporting, what methodology they are using to collect and compile their data, exactly what information is being gathered and reported, and a variety of other variables. This happens throughout the year, and sometimes these variations can be dramatic: a 1% or 2% difference might not seem like a lot in the grand scheme of things, but what might look like a rounding error can easily translate into billions of dollars and widely different decisions for chain store expansion or contraction.

Think about when you hear retail numbers reported on the news. Are certain store categories excluded from those numbers? Do you know if those numbers include online sales? The reality is that some do and some do not. The U.S. Census Bureau figures do include a category for online sales, but other metrics (such as the popular and respected figures put out by ShopperTrak) do not. There are a number of metrics out there that just focus on year-over-year same store sales — comp store increases or decreases that deal exclusively with brick-and-mortar retail. At a time when the industry is changing so quickly, and when we have been talking about the growing influence of online and mobile sales for so long now, we need to be measuring the impact of these growing channels on the broader retail landscape.

Unfortunately, it’s only going to get more complicated. What is going to happen as more online vendors move into brick-and-mortar space (Piperlime is a good example)? How will we accurately measure their success without factoring in their much more substantial online performance? Today, the true health of a retailer is less about same-store sales and more about the conclusions drawn from a much more complex and nuanced picture: the sum of all of its distribution points — including Internet, mobile, catalog, and in-store.

In addition to changing the kinds of numbers we gather and becoming more sophisticated and consistent in the way we report that information, we also need to be smarter and more cautious about how we interpret the numbers. At times, the same numbers can be presented as a big positive in one news story and a disappointment in another. Both industry insiders and casual observers should think hard about the context and about who is doing the reporting and the interpreting. What are their motivations? So much impacts interpretation, including you, the reader — and your own perceptions, preconceptions and biases.

This is confusing stuff to sort through. If I have trouble, as a guy who does this for a living, how is the average journalist or financial analyst supposed to figure it out? And, now that it seems as if more retail entities are being run by real estate or financial industry experts instead of retailers, that issue becomes even more pressing.

I’d love to get your feedback on this, but, for myself, I think it’s well past time the industry starts thinking a little more carefully and critically about how to account for these variables — and about how to come up with a more accurate, consistent and sophisticated framework for reporting sales numbers. Until such time, anyone who wants an accurate apples-to-apples picture of what’s going on in the industry is going to have to be very careful to account for content, context and complexity before drawing any substantive conclusions. What sources do you follow for industry numbers? What tips would you share for making the most of the available data? Let’s keep the conversation going: Email me at [email protected], or leave a comment below.


Click here for past columns by Jeff Green.

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REAL ESTATE

What the CFO Needs to Know: Real Estate

BY CSA STAFF

Understand the assets covered by your leases: Taken together, leases are more than just one of a chain’s largest costs — they are the largest fixed expense, and they are fixed for the long term. As a rule, individual leases average seven to 10 years.

“Understanding that is critical,” said Michael P. Glimcher, chairman and CEO, Glimcher Realty Trust, Columbus, Ohio. “For a cost so large, you should have a strong knowledge about the assets covered by your leases.”

See locations for yourself: Glimcher noted that while CFOs should staff real estate departments and rely on real estate experts when making decisions, they should get out from time to time and check out sites.

“Real estate happens in the field,” he said. “Go out and walk the property, drive the market and talk to experts. The savviest senior executives that I’ve met learn their real estate and evaluate pluses and minuses from a vantage point in the field.”

Play offense and defense: A chain can manage a retail real estate portfolio proactively or defensively.

“Proactive management looks for growth opportunities,” said Mark Richardson, principal, Huntley, Mullaney, Spargo & Sullivan, a San Francisco-based real estate and financial restructuring firm. “Perhaps, for example, a certain trade area is attracting more of your customers and can support another store. Defensive management protects assets that are doing well and maximizes the time they can contribute to the brand,” he explained.

“Defensive management also trims poor locations out of a portfolio or looks for problems that have cropped up. Changes in a trade area, for example, could mean you need a smaller
store,” added Richardson, who recommends periodic portfolio reviews that look for proactive and defensive opportunities.

Close problem units: A portfolio review with the real estate department or a consultant is likely to turn up good locations that are out-of-lease options coming up on expiration.

“Currently, good available locations can be hard to find, so those leases should probably renegotiate those leases now,” Richardson said. “Where rent costs are more than 33% of EBITDA before rent in any location, the bottom-line profit prospects for that store will be low or negative. Close them. Problem locations drag down the whole portfolio.”

Utilize construction contracts: Stores may be scheduled for renovations or expansions, and that entails construction contract documents. You can develop your own with legal counsel, or purchase industry standard documents from the American Institute of Architects for a reasonable fee.

“The architecture, engineering and construction associations jointly developed these [industry-standard] documents, and industry players are familiar with them,” said Robert D. Benda, CEO, Westwood Contractors, Fort Worth, Texas, a national builder specializing in retail. “You and your attorneys can also tailor the documents for individual jobs.”

Industry-standard contract documents form an integrated suite. The prime contract, along with the subcontractor and vendor contracts (all of the many contract documents a project may require), employ the same concepts and language in order to avoid misunderstandings and conflicts of responsibility, Benda explained.

The industry-standard documents “also reflect a national legal perspective, making them less likely to conflict with local jurisdictional statutes,” he added.

Mall Trends

Class A malls are hot, with quality space hard to find and rents rising aggressively for trophy centers, according to a report by Cassidy Turley, while older Class B centers are under pressure to upgrade lest they fall into the C sector, where vacancy is at the 10% level. For most retail real estate companies, redevelopment, as opposed to ground-up development, is the name of the game — with the exception of the outlet center sector and in cities. In general, landlords are working hard to create tenant mixes that give shoppers more reasons to visit, with a big emphasis on restaurants and other food purveyors, entertainment and beauty and wellness concepts.

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Slate Retail REIT buys North Carolina shopping center

BY Dan Berthiaume

Toronto – Slate Retail REIT has entered into a binding agreement to purchase North Summit Square, a 99% occupied, 224,530-sq.-ft. grocery-anchored shopping center in Winston-Salem, North Carolina, for $15.8 million. The property is anchored by Sam’s Club.

"We are very excited to announce our first acquisition since listing on the TSX," said Blair Welch, CEO of Slate Retail. "We see several further opportunities to make accretive acquisitions of grocery-anchored centers in attractive markets."

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