Will sales clauses in leases soon become obsolete?
The retail landscape today looks different than it did just a few years ago. Brick-and-mortar retail is becoming more diverse. Brands are embracing different operational models and integrating more closely with online and mobile channels. Retailers like Bonobos, Warby Parker and Restoration Hardware are using physical locations purely as showrooms, a new trend that appears to be gaining significant traction.
The implications of these changes are varied and profound. For now, I want to focus on one particular issue. That issue centers on a single question: when a retailer reports sales numbers, what exactly are they reporting?
To put it another way, in a world where the clear lines between online and brick-and-mortar sales are blurring, how do we determine which channel gets the sales “credit” for any one transaction?
Consider these real-world examples from my own experiences. I recently ordered some Restoration Hardware bathmats through a brick-and-mortar location. I subsequently returned them for a different color, an exchange I conducted online. Is that a brick-and-mortar sale or an online sale? In a different scenario, I placed an online order with Bonobos, and ultimately wound up making an exchange at a brick-and-mortar Bonobos store where the item came from their warehouse. What kind of sale is that?
Those are just two examples in my own life – there are countless other permutations. Even if we determine which of those transactions is recorded as an online sale or a brick-and-mortar sale, it doesn’t begin to account for the true unknowns. For example, an online purchase prompted from a consumer walking past a storefront earlier in the day could be a questionable sale, or the opposite, someone using online or mobile tools to get a sense of what’s available and where the best price might be, then visiting a physical store to make a purchase.
It’s complicated, right?
The real question is why does any of this matter? It certainly provides some fodder for media writing dramatic headlines about the demise of brick-and-mortar and the ascendance of online and mobile sales. But does it matter to the retailer? Does Old Navy care whether the dollars on their bottom line got there through an online funnel or an over-the-counter transaction in a physical store?
On one level the answer is no, not really. A dollar is a dollar is a dollar. However, it does matter – potentially quite a lot – once we start thinking about the impact on leases and what gets reported to the landlord. Some rents are calculated based on sales, and many leases have sales-based provisions, incentives or kickout clauses that are triggered by a specific sales figure. While the retail landscape may be evolving rapidly, leases don’t change nearly that fast. Unless a lease has been signed fairly recently, it almost certainly doesn’t account for the online/inline nuances and gray areas that have emerged. Think about a retailer in the eight year of a 10-year lease. Consider how much has changed during that time. Ten years is a long time in the world of retail, and an even longer time in the world of online tools and mobile technology. To put it into perspective, the first iPhone had just been released a decade ago.
A new retail taxonomy
So what options do landlords have? How do they know that what they are getting from their tenants is an accurate reflection of brick-and-mortar sales? How do they address that “channel uncertainty” in their leases? Can they stop retailers from what amounts to creative reporting of sales to trigger opt-out clauses or to suppress rents? Auditing might be possible if both sides agree, but if it isn’t clear to the retailer how to categorize a sale, how can landlords be expected to monitor such a thing?
For sales-based leasing language to be meaningful and enforceable, the retailers and landlords would have to stipulate/agree to meticulous transaction tracking and categorization. Furthermore, to address the complexities and uncertainties I mentioned above, the industry would likely have to develop a kind of standardized “taxonomy” for all the different categories of retail transactions in a multichannel world.
I suspect what is more likely is the leasing language will change. Leases will, by necessity, become much more simplified. With sales figures becoming malleable to the point of being meaningless, sales clauses in leases will be somewhere between irrelevant and unenforceable, and will likely go away. We may see conditional clauses based on different metrics (co-tenancy specifications, for example), or we might just see the industry move toward a simpler leasing structure. Perhaps something more akin to a residential lease, where breaking the lease early incurs a financial penalty. Even now, some retailers are not required to report sales. So we certainly could be moving in that direction.
That’s all in the future, for leases that have yet to be written and negotiated. The difficulty right now is that landlords have no leverage, and retailers have no incentive to renegotiate existing leases. This is a challenging time for landlords trying to adjust to an evolving and increasingly multichannel industry.
Jeff Green, President and CEO of Jeff Green Partners, puts more than 30 years of real estate industry experience to work on behalf of retailers, property owners, developers and municipalities. He can be contacted at [email protected].
Brick-and-Mortar Retailers’ Secret Weapon: Conversion Rate Optimization
Given the difficult business conditions so many brick-and-mortar retailers are facing, it’s baffling that conversion rate optimization (CRO) hasn’t become more of a focus if not an obsession.
In the online world, CRO has become an industry onto itself, spawning a global community of consultants and service providers, formal methodologies and over a hundred books dedicated to the topic on Amazon alone. There is only one book on brick-and-mortar conversion listed on Amazon.
There are a number of factors that may be preventing CRO from taking hold with brick-and-mortar retailers, but just like online marketers discovered after the dot-com bust in the early 2000’s, focusing on conversion can not only help them survive, but even thrive despite traffic declines.
Tracking Conversion vs. Optimizing Conversion
Most major tier-one retailers today track traffic and conversion rates in all their stores, so the basic data needed to conduct CRO already exists. However, the variability in physical stores makes applying conversion improvement initiatives across stores consistently a challenge, and it also makes measuring results more challenging too.
Testing and Measurement to Prove Results
A vital tenant of CRO is testing and more specifically A/B testing. In the online world this is easily accomplished by setting up two variations of a webpage and then directing an equal amount of traffic to each site. But A/B testing is much more difficult for brick-and-mortar retailers since, unlike websites, every store is unique.
So unlike online conversion rate optimization where changes can easily be made and consistently applied with a few keystrokes, in brick-and-mortar stores adjusting variables like staff levels for example must be applied at the store-level.
There’s another important difference between online and brick-and-mortar conversion optimization tests: traffic. In an online experiment, traffic can be precisely controlled so each website version receives the same amount of traffic.
In brick-and-mortar stores, the amount of traffic each store receives can’t be controlled and can vary significantly by store. Extra care needs to be applied when interpreting brick-and-mortar conversion optimization test results.
But just because the conversion variables are harder to control in physical stores doesn’t mean that conversion rates can’t be optimized or measured using A/B testing.
Start with the Biggest Conversion Driver – People
An effective CRO system for brick-and-mortar retailers must begin with ensuring staff schedules are aligned to store traffic patterns. Second, retailers need to examine how staff are deployed – tasking versus servicing customers. Third, retailers need to measure associate and manager productivity by analyzing conversion rates by hour attributed to each employee.
Conversion Rate Optimization can Mitigate Traffic Declines
In today’s rapidly changing and difficult environment, brick-and-mortar retailers should focus on the traffic opportunities they do have and apply CRO strategies. Just like the online survivors of the dot-com bust, brick-and-mortar retailers need to realize that it’s not just about the amount of traffic in their stores, but what they do with the traffic that matters most.
Mark Ryski is author of "Conversion: The Last Great Retail Metric" and "When Retail Customers Count" and CEO and founder of HeadCount Corporation.
Surging online and customer traffic boost Target; ups remodels
Target Corp. came roaring back in its second quarter from a year-long sales slump amid evidence that its investments in online and store remodels are paying off. The discounter raised its outlook for the year.
Sales rose 1.6% to $16.43 billion in the quarter ended July 29, beating analysts' estimates of $16.30 billion. Same-store sales rose 1.3%, also more than analysts had expected. Comparable digital sales surged 32%.
Net income fell to $672 million, or $1.22 per share, from $680 million, or $1.16 per share, in the year-ago period. Excluding items, Target reported earnings of $1.23 per share, beating the average analyst estimate of $1.19.
On its quarterly call, Target gave an update on its store remodeling and new store plans. The retailer now plans to remodel more than 300 stores in 2018, up from its original 250.
Target also plans to nearly double the number of smaller-format stores it will open this year, with 15 new locations announced for 2018 and "more to come," CNBC reported.
Target announced its results on the heels of the news that it was acquiring technology transportation company Grand Junction, and that it was expanding its next-day delivery pilot, Target Restock.
In addition, Target is expanding its private label lines, and will launch two apparel brands, a home goods brand and an athleisure brand this fall. More are in the works.
In a statement, Target chairman and CEO said that the company was particularly pleased that second-quarter traffic increased more than 2%, reflecting growth in both its store and digital channels.
“We continue to focus on our long-term strategy, as we work to transform every part of our business and build an even better Target that will thrive in this new era in retail," Cornell said. "While our recent results are encouraging, we will continue to plan prudently as we invest in building our brands, our digital channel, the value we provide our guests and elevating service levels in our stores.”
For the full year, Target has forecast earning between $4.34 to $4.54 per share. Analysts had called for earnings per share of $4.39 in 2017, falling on the lower end of Target's updated range.