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].
Supermarket space declines in Chicago
Grocery is one of the fastest-growing segments of retail — just not in Chicago.
Over the past two years, 25 supermarket shut their doors in Chicagoland. Sixteen new ones opened, but they were smaller than the ones that closed, making for what Mid-America Real Estate calls an “alarming” loss of 544,512 sq. ft. of inventory.
“The combination of nearly a million square feet of Dominick’s space being absorbed by the market leaders… with short-term bankruptcies and the ever present threat of Amazon’s launch into grocery has created a stall and step backwards in urban Chicago,” says Dan Tausk, a Mid-America principal and director of its urban tenant brokerage who co-authored a study on the Chicago supermarket scene with Dan Maentz.
Hardest hit have been South Chicago and the near west suburbs. The south and southwest sections of the city suffered a net loss of four grocery stores totaling 153,000 sq. ft. Total square footage declined by 262,000 in the western ‘burbs, which lost two small-format Meijer’s stores and a large Ultra Foods.
Key factors at play in The Second City, according to the Mid-America report:
• Aldi’s store total declined to 49 with the closing of three stores, and the German-based chain canceled plans to build a new location. Jewel-Osco now leads the market with 51 stores.
• The two Meijer’s along with two Express and two Neighborhood Markets closed by Walmart in a nationwide shutdown accounted for a combined loss of about 240,000 in grocery square footage.
• Smaller-format grocers: Target added four 20,000-sq.-ft. to 30,000-sq.-ft. stores between 2015 and 2017. Fresh Thyme Farmer’s Market’s first two Chicago locations were both under 30,000 sq. ft. And food co-ops Chicago Market and The Dill Pickle exist in the 10,000-sq.-ft. to 13,000-sq.-ft. range.
Mid-America’s study encompassed 3.2 million Chicago residents in Chicago and the surrounding suburbs. Grocery stores under consideration had to exceed 10,000 sq. ft. in size.
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Harnessing the Power of Pop-Up Shops
Pop-up stores are a retail trend that shows no sign of slowing down.
The ability to create a brick-and-mortar presence without many of the hassles that come with establishing and maintaining a permanent physical location has become an increasingly attractive option in recent years. The pop-up store concept has transformed into an estimated $50 billion industry — fostering new partnerships, experiential marketing opportunities and a unique way for retail brands to engage with their customers.
From established global brands to independent e-commerce merchants, retailers of all shapes and sizes are utilizing pop-ups as a one-of-a-kind way to experiment within the physical retail environment. High-end luxury brand Louis Vuitton recently generated lots of buzz by promoting its collaboration with skateboarding shop and clothing brand Supreme through the launch of a series of global pop-up store locations.
Retail giants like Nordstrom and JC Penney are also benefiting from the trend via in-store pop-up installations. By lending a portion of their storefront to a merchant like Sephora or Gwenyth Paltrow's lifestyle brand Goop, these retailers have the opportunity to drive in-store traffic while also attracting and engaging new customers.
It’s no wonder a wide range of merchants are looking to capitalize on pop-up shops. Not only do these temporary store concepts offer flexibility but they typically cost as much as 80% and come with far less risk.
Although short-term retail footprints are becoming a mainstay across the industry, that doesn’t mean embarking on the pop-up store concept – and making it successful – comes easy. To make the most of this temporary, limited edition retail offering, there are a few important considerations to keep in mind:
• Focus on Shopper Needs. The pop-up retail environment not only offers flexibility to merchants, but it presents the opportunity to revamp the shopping journey for customers. Part of establishing brand awareness and engaging with shoppers through a pop-up shop is making sure shoppers walk away with an experience they won’t soon forget.
Offering personalized promotions or equipping employees with tablets for looking up inventory, placing orders or even making payments will help merchants enhance their pop-up store offering. Adjusting marketing techniques and customer service tactics can also go a long way in enhancing the retail experience within pop-up environments.
• Keep Payments Simple. The size and format of pop-up shops can vary drastically depending on a variety of factors, including a merchant’s budget and design preferences. In many cases, having a traditional point-of-sale (POS) setup may not provide the flexibility needed to operate in a pop-up space. Rather than trying to incorporate traditional cash registers or checkout lines, many merchants are using pop-up locations as a way to experiment with modern payment options such as mobile wallets and tablet-based POS solutions.
• Get Experimental. Pop-up stores serve as a great way for merchants to test out new products or concepts. Whether a brand is looking to promote a new collection or showcase a unique collaboration, pop-ups create a sense of “limited time only” urgency that attracts and retains the attention of customers. By experimenting with new offerings within a pop-up, merchants also have the opportunity to get on-the-ground feedback and suggestions before taking on the risk of pushing out new products to a larger market.
The exclusive, unexpected and limited nature of pop-ups can offer merchants an alternative way to thrive in the rapidly changing retail landscape. Capitalizing on the trend requires finding the right pop-up model and strategizing to attract the right customers, all while delivering on the unique experience shoppers have come to expect.
Chris Francis is VP of market development at Worldpay US, a global payments provider for all channels: in-store, online and via mobile.