Editor's note: This article was excerpted from How to Start a Retail Store
Shopping centers are distinctly different from downtown and local business strips. The shopping center building is pre-planned as a merchandising unit for interplay among tenants. Its site is deliberately selected by the developer for easy access to pull customers from a trade area. It has on-site parking as a common feature of the layout. The amount of parking space is directly related to the retail area. Customers like the shopping center's convenience. They drive in, park and walk to their destination in relative safety and speed. Some shopping centers provide weather protection, and most provide an atmosphere created for shopping comfort. For the customer, the shopping center has great appeal.
Can You Qualify?
Developers and owners of shopping centers look for successful retailers. If you are considering a shopping center for a first-store venture, you may have trouble. Your financial backing and merchandising experience may be unproven to the developer. Your challenge is convincing the developer that the new store has a reasonable chance of success and will help the tenant mix.
Whether or not a small retailer can get into a particular shopping center depends on the market and management. A small shopping center may need only one children's shoe store, for example, while a regional center may expect enough business for two or more.
Darrell T., a licensed dealer of Thomas Kinkade artwork, thinks the main reason the Seattle mall leasing agents allowed him in without prior retail experience is because the artist his gallery exclusively represents has a great reputation--and because of the product line the gallery carries. "In nationwide mall tenant polls, I believe [the artist] is No. 2 in sales per square foot, second only to Sunglass Hut," says Darrell.
To finance a center, the developer needs major leases from companies with strong credit ratings. The developer's own lenders favor tenant rosters that include the triple-A ratings of national chains. However, local merchants with good business records and proven understanding of the market have a good chance of being considered by a shopping center developer. So if you or your store manager has a good reputation and track record in retailing in the area, you may be able to make a strong case for acceptance into the center you want.
In examining any shopping center location, get answers to questions such as these: Are its shoppers your prospective customers? Would the center offer the best sales volume potential for your kind of merchandise or service? Can you benefit enough from the center's access to a market? If yes, can you produce the appeal that will make the center's customers come to your store? Can you deal with the competition of other stores?
How much space do you need and where do you want it? Naturally, the amount of space you want will determine your rent. Many merchants need to rethink their space requirements when locating in a shopping center. Rents are typically high, so space must be used efficiently. What amount of space will you need to handle the sales volume you expect to have? Be sure that it has adequate interior space for sufficient inventory, an area for an office, and possibly a receiving and shipping area. You should also consider the necessity for adequate space for expansion when business picks up.
Your location in a center is important. Do you need to be in the main flow of customers as they pass between the stores with the greatest customer pull? Who will your neighbors be? What will their effect on your sales be?
"We're in [a mall that] has about 60 specialty shops," says Darrell T. "We compared it to some of the other sites in the territory that were available to us, and based on the information we received--sales per square foot, other stores--we went ahead and chose [this mall]. We have to be a little picky about our location. Galleries located in a prime spot within a mall do much better than those that are in an out-of-the-way location. Even though the malls are comparable, basically a 'C' location in an 'A' mall is not the same as an 'A' location in a 'B' mall," he says. "And location in the mall is quite possibly the most important factor--even more than the mall you are in--in my mind. As long as you are visible and can catch the shopper's eye, I think you'll do well wherever you go."
What will rent really cost? In most nonshopping center locations, rent is a fixed amount that has no relationship to sales volume. In a shopping center, the rent is usually stated as a minimum guaranteed rent per square foot of leased area against a percentage. Typically, this percentage is between 5 and 7 percent of gross sales, but it varies by type of business and other factors. This means that if the rent calculated by the percentage of sales is higher than the guaranteed rent, you pay the higher amount. If it is lower than the guaranteed rent, then you pay the guaranteed rent amount.
But this guarantee is not the end. In addition, you may have to pay dues to the center's merchants' association. You may also have to pay for maintenance of common areas. Therefore, you must think of "total rent" when considering what you can afford to pay. Can you draw enough sales to cover the true rent of being in a center?
Don't forget that you still have to design and finish out your space. You pay for light fixtures, counters, shelves, painting, floor coverings, and installing your own heating and cooling units. Some landlords provide a cost allowance toward completion of your retail space. This "tenant allowance" is for storefronts, ceiling treatment and wall coverings. The allowance is a percentage of their cost and is spelled out in a dollar amount in the lease. Some developers will help you plan storefronts, exterior signs and interior color schemes. They provide this service to ensure storefronts that add to the center's image rather than detract from it.
About 80 percent of America's 1,800 enclosed and regional shopping malls have temporary tenants, which include kiosks and carts. There are between 10 and 40 carts per mall at the Simon De Bartolo Property Group malls of Indianapolis, which rely on carts to add color and variety, as well as to generate income. Entrepreneurs can display their wares in a prime, high-foot-traffic location with little investment. Some cart operators move in just to capitalize on busy holiday seasons, and others remain year-round.
Rent for in-line stores is about four times the rent for carts and kiosks. You can buy a cart for $3,000-plus or rent one from a mall. Many entrepreneurs find carts and kiosks a low-cost way to launch a retail business or to supplement an existing business. You'll see a variety of specialty products introduced this way--silver jewelry, engraved products, imported fragrances, hair accessories, watches, etc. Some retailers use carts as test businesses in potential markets, while others make more than $1 million by operating several carts in several malls and cities.
At Bloomington, Minnesota's Mall of America, about 100 temporary tenants dazzle 40 million visitors a year. Cart rental rates are about $2,300 a month or 15 percent of monthly sales, whichever is greater. All temporary tenants must pay $1,500 in "key money," which pays for a store designer to design and build a cart with the right look.
Everything Is Negotiable
Once you've decided what kind of space you want, where, and how long you need it, it's time to consult a lawyer to discuss what specific issues you need to address in order to negotiate the best lease for your business. Core points to review carefully are occupancy date, chargeable floor space, which renovations or tenant improvements the landlord will do or pay for, services to be provided, liability, and renewal or termination terms. Once you're close to reaching an agreement with the real estate broker, leasing agent or landlord, your attorney can make sure that everything is in writing to clearly define each party's obligations.
Retail space is usually rented on what's called a "net lease" basis, meaning that you arrange for most of its services. Unless your premises are tied to the building's mechanical systems, the costs for most services--such as heating and air-conditioning--are your responsibility.
The breadth of your use clause (the specific use intended for the space) will affect your ability to assign your lease or sublet the premises. The broader the definition, the better. If you've leased the space to sell ski equipment, for example, and business lags because of a lack of snowfall, you want to have the option of opening a juice bar instead.
In addition, it's a good idea to get a restrictive covenant to prevent the landlord from leasing space in the same building or nearby to a business that competes with you. How far this provision extends will depend on the type of area you're located in. In a city, it might be a few blocks, whereas in the suburbs, it could be a few miles.
With shopping center leases, you are customarily charged for maintenance of common areas and for the mall's marketing efforts. Find out what the mall's plans are for any structural alterations or remodeling, resurfacing the parking lots, or replacing the roof. These can be devastating assessments for a young business. Requirements for hours and days of operation, employee parking restrictions, participation in community service events, gift certificate and loyalty programs, and storefront appearance may not fit into your business plan or capabilities. Make sure you will be capable of conforming to these requirements.