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10/01/2021

Why Retailers and Their Landlords Should Rethink Leasing Models

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With the contraction of department stores, many of today’s malls and shopping centers lack a predominant anchor and, without this, retailers are more skeptical about the ROI of such costly real estate.
With the contraction of department stores, many retailers are more skeptical about the ROI of such costly real estate.

As the retail revival continues, today’s merchants are rethinking their brick-and-mortar strategy. They’re becoming more efficient with their space and fulfillment operations, with some retailers — like Target — now fulfilling a majority of their sales from the store. Other retailers are even opening “dark stores” with the sole purpose of fulfilling online orders.

There’s also a noticeable shift away from leasing in enclosed malls, a trend accelerated by the pandemic. Gap said in October that it’s pulling back from malls and wants 80% of its stores to be outside of enclosed centers by 2023. Gap isn’t the first retailer to jump on this trend and certainly won’t be the last if retailers and their landlords can’t agree on more mutually beneficial leasing model.

Here’s why.

The Existing Model

The existing leasing model between retailers and landlords is focused on fixed revenue and share of sales. In layman’s terms, retailers are charged a base rent and/or a variable component that usually includes a payment for share of sales.

This model worked when 100% of retail sales came from inside the physical store. However, shopping is no longer linear. With the advent of online and e-commerce, it's more challenging to determine attribution of sales which is creating a divide between landlords and tenants.

[See also: Evolution of How Consumers Shop]

This debate is more timely than ever, with U.S. click-and-collect sales doubling in 2020, according to a recent report from eMarketer. But, does an online purchase that needs to be picked up inside of a store (AKA “BOPIS”) count as a sale? In this scenario, landlords are shouting a resounding “yes!” and retail tenants are shouting “maybe!”

Additionally, the traditional leasing model was centered around anchor stores driving foot traffic. Many retailers relied on behemoth department stores like Sears to draw customers in droves. With the contraction of department stores, many of today’s malls and shopping centers lack a predominant anchor and, without this, retailers are more skeptical about the ROI of such costly real estate.

The New Model

Despite recent headlines, we haven’t seen the end of the mall. However, retailers and their landlords must work together to develop a new leasing model that incentivizes both parties and fosters collaboration versus contention. Two KPIs that can achieve this and account for the reality we all now live in are “traffic per square foot” and “sales per shopper.”

Under this more innovative model, landlords would be responsible for driving the “traffic per square foot” through effective advertising, their roster of retailers and an experience that draws customers to shop in-store versus online. Meanwhile, retail tenants would be responsible for making their individual store as productive as it can be through effective merchandising, customer service, inventory availability and more.

[Related: Retaining the New Consumer Through the Power of Technology]

This would essentially evaluate how effective landlords are at driving foot traffic and how successful retailers are at maximizing shopper spend.

Finding Common Ground

Trust is lacking between retailers and their landlords, and what starts as a romance quickly turns to "Show me the numbers." Retailers think landlords are there to take their money and not drive business, while landlords think they are giving retailers a community that’s not being taken advantage of.

It doesn’t have to be this way. Retailers and shopping center operators must first work together to develop a mutually beneficial and collaborative partnership through innovative leasing models and agreed upon metrics that foster common goals to reimagine success.

Brian Field is senior director, global retail consulting practice, at Sensormatic Solutions.

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