If you want to see an abusive relationship, look no further than the ties between some landlords and their retail clients. It takes some courage to know when it’s time to move on, and just do it:
1. Know how much foot traffic you need, so you can tell when it becomes unsustainable
Even before you start running your business, you should work out the minimum sales you need – and consequently, the amount of foot traffic that entails. Here’s a rough example:
Say you need a minimum of $50,000 in sales per week, and you’re looking at purchases of around $60 per customer. That’s about 834 buying customers per week, or roughly 120 buying customers per day.
Now, assuming you have a conversion rate (the number of walk-ins you convince to buy something) of about 40 per cent*, you would need daily foot traffic of about 300 people in the store. Alternatively, you can look at it on a weekly basis, as the weekends tend to bring in more people than weekdays e.g. foot traffic of 2,100 per week.
(You can also try to improve conversion rates, but that’s easier said than done. Who isn’t already trying as hard as they can to sell?)
If foot traffic fails to meet this quota for three or more consecutive months, it may be time to start scouting around for another location. Some seasonal drops in foot traffic – often between March to May on the local scene – are to be expected; but you should be alarmed if the numbers keep falling beyond that.
*We do not have available statistics in Singapore, but the estimated conversion rate for most retail stores in general is about 20 to 40 per cent. This means only about a third of your foot traffic tends to convert to actual sales.
2. Ask your customers
It should be obvious, but a lot of retailers just plain forget to ask their customers about the location. Some of the questions you want answered are:
- Would you rather just buy from us online and have us bring it to you?
- Do you find it easy to get to the store / do you live near here?
- Were you able to find us easily?
If the majority of customers complain that it’s hard to reach you – or say they live far away – then you may be wrongly sited. You’re either far from your intended customer demographic, or your store location is too obscure to be noticed.
You can also run small surveys – perhaps with prizes to encourage responses – on how your customers would react if you were to move elsewhere. This is will give you some sense on the overall sales impact, if you decide not to renew the lease.
3. Complementary businesses move out, undesirable neighbours move in
A complementary business is one which diverts its customer pool to you. For example, a foot reflexology parlour, or a hair salon, is often complementary to an enrichment centre – parents can get service while their children are in class. When complementary businesses start moving out, you might see a significant drop in your customer base.
Likewise, you need to watch out for who’s moving in. Competitors are one obvious issue; but so are businesses that present an undesirable front close to yours. If you’re running a store catered to children’s goods, for example, you might not want to be nearby when a sleazy massage parlour moves in.
Most landlords are careful to screen tenants (especially REIT run malls); but it can be utter chaos in old strata titled malls, where completely incompatible businesses end up next to each other. We know of at least two cases when an F&B outlet has moved in next to a boutique, and left the clothes with the aroma of old cooking oil.
4. Rental costs start to account for more and more of your revenue
We’re not referring to how much of your revenue goes toward paying rent (an acceptable threshold differs based on each business). We’re referring to how much more of your revenue goes into paying rent, over a time period.
If you see that it’s creeping up five per cent every year, for example, you’ll know you eventually have to move. Rather than bank on negotiations with the landlord, plan your move early. Decide that when rental costs hit a pre-planned point, you are going to move and that’s it.
Don’t make this a matter of “gut instinct”, but one of strategy. Work out the dollars and cents (what you can afford), and stick to the plan.
5. Falling rental, plus falling foot traffic
This is one situation that catches a lot of new store owners off-guard. It’s when the landlord starts drastically cutting rent, even as the foot traffic steadily falls. Some businesses may choose to stay on, thinking they’re getting cheap rent after all. But you know what?
When landlords start cutting rental rates drastically, and the mall (or whatever location you’re in) starts to empty out, you’re seeing a classic death spiral. As the foot traffic thins, businesses will move out. As fewer businesses are there, fewer people walk to the area. Which in turns leads to fewer businesses, lower budgets to upgrade the place or hold events, etc.
Don’t be so eager to hold on just because you’re getting a “cheap deal”. The area is dying out, and it’s time to start planning your move by informing customers early, scouting a new location, and so forth. Don’t end up trapped in the same area when people stop visiting, and revenue falls into negatives; it’ll be much harder to fund a move at that point.
Running a retail store? Voice your thoughts in our comments section or on our Facebook community page.
Looking for retail property? Check out 99.co to find a retail space in the best location, at the best rental rates or price.