These days, retailers are getting ruthless when it comes to closing unprofitable stores. The competition in all the major retailing sectors is so fierce that they can’t afford to keep around stores that are not hitting performance targets.
But sometimes the solution doesn’t have to be as drastic as eliminating every less-than-perfect unit. A few cosmetic changes here and there may give the store the added boost in traffic it needs to become profitable again. Bridget Grams, principal with Huntley, Mullaney, Spargo & Sullivan Inc. (HMS), a lease and debt restructuring firm, has sat down with NREIto talk about the options available to retailers in that position. HMS has recently done landlord negotiation work on behalf of Carlson Restaurants, OfficeMax, Walgreens and Hooters Restaurants, among other companies.
NREI: How can store remodels help retailers improve sales?
Bridget Grams: What we find with some retailers is that their concept may have come and gone and their relevance is not as appealing to the consumer. If a store is 10 or 15 years old and they haven’t done any physical changes to it, that starts to become visible. And maybe competition comes into the market and takes away their market share. We approach the landlords about partnering with the retailer to remodel or refresh, which could increase their sales and [create] a better situation for other tenants in the center and for the landlord of the property.
NREI: How much interest are you seeing in this method of improving sales?
Bridget Grams: It seems to me that retailers are very much in the mindset right now of being competitive and reaching out to their consumers and connecting with them. They are looking at what to do on all fronts to get that connection back.
NREI: What kinds of physical changes deliver the best results in terms of a sales uptick?
Bridget Grams: The exterior of the store is the best billboard you could possibly have. The changes that are made from the exterior are usually an upgrade in signage or awnings, anything that’s concept-specific: maybe a new logo or new colors. And also maybe bringing a new look to the front of the building, maybe adding a column to get consumers’ attention. And then, on the interior, making changes the consumer can relate to, whether improved store flow or more customer service or making things more accessible, definitely gets people’s attention.
NREI: How much do remodeling costs run, on average?
Bridget Grams: A lot of the retailers we are working with right now are looking at remodels in the $500,000 to $1 million range. And for a lot of the restaurants, the refreshments costs are in the $100,000 to $300,000 range. The cost discrepancy has to do with the square footage.
NREI: How do you try to convince landlords that the remodel is a worthwhile?
Bridget Grams: Usually, a [retail] company approaches us after they already know what they want to do and then we go and talk to the landlord and try to create a partnership between the landlord and the tenant. When we are contracted by our client, they have usually tested the remodel in a few different markets to prove it out. We get permission to share their test results with the landlord and we give the landlord the average [improvement in sales], as well as the highs and the lows. We do think it’s important to share that information with the landlord so they can see what their return oncan be.
NREI: Can you give an average for what kinds of returns landlords are likely to see from this?
Bridget Grams: For casual dining, in general, the remodels usually cost between $200,000 and $300,000 and then the landlords contribute on average 30 percent. And the sales increase, on average, is between 5 percent and 10 percent.
NREI: How long does the negotiations process with the landlord take?
Bridget Grams: From start to end, it’s probably a 60- to 90-day period.
NREI: How open are landlords to contributing their own money toward remodels?
Bridget Grams: I would tell you from my experience landlords are open to contributing to the remodels if there’s something that’s beneficial to them—if there is a proven track record in rent increases, if the tenant is also willing to give additional term to the landlord so everybody can amortize their costs. And also, if the landlord can speak to their lender and can refinance their loan at a more favorable rate, they seem to be very open-minded about it.
NREI: Does the landlord’s size—whether it’s a private company with a handful of properties or a national REIT like Simon or General Growth—play a role in their willingness to work with the tenants on this?
Bridget Grams: I would say they seem to be almost equally as open, but the national landlords have a much stricter process they go through. You have to submit your proposal, it has to be [officially] approved, whereas a mom-and-pop landlord is usually the decision maker. The regional landlords and mom-and-pops can make the decision more quickly.