When should I upgrade my store?
In today’s super competitive retail environment, we have to be on top of our game if we wish to remain in business. As a retailer, there are so many aspects that we need to get right, including store location, store presentation, merchandising, buying, customer service, advertising/marketing, human resources, financial management and the list goes on.
I wanted to discuss one aspect insofar as it affects your retail lease, that of store presentation or to be more precise, your fit-out.
Irrespective of whether or not you purchased an existing business or started a new business from scratch, it is imperative that the presentation of your fit-out always appears fresh. Remember the old adage “A picture is worth a thousand words”. Obviously a tired antiquated fit-out will not be appealing to customers and this also sends a strong message to your landlord, suppliers and the wider community that you really don’t care. In fact there is empirical evidence to suggest that a retail business that is rundown and dilapidated will generally not perform as well as a retail business that has a modern vibrant fit-out.
So, when is the right time to upgrade your store? Well, the answer is it depends upon a number of factors, not the least being when your lease expires. As a tenant, the first question you should always ask yourself is, do I have enough tenure in order for me to heavily re-invest in my business? In other words, do I have enough time remaining on my lease to risk outlaying a large amount of capital? This is a very important question to ask yourself, as a re-fit could easily cost $100,000-$300,000 (maybe a lot more depending upon the type of retail business).
For example, let’s say you have been operating a newsagency in the same shop for 6 years and have a 7 year lease. During this time, you made a few minor improvements to your fit-out such as the odd lick of paint and perhaps installed a few LED lights but nothing too major. Intuitively you know that the store really needs an upgrade and your respective Lottery authority also insists that you need to upgrade your Lotto counter and screen within the next 6 months. What should you do?
You only have 1 year’s guaranteed tenure, but you decide to move forward with the refit now, however what happens if the landlord decides to not renew your lease in 12 months time? Obviously, you would have to vacate the premises meaning more than likely you would still owe a lot of money to your financier and if you had to find new premises, you would also have to fit-out these premises, which could be an additional $100-300K. On top of this you would have to outlay a significant cost to de-fit and make good your old premises. As this example demonstrates, the financial consequences of not planning ahead could be quite painful. You might think that no-one would be that silly to invest such a large sum of money without the benefit of guaranteed tenure. I’d like to say that is true, but during my career, I have witnessed many cases exactly like this example.
A far more prudent approach would be to try and renegotiate a new lease before you made such a large financial commitment. If you approached your landlord and explained that you wanted to bring forward your lease renewal slightly on the basis of you doing a major store upgrade, most landlords would oblige. Presuming that you are successful and managed to secure a new lease term (and perhaps even an option to renew), you now have peace of mind that whatever you spend on your upgrade will not be wasted.
In my opinion the best approach for keeping your store looking fresh all the time, is to re-invest more frequently during the term of your lease, but not necessarily with large lumps of capital. Successful retailers often budget for small cosmetic makeovers every 2-3 years, so when it comes to doing a major upgrade (usually 5-7 years), the cost is not near as severe, as much of the fit-out has already been modernised over the period. This approach also benefits your trading performance as customers will be more attracted to a retail business that always looks modern and tidy as opposed to a store that is deteriorating.
Of course there is a cashflow advantage to this approach too. Investing modest amounts of capital and spreading these costs over the term of your lease, is far more pragmatic than having to outlay large sums of capital every 5-7 years.
I guess if there is one guiding principle that I recommend, it is to have a long term Business Plan and an accompanying Capital Budget that allows for small regular injections of capital to ensure that your business always looks fresh and inviting to customers.