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Guide to Growth: How do I balance the rent-to-turnover equation when opening a store?

High-footfall locations would seem to guarantee higher turnover, but also command higher rents.

Drapers’ Guide to Growth programme is produced in partnership with Clipper.

There is no easy answer to the dilemma of deciding what constitutes an appropriate spend on rent. The answer will vary hugely from business to business,and will depend on the nature of the business and the location, but also the purpose of the store.

“It’s an impossible decision to say what the ‘correct’ ratio of rent to turnover should be,” says one former retail finance director. “You may need a prime high street location because you’re not a massive name and you can’t rely on people coming to your store – in which case, the rent to turnover will be quite high and seem quite painful.”

He continues: “As you get closer to a ‘destination’ location, rents go up, but so will your turnover. It is a dilemma: do you save on location and risk low footfall or get a prime location that is more expensive?

“If you are in more of a ‘destination’ location, you have to be much more aware of additional, fluctuating costs such as business rates and lease terms. You have to be aware of lease clauses and costs, and should take appropriate legal advice.”

Do you save on location and risk low footfall, or get a prime location that is more expensive?

Former retail finance director

“If you were opening a bridal shop, for the customer it is a once-in-a-lifetime purchase. It’s all about building a reputation to draw people to the store,” explains Maria Malone, principal lecturer (fashion business) at Manchester Metropolitan University’s Manchester Fashion Institute. “A customer is going to drive to get there.”

In circumstances such as this, investing in a strong location could prove beneficial for sales further down the line. The location itself may act as a selling point for the business and therefore warrant a higher relative spend.

Most companies report their store costs and revenues in their financial results, and reading through the documents can give an insight into differing approaches. Lifestyle retailer Joules has 125 stores in the UK and Ireland, and a sophisticated multichannel offer. It reported store revenues of £75.9m for the 52 weeks to 26 May 2019. Store costs, including rent, renovations and other costs associated with running stores, totalled £31.6m, representing a ratio of 2.4:1 turnover-to-store costs.

Meanwhile, Ted Baker reported fixed lease payments of £41.5m plus variable lease payments of £2.6m for the year to 26 January 2019 on store revenues of £339.3m, which is a ratio of 7.7:1 turnover-to-store costs – although this revenue figure includes stores operated by licence partners. Sales per sq ft for the period – excluding ecommerce – were £786.

It is important to note that for both of these figures, the store costs may not only include rent, but are also likely to include costs such as renovations and other bills.

Our new advice portal for retailers and brands, Guide to Growth, aims to solve the problems and challenges fashion businesses encounter as they grow. Email your questions to associate editor graeme.moran@emap.com and we will get them answered. 

Plus, read our Growth in a Changing Economy report here to learn how fast-growth brands and retailers are overcoming barriers to growth. 

In partnership with Clipper

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