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What small businesses should consider as they open physical stores

June 7, 2021

As customers emerging from isolation seek out retail they can touch and feel, the market is ripe for e-commerce brands to open brick-and-mortar stores. SCT contributing editor Matt Hudgins queried Leap director of real estate Rebecca Fitts, whose company helps e-commerce companies open physical stores.

Why are e-commerce businesses opening brick-and-mortar stores?

We are seeing people who want to test new markets, as well as the physical channel. Some brands have completely gone away, creating an opportunity for new brands to come in and be new leaders. And we are hearing from a lot of brands who are seeing that we are going to come out of this pandemic and there will be some demand for a space their customers can visit. The retail real estate is there for the taking, and a lot of vacancies are being snapped up. What was up is now down, so spaces have come available and lease rates and terms have become more accessible in some markets. With the way people are migrating, a lot of secondary markets are getting attention, which can make it easier to get a store set up and open.

What are the major advantages to launching stores right now?

The advantages haven’t necessarily changed from before the pandemic. If you are living online, people want to touch and feel and experience your brand. The cost of acquiring customers has gone up online, too, and a physical presence helps with that because a store is a great way of acquiring customers. You have to think about the cost of retail rent and operating expenses and compare that to the cost of a Facebook campaign.

What are the main challenges small businesses face in opening physical stores?

A lot of it is the cost. There is definitely some trepidation in signing a lease, and then owners are thinking of all those costs that go into opening a store. That ranges from capital expenditure, or what it takes to get a great-looking store, to your labor model, which is hugely important. Those folks are on the front line and are going to make your store and create that customer experience. And there are the operations costs. Everyone has to think about those things, whether for a small business that is family owned or a larger retailer.

How has COVID-19 affected retail leasing?

Earlier in the pandemic we were making a lot of lease amendments and working with retailers who were struggling. A lot of real estate folks hadn't worked in that environment before. On the developer side, I've been asked for rent relief, which really became two parties coming together and working through issues to see if these businesses could survive. That was pretty heavy. Fast forward, and real estate people have never been busier. They are leasing space, and we can't open stores fast enough. I'm seeing that across the country.

How have retailers' requirements changed?

People are doing shorter leases with terms of about five years, which works for both parties because there is less risk. Folks are asking for force majeure language, which is controversial. And stores may be pushing up their square footage because if we have another government order to limit occupancy, you want more than one person at a time in your store. On the design side, more is going into meeting the customer where they want to be met, and doing great omnichannel stores seems to be key. Store owners want to create a great customer experience, and COVID has certainly made the store a more empathetic place, a kinder place, because you had to up your game to make people feel comfortable coming inside. Retailers need to be able to do pick-and-pack from the store and offer curbside pickup, buy-online-pick-up-in-store and concierge appointments, where you have the sales associate in the store showing people some great pieces online. I didn't know if that would last beyond the pandemic, but people bought into it because it was fun.

What provisions should prospective tenants seek or offer in lease negotiations?

They should ask for a term that is right for them, whether that is three years, five years or whatever. Landlords are becoming more agreeable on this point, and it is really a two-way street now. I'm hearing from landlords who say, “I'm OK with doing a short-term deal and seeing if this business can make it rather than having to help the tenant exit the lease before the end of a longer term if things don't go well.” Second, consider doing a variable deal structure to make rent a percentage of sales instead of a flat rate for either an intro period or the full term. Options will depend on the location; we are doing some Main-and-Main deals, and those landlords want a more traditional rent structure. The third provision retailers want is a force majeure clause for some protection in case there is another government shutdown order. As far as what the landlord will ask for, depending on where you are in the bell curve of your business, you are going to have a conversation about posting a security deposit or guaranteeing the lease. Communication with landlords has gotten better, so they may agree to a burndown that gradually applies the deposit to help pay rent throughout the lease.

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