In a column for Retail Dive, retailing veterans Peter Lynch and John Graub encourage chains to revisit their portfolio strategies in response to today’s challenges.
Retailers’ timeworn approach to managing their real estate portfolios is badly in need of an update, write two experts from A&G Realty Partners in an opinion piece for Retail Dive.
Chains in bygone eras could survive by running a competitor analysis once a year, shuttering the worst of their stores and winning a few concessions from landlords, write Peter Lynch and Jon Graub, Principals at the Melville, N.Y.-based firm.
But in the Aug. 8 column, the retailing veterans argue for a real estate reboot in the sector. “The market is changing in ways that call for new approaches to retail portfolios—especially among chains that expanded aggressively during the go-go years,” they write.
In the piece (“Why retailers need to revisit their real estate strategies”), Lynch and Graub provide four suggestions based on their experience assisting healthy and distressed retailers with dispositions, lease restructurings, valuations, acquisitions and other services.
The first is to stop delaying tough decisions. To stay competitive, write Lynch and Graub, retailers of all types and sizes need to be proactive and do what is best for the long-term health of the business. “Our firm recently worked with a struggling chain that waited far too long to close 300 underperforming stores,” they note. “The delayed decision caused this operator to hemorrhage money on low-volume locations that should have been axed years ago.”
The second is to make portfolio reviews a top priority. Older chains, in particular, need to know whether they are paying above-market rents at properties with declining prospects, perhaps due to anchor vacancies caused by recent bankruptcy filings. Portfolio reviews increasingly involve more urgent imperatives than in the past, they contend. “So far this year, the likes of Payless ShoeSource, Charlotte Russe, Shopko and Gymboree, to name a few, have filed for bankruptcy,” write Graub and Lynch. “What names will be added to this list six months hence? In a marketplace that tends to brutally punish those that wait too long to respond to change, portfolio reviews can help retail chains stay nimble.”
The third is to carefully consider the mobile customer. While targeting the bottom 10% of underperforming stores continues to be a sound strategy, in today's marketplace, metrics like sales per square foot and comp-store sales no longer tell the entire story, according to Lynch and Graub. “These days, the ZIP codes of your online customers are a critical consideration,” they write. “A moderately performing store might double as a fulfillment center for online orders, playing an important role in your e-commerce strategy. Another store might support your online strategy by giving nearby customers an easy way to make in-person returns.”
Lastly, they encourage chains to carefully rethink their approaches to leasing. That could involve renegotiating kick-out clauses and term length with a view toward maximum flexibility. “Having more options, after all, enables you to execute on relocation strategies designed to bolster productivity,” they advise. However, retailers with great lease terms on strong performing stores should consider locking in those situations by signing longer leases of three years or more, contend Lynch and Graub. “Hedging too much can be a mistake,” they argue. “What if those terms are not available the next time the two parties sit down at the negotiating table?”