Choosing the Right Retail Location: a 5-Step Guide

Overview

Previously, we highlighted that a significant reason businesses fail is due to a poor retail location. A lousy location means customers can’t find your store, resulting in lower profits from fewer sales.

This chapter will help you choose the best retail location for your business. It covers the criteria to think about, various types of locations, and how to negotiate your lease.

Key criteria for choosing the location of your retail business

Visibility and accessibility

For your retail store to thrive, focus on being easily seen and reachable. Choose a spot where many people pass by so your store catches their attention, and they’re more likely to check it out. 

Plus, make sure it’s easy for customers to get there, whether they’re walking, driving, or using public transportation, so they find it convenient to visit often.

Alignment with the target audience

Select a location that matches the characteristics and preferences of your target customers, making it easy and convenient for them to reach your store.

If your target audience is young professionals, consider setting up shop in a business district or close to office spaces. For a store serving families, opt for a location near residential areas or schools, ensuring your offerings align with the daily requirements of your desired customer base.

Proximity to competitors

Consider your business size when deciding how close to set up shop to competitors. Smaller businesses may encounter more challenges, while larger ones could discover growth opportunities nearby.

A study from the Marriott School of Business suggests that deciding on your store’s location concerning competitors needs careful thought. The survival rate for the smallest businesses drops by 14.1 percentage points, but it goes up by 2.6 percentage points for the largest ones.

Rent price

Controlling expenses and maximizing profits are crucial to running a successful retail business. Keep your store’s lease and rent manageable by balancing costs and potential revenue for long-term sustainability.

A higher-rent location justifies itself by generating significantly more foot traffic, increasing sales. Conversely, a cheaper location may be practical if it provides sufficient visibility and accessibility to your target audience.

Types of retail locations

Mall/shopping centers

A mall is a vast shopping area where customers can conveniently find various stores under one roof, ranging from big-box retailers to independent shops.

This location suits businesses that do well in a competitive retail environment and want to reach a wide range of customers, like clothing stores and electronic shops.

Pros:

• High foot traffic.
• Built-in customer base.
• Shared marketing efforts by the mall management.

Cons:

• Higher rent compared to standalone locations.
• Limited control over the mall environment.

Stand-alone

Stand-alone stores are unique establishments that operate independently, not relying on other retailers or malls to attract customers. They serve as their destination, focusing on specific market segments such as food, health, beauty products, or electronics.

Pros: 

• Complete control over the store environment.
• Flexibility in design and layout.
• Potential for unique branding.

Cons: 

• Relies on stand-alone marketing efforts.
• May have lower foot traffic compared to malls or high streets.

Shophouses (ruko)

“Ruko” is a term derived from “Rumah Toko,” meaning a place that combines living space and business operations. Usually spanning two or three floors, a ruko is valued for its practical layout, enabling owners to reside and run their businesses conveniently.

Ideal for small retail ventures, local shops, or boutique stores, Ruko is perfect for owners who desire hands-on involvement in daily operations and the convenience of living at the exact location.

Pros:

• Integrated retail and operational space.
• Potential for cost savings by combining retail and office functions.
• Customization of both retail and operational spaces.

Cons:

• Limited visibility compared to street-front locations.
• Potential for zoning and operational challenges.
• Less foot traffic compared to malls or busy streets.

Home-based

Consider setting up your retail store at home, especially when just starting. It’s a practical choice, especially if you’re unsure about other locations.

Pros:

• Lower overhead costs 
• Flexibility in working hours 
• Potential tax advantages.

Cons:

• Limited space for inventory
• Zoning restrictions 
• Potential lack of visibility compared to commercial locations.

Process for selecting a store location

1. Do the market research

To succeed in retail, you should emulate larger companies by understanding their customers’ buying habits, preferences, and demographics. Begin by conducting demographic research on potential customers to determine the right location for your business.

Understanding demographics provides basic information, while psychographics delve into opinions, attitudes, and buying behaviors. Although psychographic research may cost more due to in-depth interviews, it uncovers valuable insights that can boost your effectiveness in serving customers and give you a competitive advantage in the retail business.

2. Analyze your budget

Ensure your business plan covers startup and operating costs, funding sources, sales projections, and cash flow details. Look closely at the financial analysis to determine a reasonable rent and related expenses budget. 

Be practical about location choices, considering your budget constraints, and explore affordable options, such as up-and-coming neighborhoods, to avoid straining your resources.

3. Conduct a competitor analysis

Identify existing businesses in the area you’re considering and analyze their strengths and weaknesses. Assess whether there is room for your retail business to thrive alongside competitors. 

Also, look out for nearby businesses that would complement you. For example, if you’re opening a bookstore, being close to a coffee shop could make shopping more enjoyable for customers.

4. Assess the foot traffic

Choose locations by watching how many people pass by. A bustling street may bring in more customers, but it usually means higher rent.

Think about when foot traffic is busiest during the day and week. Being close to offices with many lunchtime visitors could be smart if your shop sells snacks.

5. Negotiating the lease

After finding the right spot, talk to the landlord about terms, rent, and any extra expenses — research local rates to make fair comparisons.

As a new retailer with a small business, know that you have negotiating power for your retail lease. Negotiate confidently for terms that fit your budget and business goals. Don’t hesitate to ask for favorable conditions.

Types of leases to consider for your retail business

Fixed-rent lease

In a fixed-rent lease, you pay a set monthly amount, no matter how much you sell. The size of your store usually determines this payment.

A fixed-rent lease can be a good fit if your retail business has a steady and predictable income. It helps you plan your monthly budget by keeping your expenses. 

Pros: 

• Stability: The fixed amount provides stability in budgeting, allowing for easier financial planning.
• Predictability: Business owners know how much they must pay monthly, regardless of sales fluctuations.
• Lower Risk: The business is protected during slower periods because rent is not tied 

to sales.

Cons:

• Limited Flexibility: If the business experiences a sudden increase in sales, the fixed rent may become less favorable compared to a percentage-based arrangement.
• Potential Overpayment: During slow periods, tenants may feel they are paying more than their fair share compared to a percentage retail lease.

Straight-percentage lease

In this unique setup, retail tenants pay rent based on a percentage of their total sales over a specific time, often quarterly, though some prefer monthly or yearly.

This kind of retail lease works well for retail ventures with sales that vary, connecting rent directly to how well the business is doing. It’s a way for landlords and tenants to team up in facing the ups and downs of the business together.

Pros:

• Performance-Driven: Aligns rent with the business’s performance, allowing for reduced expenses during slower periods and increased affordability during successful times.
• Shared Risk: Shares the risks and rewards of business fluctuations between the landlord and tenant.
• Flexibility: Provides flexibility for businesses with variable sales.

Cons:

• Uncertain Expenses: Monthly rent can vary, making it challenging to predict fixed costs and potentially impacting budgeting.
• Potential High Costs: The percentage-based rent can increase overall expenses during exceptional sales.

Percentage-with-minimum lease

In a percentage-with-minimum lease, you pay rent based on a percentage of your sales, but you must pay a minimum amount even if your sales go down.

This type of retail lease can be a good choice if you’re running a growing retail business. It gives you a fixed cost and the flexibility to pay less when sales are slow or more when they’re booming.

Pros:

• Balanced Approach: Combines the stability of a base rent with the flexibility of a percentage lease, offering a middle ground.
• Shared Risk: Similar to a straight-percentage lease, it shares the risks and rewards of business performance.
• Potential Cost Reduction: Can provide cost savings during slow periods, offering relief to the business.

Cons: 

• Complexity: Combining fixed and variable components can make lease terms more intricate and potentially challenging to negotiate.
• Risk of Higher Costs: If the conditions for higher percentages are easily met, the overall rent could become comparable to a straight-percentage lease.

Lease negotiation best practices

Research the property thoroughly

Negotiating a retail lease differs depending on your market, the property, and the landlord. It’s essential to do thorough research because each situation has its quirks. 

Collect detailed info on market conditions, property details, landlord reputation, and similar deals. To make informed decisions, compare your current lease terms and costs with industry standards.

Build rapport with the landlord

When negotiating your retail lease for a retail space, remember it’s not just about numbers and paperwork; it’s about building solid relationships. Foster trust with your landlord through clear, respectful communication, and keep a positive and professional tone throughout the negotiation.

Have all agreements in writing

Ensure a solid lease negotiation by getting everything in writing. Verbal agreements don’t count in real estate — only a signed agreement with the terms you’ve discussed matters. 

Double-check and clarify every detail by carefully documenting all lease terms. Review the written agreement thoroughly, addressing gaps, errors, or uncertainties to avoid future issues.

Give the release clause extra attention

Review your lease to understand when the landlord can terminate it. Check if not paying rent or selling the property allows them to evict you.

Find out how you can end the retail lease if you want to grow your business. If you’re closing the business, consider subletting your store to another tenant.

Always involve a lawyer

Navigating real estate law can be tricky, especially with the legal jargon and complex clauses found in lease agreements. To steer through this, consider consulting with a real estate lawyer who can break down the complexities and make them easier to grasp.

A specialized lawyer can offer a straightforward explanation of your rights and responsibilities in the retail lease. It ensures that you fully understand the terms you agree to, preventing potential disadvantages.

Summary

To find the right spot for your retail business, thoroughly research potential locations, analyze your budget, and understand your target customers well. Making informed decisions at this stage is crucial for the success of your retail venture.

Choosing the right retail location isn’t just about securing a space; it’s a strategic advantage that can boost your business. In the next chapter, we’ll guide you through setting up your store, covering critical elements like layout planning and furnishings.

References

Ramsey, D., & Ramsey, J. (2010). The Everything Guide to starting and running a retail store: All you need to get started and succeed in your own retail adventure. Adams Media.