With retailers keen to dispose of excess space, businesses have started to sublet sections of their shops to other traders.
Carving up your retail estate and subletting floor space might sound like the perfect solution for how to downsize in an era when convenience and online purchasing is fast replacing large, out-of-town shopping. But while such a decision makes good business sense, a multitude of obstacles can get in the way.
Is the spectre of inflexible leases, uncooperative landlords and planning permission refusal, not to mention the retail industry’s collective drive to streamline rather than upscale operations, threatening to halt the carving up of shops concept before it has even had a chance to get off the ground?
Redefining retail space
The internet is largely to blame for this race to ditch space, but there are a number of other contributory factors.
For instance, consumers’ growing penchant for shopping little and often has resulted in a mounting number of bricks-and-mortar retailers seeking to redefine the role of the physical retail space itself.
In essence, shoppers often want to “spend as little time as possible” in physical stores, says retail analyst Freddie George at Cantor Fitzgerald. “The trend of convenience is being reflected right across the board. People don’t want to go to a big store - they want to pick it up locally,” he says.
The rapid emergence of multichannel retailing is also accelerating this dramatic shift in consumer behaviour, according to George. “The internet is cannibalising some stores,” he says.
Kingfisher is one retailer attempting to give consumers more convenient ways to shop by making B&Q’s vast warehouse-like retail spaces more streamlined and profitable. “A lot of the B&Q stores are not in the right location for retail outlets,” George says, adding the retail chain is “desperate to try to downsize”.
Subleasing floor space is part of Kingfisher’s “rightsizing” - rather than the more doom-laden moniker ‘downsizing’ - strategy. In south London, the decision to split its 120,000 sq ft store in Belvedere and sublet 60,000 sq ft of space to Asda is proving profitable for the DIY giant, according to group chief executive Ian Cheshire. The new smaller store is “taking almost the same amount of money” as the larger old store, Cheshire told Retail Week last month when the DIY giant revealed its full-year results, adding that Kingfisher could make the same money with 20% less space across its portfolio.
“If you started with a blank sheet of paper, you could probably take the same amount of trade in 20% fewer stores.
If you could find complementary retailers to take space - like cycle shops, or retailers such as Go Outdoors - why wouldn’t you get them in? We are taking almost the same amount of money,” he said.
Reducing the B&Q trading space in the Belvedere store by 50% has resulted in a sales density improvement of 88% and a capital value increase following change of use, according to Kingfisher’s results statement. Opportunities to downsize further stores are also being investigated, added a spokesman, who said plans to do the same in four more shops were already in place.
In terms of overall profitability, reducing the B&Q portfolio footprint “could be a fantastic unlock,” Cheshire said. “It could be really significant for our returns.”
It seems like a great idea, but the subletting strategy is not without its obstacles. Cheshire hints at difficulties in getting planning permission and landlord approval on any new tenants, unless leases are near to expiry. It could take “a long time” to achieve the size of the estate Kingfisher wants, he said. “It’s not going to be a quick fix because we don’t have a mountain of lease expires.”
In Belvedere, planning permission took 12 months to be granted, while obtaining permission for the four further sites is expected to take between six and 18 months, demonstrating just how many hurdles the retail giant expects to face.
Kingfisher isn’t the only home improvement retailer to attempt to reduce trading space. Focus DIY dropped 26% of its floor space in 2010 - although the initiative was too late to save the retailer, which entered administration the following year. Last September, meanwhile, Wickes revealed plans to ditch 1.4 million sq ft as its burgeoning online operation began to reduce the need for physical store space.
The need for retailers with large stores to retrench in the current economy is “driven by the desire to downsize floor space and cut costs,” according to Deloitte head of real estate advisory Richard Owen. But, he says, subletting does throw up a variety of difficulties for retailers. “The first is whether or not the user [new tenant] is acceptable,” he says. “One of the things retailers will search for is open A1 planning consent [flexible planning consent for retail sales of any goods other than food] - not all leases would allow change of use.”
Another issue is car parking, which can become a problem if there are complications over changing the use of the site. Owen says this is why the flexibility of open A1 consent is so desirable. In addition to these bureaucratic issues, obtaining the consent of landlords can sometimes prove difficult, he says. While some are pragmatic and amenable to change, others can create problems.
Such stumbling blocks are worth attempting to overcome however, Owen maintains, as subletting “makes a huge difference to the margins that the retail location will make and halve property costs”.
Struggle to sublet
There’s one other big issue. With many retailers scrambling to reduce rather than increase their footprint, it leaves a diminishing pool of companies interested in taking on subleased floor space.
George says: “Everyone wants to reduce space. It will be a much more competitive market. Everyone has too much space - their stores are too big for what they really want.”
Some out-of-town retailers will struggle to sublet floor space to grocers, George says, because many supermarkets are retrenching from bigger stores.
A lot of food retailers will be looking at downsizing their shops following the success of convenience store formats, he points out, meaning taking floor space from other retailers will be low on their list of priorities.
In fact, any big-box retailer wanting to lease existing trading space, whatever category they operating in, will face an uphill struggle. “I don’t think it’s going to be easy - it’s a very tricky thing for them to do,” George says.
The obstacles are sizeable and, unless a lease is up for renewal, attempting to push through a deal can be a real headache. But when the potential benefits are so high, it’s likely to be worth looking into.