How Retailers Cope With Rent Inflation
Retailers must cope with rent inflation just like residential tenants and other business owners. When a lease comes up for renewal, the owner of the property you rent might increase the amount you pay every month to cover his increased expenses. For example, if property taxes increase, the owner will want to pass on those expenses to his renter. Fortunately, retailers can offset rent inflation through in-house adjustments.
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Negotiation
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When viewed as a starting point for negotiation, rent inflation becomes easier to cope with. While landlords are not required to negotiate with tenants, they will often consider alternate offers, especially from a long-term or courteous tenant. Negotiation is a form of compromise, so it will not eliminate rent inflation. It will just lower the additional expense to a more manageable level. Prepare a detailed explanation as to why the rent increase is prohibitive, then present a reasonable counteroffer. Where possible, offer comparables from other local retail establishments.
Price Increases
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Just as rent inflation is necessary for landlords, price increases sometimes become necessary for retailers. You might lose customers if you boost your prices too much, but you can usually retain loyal customers by explaining the increases and avoiding big hikes. Additionally, retailers can reduce backlash from price increases by changing prices during high-demand periods. If your business experiences seasonal surges in sales, for example, that would be a good time to implement the changes.
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Downsizing
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Retailers are often scared of increasing prices because they worry about alienating customers. This is a valid point, and downsizing is one alternative. If you keep prices the same but reduce the quantity or quality of the product, you will save money to offset rent inflation. Discerning customers will notice the change and might react negatively. Prepare employees to respond proactively to these concerns. Additionally, take care to avoid bait-and-switch tactics or other unethical sales practices.
Commission
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Landlords will sometimes amend lease agreements to include a set base for rent in addition to a percentage of sales. Depending upon projected sales, this arrangement benefits retailers by decreasing their bottom lines and avoiding the ramifications of rent inflation. If projected sales are high, however, the total expenses might exceed that of the base rent with inflation. Retailers should evaluate sales figures from previous years to determine whether this alternative will be in their best interests.
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References
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