The Rent Review Specialist
Shops
Footfall
Footfall is pedestrian flow, the number of people that walk past the shop on a regular basis. In my opinion, there are two types of footfall: the first stems from fixed attractions, the second from what I describe as ‘magnetic’ retailers, more popularly known as ‘destination’ retailers, (albeit destination retailers are not quite the same).
A fixed attraction is anything that is capable of attracting people regardless, for example a bus terminus, railway station, a public car park, library, a tourist attraction such as a historic building or museum, a church or cathedral, an office building or industrial complex where a large number of people work, a seaside resort, open countryside, national park, and so on. All built-up and many rural areas have their own fixed attractions and the popularity for footfall would depend upon the attraction.
All retailers are capable of creating and maintaining goodwill in their dealings with customers but a ‘magnetic’ retailer is so good at goodwill that the impact of the reputation and level of esteem will radiate and attract or draw customers to that retailer from far and wide. In retailing, a distinction may be made between dependent and magnet or destination retailers. Provided the location is accessible, it doesn’t usually matter where destination retailer is based, people will travel often long distance to shop there. For an ordinary retailer whose attraction is not especially magnetic, such retailers are more dependent upon the continuing existence of footfall generated by others. For such retailers, the trading position is therefore more critical. For magnetic and destination retailers the proximity of other retailers is unimportant.
Fixed attraction footfall may not be enough to support a retail business profitably, because rarely would the retailer have any control over the type of people drawn to the fixed attraction. The potential to be obtained from a trading position that includes a magnetic retailer is easier to gauge because the type of products/goods/services offered by the magnetic retailer are likely to suit particular segments or sectors of the consumer market and determine the spending power of the target customer.
A difficulty for the non-magnetic or not-especially-magnetic retailer is whether the magnetic retailer can be relied upon to remain in the trading position for the duration of the non-magnetic retailer’s business tenancy commitments. A non-magnetic retailer that commits, for example, to a term of 10 without a break-clause will have to be confident that the attraction of the trading position would remain at least constant and certainly no worse for the entire period. If the trading position were to deteriorate during that period of time then it is possible the non-magnetic retailer could become stuck or locked into to an unprofitable trading position and unsaleable business commitment.
I have said that an investor owns the property, not the tenant’s business so the fact the tenant may have got it wrong is in theory nothing to do with the landlord. In practice, the landlord can also lose out because of whether the property would let to another tenant for at least the same rent as the rent the failed tenant had agreed.
When appraising a trading position, the investor must be careful not to fall into the trap of jumping to the wrong conclusion (a possibility made likely as a result of the actual tenant’s comments, for example) by confusing the planning Use Class for the shop, the permitted use in the lease to the actual tenant, and that particular tenant’s style or way of going about running its business within that permitted use. It is important to recognise there is and can be a difference between the actual tenant’s experience of the trading position based upon how that particular tenant has chosen to attract footfall, and the nature and calibre of the footfall itself.
For example, it is by no means unusual for retailers to make pronouncements about the state of the market as a whole as if their subjective experience should be construed representative of shopper behaviour. No retailer has such a monopoly that it can ever be 100% certain that its own experience based upon how it goes about attracting and generating customers is necessarily representative. From the investor’s perspective, as owner of the property, the test of the trading position is not only the experience of the actual tenant but also the potential of the tradition for other retailers and different types of business.
Generally, a regional/national multiple retailer, a specialist destination retailer, a department store and a chain store are likely to be more magnet than a local or independent shopkeeper. Local and independent retailers and shopkeepers are often magnetic to a limited extent, depending upon their reputation in the local community but in the context of an investment proposition the competitive pressures on retailing generally are likely to be more burdensome for the smaller retailer.
When shop investments are offered for sale and whether or not the actual tenant is a multiple retailer, it is common for details of the proposition to highlight trading names of other multiple retailers and large companies in the vicinity. Boosting the attraction of the investment proposition by reference to the nearby presence of well-known retailers is designed to trap the unwary. The question is how many of the nearby multiple retailers would be interested in opening a shop in that trading position if it or the other multiple retailers were not already there. What the investor is unlikely to know (unless exceptionally well-advised and even then not 100% sure) is how many of the multiple retailers in the vicinity are planning or intending to assign their leases or not renew on expiry. When the existing landlord gets winds of the tenant’s intention and depending upon the time-scale the more cunning landlord will sell the investment well before the tenant moves on.
I introduced a test of a trading position in decline when I applied what is known as the knock-on effect of comparable evidence. Basically, what happens is that when rent at review are increased to a level at which it becomes uneconomical for a multiple retailer that retailer will either assign or sub-let the tenancy and relocate to a better trading position (which on the face of it may not be cheaper but is more profitable for that particular retailer) or close down the branch. If when the tenancy is assigned or sub-let or the landlord offers the shop to let on a new lease and the new tenant is not a multiple retailer, often the rent that the new tenant agrees will exacerbate the rents in the trading position, and add to the uneconomical level. Also it is unlikely a tenant of lesser reputation will contribute much if anything to the creation of passing trade. As time passes, the number of multiple retailers in the vicinity drops until the trading position becomes the sole territory of non-magnetic retailers. Often the complaints by local shopkeepers about rents and business rates (business rates are based on Rateable Values in turn calculated by reference to rents) are a legacy of an ex-multiple retailer trading position.
Of course, the same applies in reverse. A trading position will often improve for all manner of reasons, such as a new fixed attraction, the entrance to a new shopping centre, or a letting to a magnetic retailer in the sector of the market where there is a lot of customer spillage or excess for others retailers nearby.
Generally, it is very difficult if not impossible to restore the popularity of a trading position once the rot has set in. It is vicious circle: once people get used to shopping elsewhere what remains of the footfall can give the impression of no shops worth bothering with. Moreover, and although it may not be politically correct to say so, there is nevertheless a reluctance amongst many people when shopping to want to mix and mingle for all and sundry.
A fixed attraction is anything that is capable of attracting people regardless, for example a bus terminus, railway station, a public car park, library, a tourist attraction such as a historic building or museum, a church or cathedral, an office building or industrial complex where a large number of people work, a seaside resort, open countryside, national park, and so on. All built-up and many rural areas have their own fixed attractions and the popularity for footfall would depend upon the attraction.
All retailers are capable of creating and maintaining goodwill in their dealings with customers but a ‘magnetic’ retailer is so good at goodwill that the impact of the reputation and level of esteem will radiate and attract or draw customers to that retailer from far and wide. In retailing, a distinction may be made between dependent and magnet or destination retailers. Provided the location is accessible, it doesn’t usually matter where destination retailer is based, people will travel often long distance to shop there. For an ordinary retailer whose attraction is not especially magnetic, such retailers are more dependent upon the continuing existence of footfall generated by others. For such retailers, the trading position is therefore more critical. For magnetic and destination retailers the proximity of other retailers is unimportant.
Fixed attraction footfall may not be enough to support a retail business profitably, because rarely would the retailer have any control over the type of people drawn to the fixed attraction. The potential to be obtained from a trading position that includes a magnetic retailer is easier to gauge because the type of products/goods/services offered by the magnetic retailer are likely to suit particular segments or sectors of the consumer market and determine the spending power of the target customer.
A difficulty for the non-magnetic or not-especially-magnetic retailer is whether the magnetic retailer can be relied upon to remain in the trading position for the duration of the non-magnetic retailer’s business tenancy commitments. A non-magnetic retailer that commits, for example, to a term of 10 without a break-clause will have to be confident that the attraction of the trading position would remain at least constant and certainly no worse for the entire period. If the trading position were to deteriorate during that period of time then it is possible the non-magnetic retailer could become stuck or locked into to an unprofitable trading position and unsaleable business commitment.
I have said that an investor owns the property, not the tenant’s business so the fact the tenant may have got it wrong is in theory nothing to do with the landlord. In practice, the landlord can also lose out because of whether the property would let to another tenant for at least the same rent as the rent the failed tenant had agreed.
When appraising a trading position, the investor must be careful not to fall into the trap of jumping to the wrong conclusion (a possibility made likely as a result of the actual tenant’s comments, for example) by confusing the planning Use Class for the shop, the permitted use in the lease to the actual tenant, and that particular tenant’s style or way of going about running its business within that permitted use. It is important to recognise there is and can be a difference between the actual tenant’s experience of the trading position based upon how that particular tenant has chosen to attract footfall, and the nature and calibre of the footfall itself.
For example, it is by no means unusual for retailers to make pronouncements about the state of the market as a whole as if their subjective experience should be construed representative of shopper behaviour. No retailer has such a monopoly that it can ever be 100% certain that its own experience based upon how it goes about attracting and generating customers is necessarily representative. From the investor’s perspective, as owner of the property, the test of the trading position is not only the experience of the actual tenant but also the potential of the tradition for other retailers and different types of business.
Generally, a regional/national multiple retailer, a specialist destination retailer, a department store and a chain store are likely to be more magnet than a local or independent shopkeeper. Local and independent retailers and shopkeepers are often magnetic to a limited extent, depending upon their reputation in the local community but in the context of an investment proposition the competitive pressures on retailing generally are likely to be more burdensome for the smaller retailer.
When shop investments are offered for sale and whether or not the actual tenant is a multiple retailer, it is common for details of the proposition to highlight trading names of other multiple retailers and large companies in the vicinity. Boosting the attraction of the investment proposition by reference to the nearby presence of well-known retailers is designed to trap the unwary. The question is how many of the nearby multiple retailers would be interested in opening a shop in that trading position if it or the other multiple retailers were not already there. What the investor is unlikely to know (unless exceptionally well-advised and even then not 100% sure) is how many of the multiple retailers in the vicinity are planning or intending to assign their leases or not renew on expiry. When the existing landlord gets winds of the tenant’s intention and depending upon the time-scale the more cunning landlord will sell the investment well before the tenant moves on.
I introduced a test of a trading position in decline when I applied what is known as the knock-on effect of comparable evidence. Basically, what happens is that when rent at review are increased to a level at which it becomes uneconomical for a multiple retailer that retailer will either assign or sub-let the tenancy and relocate to a better trading position (which on the face of it may not be cheaper but is more profitable for that particular retailer) or close down the branch. If when the tenancy is assigned or sub-let or the landlord offers the shop to let on a new lease and the new tenant is not a multiple retailer, often the rent that the new tenant agrees will exacerbate the rents in the trading position, and add to the uneconomical level. Also it is unlikely a tenant of lesser reputation will contribute much if anything to the creation of passing trade. As time passes, the number of multiple retailers in the vicinity drops until the trading position becomes the sole territory of non-magnetic retailers. Often the complaints by local shopkeepers about rents and business rates (business rates are based on Rateable Values in turn calculated by reference to rents) are a legacy of an ex-multiple retailer trading position.
Of course, the same applies in reverse. A trading position will often improve for all manner of reasons, such as a new fixed attraction, the entrance to a new shopping centre, or a letting to a magnetic retailer in the sector of the market where there is a lot of customer spillage or excess for others retailers nearby.
Generally, it is very difficult if not impossible to restore the popularity of a trading position once the rot has set in. It is vicious circle: once people get used to shopping elsewhere what remains of the footfall can give the impression of no shops worth bothering with. Moreover, and although it may not be politically correct to say so, there is nevertheless a reluctance amongst many people when shopping to want to mix and mingle for all and sundry.