Financial components and budgetary considerations.
What is it going to cost me? That’s the question many retail furniture storeowners ask when contemplating a major capital improvement. If you are considering an investment in furniture merchandising space, you need to look carefully for hidden costs that can easily sneak up and surprise you.
The first article in this series, published in the April/May issue of FURNITURE WORLD (posted to the operations management index on www.furninfo.com) defined the importance of having a plan, and provided an overview of the planning process. In this issue, we look at the financial components and budgetary considerations that will help you to make a wise investment in merchandising space.
It is best to compile detailed cost information that compares your options in a spreadsheet format for easy comparison. Some costs such as monthly rent, taxes, utilities, moving, renovation, financing, and maintenance are easy to calculate. Others like differences in warehousing and delivery costs specific to individual locations will be harder to quantify. Human resource costs for staffing sales positions, management and office personnel should be calculated too.
RENT/ PURCHASE COSTS
Comparing the cost of a rent vs. lease option for a single piece of property is a relatively simple NPV calculation that factors cash flows associated with owning or leasing discounted over time. When multiple locations are under consideration, renting or leasing must be evaluated within the larger context of long-term profitability, factoring in your plans for the growth and stability of your business.
Market specific analysis can be supplied by commercial real estate investment consulting and analysis service firms, and from the U.S. Department of Commerce. Computer software is also available that can help you to analyze lease vs. lease budget and lease vs. purchase decisions. These allow you to analyze, budget and compare real estate leases domestically or internationally. They feature reports and graphs including cash flow, profit & loss, NPV calculations, capital and expense budgets.
Rental rates during the first quarter of 2002 of 5,000 to 15,000 s.f. varied from $80.00 in San Francisco to $31.00 in Oakland to $25.00 in Boston to $10.00 in Columbia, SC.
There is a "rule-of-thumb" calculation furniture retailers can use to calculate how much rent they can afford. It is that 5% of anticipated sales revenue may be spent on rent (at break even). This is just a quick and approximate measure. Different locations will contribute unique costs to your operation.
AVOIDABLE COSTS AND TAXES
Some costs are unavoidable, some can take you by surprise and others can be negotiated away. Try to make sure that you know all the facts. The property’s owner/builder should provide you with a copy of fire, electrical and structural inspections as well as regulations that affect the store’s exterior. These include the required number of parking spaces, zoning and sign limitations that can facilitate or restrict your business activities. Space should also conform to federal, state, and local laws, including building codes and accessibility standards for the disabled and the elderly.
Don’t forget to investigate any tax advantages or abatements you might receive within the perspective of your overall tax situation. If you are leaning toward purchase, you might investigate economic incentive programs offered by developers and government agencies. A federal program, Local Economic Revitalization Tax Insurance Act (LERTA) allows local municipalities, school districts and counties to offer abatements on property taxes for up to 10 years to prospective property buyers of buildings in need of improvement.
If you are purchasing, buying, building or renovating retail space, you may want to consider using the services of a professional planner. The process of designing or redesigning retail space and hiring a store planner was addressed in the April/May 2002 issue of FURNITURE WORLD (posted to the Operations Management Index on www.furninfo.com).
You can consult an interior designer, an architect or a store planner who specializes in the furniture industry. Letters following a name identify credentialing associations such as A.I.A., A.S.I.D., I.D.S., I.S.P., C.S.I. Membership in a professional association usually denotes a certain degree of competency.
Store planning firms typically have a staff of store planners and offer a variety of services such as site feasibility studies, site surveys, conceptual store planning and design, construction contract documents, building permit expedition and site project administration.
The costs attached to professional planning services will vary. Planning professionals can charge an hourly rate, flat fee or percentage of construction cost.
Although there is a cost associated with hiring a design firm, there are also costs that should be considered for not hiring one. Retailers who divert in-house resources away from daily operations, sales and marketing during the planning and construction of a new facility may see substantial negative impact on their operations. This fact should be noted in any cost analysis.
The normal renovation cost for a 25,000 to 30,000 square foot store is $20.00 per square foot. Retailers often defer or reduce these upfront costs by negotiating leases whereby the landlord does all or a majority of the work in return for increased rent and or a longer lease term.
Once the renovation process begins, it is vital to have a management representative on-site to oversee the process. Not attending to this detail is like asking for shoddy work, delays and cost overruns. This person should be responsible for expediting tasks, monitoring work loads, resolving contractor/subcontractor, union/non union disputes and scheduling.
Delays are a common occurrence in the construction business and can be extremely costly, but dealing with municipalities and their building inspectors (fire, plumbing, electrical and in some cases, state elevator/escalator), can hold up or completely stop an operation.
The zoning board can hold up a project for reasons such as disallowed signage, non-compliance with federal handicap laws and corrections that need to be submitted. Adherence to originally submitted drawings, if at all possible, is a benefit. Municipal boards do not like to see changes made following their approval.
To avoid long zoning board delays, make sure that original drawings comply with all local codes. Inspection delays can be alleviated through compliance with every suggestion made. It is best to have one diplomatic person responsible for dealing with inspectors who can either expedite or shut down your entire operation.
An example of a non-compliance delay occurred during my tenure overseeing design, space planning, construction and renovation for Seaman’s Furniture.
In this case, the renovation of a semi-finished "Vanilla Box" space was well underway. All preliminary systems such as plumbing, electrical systems and sprinklers had received an "OK" inspection sticker, a temporary "C of O" (Certificate of Occupancy). The sprinklers were loaded, active and approved. Furniture was on track to be brought in before the final walk-throughs. Final inspections are necessary to make sure all the safety features such as emergency lighting and exit signing are in place.
Seventeen tractor-trailers loaded with the merchandise ready to be unloaded had arrived on schedule with seven more vendor trucks expected the following day. The Fire Marshall and Building Inspector had other ideas. In their opinion, the store was unsafe. The marshals decided that a fire hydrant needed to be placed in the entrance of the shopping area… a job which might take several weeks to complete.
This problem resulted from the landlord’s failure to respond to the inspector’s requests. These situations are routine and require a calm, problem-solving approach. In this case the solution was to hire a "fire watch" at $80.00 per hour — 24/7 until the hydrant could be installed.
Luckily, the trucks had not been sent back. They were waiting in a nearby area and the store was able to open on time. The expense for the "fire watch" was small in comparison to the cost of delaying the store opening for as much as a month. Had this situation been handled by a lower level contractor or employee, a different result would have almost certainly occurred.
COST OF A POOR LOCATION
Not all locations are created equal. Settling for a poor location implies a cost in decreased traffic, loss of goodwill, wasted advertising dollars and reduced sales revenues. These can be quantified, treated as costs and measured as a lost opportunity to secure an optimal location.
Remember that marketing truth— Location, Location, Location. Look for your property near the heavy-hitters such as home improvement stores. These make great neighbors, as do leading merchandisers, super bookstores, grocery-anchored centers and so forth. You will benefit greatly from this type of location. Even a small store that is well planned and merchandised can get healthy volume from a superior location.
Another choice position for many stores is near all the other furniture stores in town. People like convenience, so cluster merchandising is a correct way to position yourself. Successful car dealerships and jewelry stores for example, are frequently found together.
THERE IS MORE TO LIFE THAN COSTS
Remember that in spite of what insurance actuaries may believe, not all costs can be measured in dollars. There are intangible costs associated with certain locations and business decisions. These can take the form of decreased convenience or shattered peace of mind.
It doesn’t matter if you are thinking about remodeling an existing space, are ready to set up a new location in a newly-built prototypical space or having a grand opening in an older building, you still need to look closely at the costs in an orderly and focused way. This can allow you to make the best long-term decision for your business and for yourself.
Bill Blake is President of WRB Associates a space planning and design firm that creates and maintains retail environments that increase sales per sq. ft. and boosts merchandise turns. Questions can be sent to Bill care of FURNITURE WORLD at email@example.com.