A new beginning for Retail Franchising?

The capitulation of some of the country's most trusted retailers in recent months is surely causing prospective business builders to exercise caution in approaching any opportunity with a shop lease attached. So while interest in franchising is markedly on the up as the increased uncertainty attached to employment causes more people to examine alternate modes of generating an income, are retail franchisors expecting a struggle to fulfil their franchise owner recruitment targets?

Not according to Cash Generator Franchise Manager Robin Page, who asserts: 'Although the press like nothing better than to talk down retail and seem to get great pleasure in spreading doom and gloom, there are many retailers who are performing well.'

Dream Doors Managing Director Troy Tappenden agrees: 'Even though some retail brands are struggling, others are achieving very strong growth because of where their product sits in the current economic climate. If your product is specific and sits well, you've got a very good chance of having good growth and profits. For instance, Dream Doors' kitchen facelifts are in demand because when people are not moving, they're improving. Plus, we sell well to senior citizens who are less affected by pressures on mortgages and incomes. If there's a strong quality business that's positioned well, people will want it.'

For retailers that continue to flourish during the economic downturn, there is more good news. According to retail property specialists we are in a window of tremendous opportunity for new retail launches. 'In the current marketplace there is the capacity for retailers to expand and grow their businesses like they could never have done before the credit crunch,' says Warren Doomb, Head of Retail at retail property specialist David Menzies Associates. 'We're meeting with people looking to capitalise on the availability of retail space on a weekly basis because now is a time when smaller retailers can achieve growth that they would have struggled to achieve in a stronger environment.'

The collapse of big high street names such as Woolworths and Zavvi has left hundreds of high quality sites empty. This increase in availability is creating a situation where anxious landlords, no longer able to pick and choose from the large national brands, are prepared to let strong retail locations to tenants whose networks are at a much earlier stage of development.

Pretzel retailer Auntie Anne's is an example of a franchise that is capitalising upon this new availability. 'We are being inundated with offers and are securing many strong locations on favourable lease terms that two years ago were only being offered to major national retailers,' says Managing Director Robert Burton. 'This is the case with the very best metropolitan shopping centres right the way through to small provincial town centre shopping centres. We are even talking to some shopping centres that previously weren't even accepting kiosks. There's definitely a big mood swing towards landlords working with retailers.'

As any economist will tell you, where there's a shift in the balance of supply and demand there are pressures on the associated prices. With landlords suddenly experiencing a vacuum of prospective tenants, rents are heading downwards. 'Landlords are now paying rates on empty properties,' points out Robin. 'This, as well as a general downturn in demand and the growing impact of out of town retail parks and supermarkets, is forcing traditional high street occupiers to be more willing to negotiate.

'Sometimes this is in the form of actual rent reductions, but it can also be through incentive packages such as rent free periods or stepped rents. Also existing leaseholders keen to offload sites are now prepared to either sub-let below the rent they are paying or offer reverse premiums to induce others to take over leases.'

This is providing real savings for franchise owners. 'We're getting roughly 25 per cent knocked off across the board,' reveals Troy. 'On top of that we're negotiating the first three months rent free as well to tide the franchise owner over while they're doing the shopfit.'

Robert agrees: 'Landlords are generally more sympathetic towards agreeing some form of deal on the lease. New sites that are becoming available are certainly at lower rates than we would have expected 12 months ago - we're looking at some sites that are 30 per cent below where they were early last year.'

For Warren, the most obvious trend is the switch from a requirement for rents to be paid in advance quarterly to monthly. 'This means businesses aren't under quite the same cash flow demands as they have been previously,' he reflects. 'Also, most are asking for break clauses, giving the tenant the flexibility to walk away from a site that isn't performing for them. Retailers are generally being tougher in their demands, and if they have the covenant strength of a substantial franchisor with strong accounts they can do attractive deals.'

However, Robin cautions, 'landlords always look for security to ensure they receive their rental income and that the property is maintained. Even when they are having to discount or give larger incentives they still need to maintain this.'

With some forecasters, the government included, suggesting that the current recession could last up to six quarters, early 2010 could herald an upswing in fortunes. What does this mean for retail franchises seeking to exploit the attractive deals being offered? 'There is an element of crystal ball gazing, but we think there's a 12 - 18 month window to lock into some really cracking deals,' says Robert. 'We posted our best December ever in terms of sales in 2008 and with the lowered rents on offer it certainly makes it easier for new franchise owners to break even quicker and make greater profits. There's more window shopping going on, but people walking past Auntie Anne's are hungry, like what they're seeing and are buying.'

Dream Doors are also accelerating their showroom openings in order to capitalise upon the opportunities currently being offered. 'We usually allow our franchise owners to operate from home for their first year while they build the business up,' reports Troy. 'However, we're now fast-tracking them to open six months ahead of the business plan. This requires a lot more support from us - it's double the workload - but it's worth it to provide our franchise owners with the credibility of a showroom.'

Reported by Stuart Anderson