Common Retail Leasing Mistakes: Effective Competition Analysis

Understanding your competition is critical to business success. In fact, without an in-depth analysis of your competition and the businesses around them, you will not be able to follow these fundamental marketing strategies that are vital for consistent business growth and performance:

• Pricing Strategies
• Delivery Strategies
• Promotional Strategies
• Advertising which displays your unique service or product offering
• Understanding what factors give your business a competitive edge and using those in advertising
• Leasing Structures that protect and promote competition

This article is part of the LeaseInfo Series, Common Retail Leasing Mistakes. In this series the LeaseInfo Team breaks down fundamental retail leasing ideas and shows you how to apply them effectively. Once you’re done reading about Competition Analysis, check out our other articles. We recommend Retail Lease Negotiation and Hyper Local Economies and Their Impact on Traditional Shopping Centres.

Retail Competitor Analysis

The first step in understanding your competition is by completing a Retail Competitor Analysis. This is particularly important for new businesses, as it is paramount to connect with a potential customer base as quickly as possible, and you cannot do so when you’re advertising and product offering is not hitting the mark. That said, competition analysis is an ongoing process, healthy, proactive businesses will constantly be surveying the market for new ways to connect with their customers.

So how do you complete a Retail Competitor Analysis? First, find your competition, this may seem like a simple step, but it is a highly complex process. If you are unsure about how to determine your trade and catchment area as well as the market you currently occupy then we recommend you check out our article on Analysing Retail Sales Potential to help you understand how to find your competition.

Once you have a list of all your potential competitors, ask yourself the following questions about each business:

What are your competitors:

• Strengths?
• Weaknesses?
• Marketing Strategies?
• Pricing Strategies?
• Product offering?
• Proximity to your location?
• Annual Sales?
• Leasing structure?

Creating a Strategy

Answering these questions can be a time-consuming process in which retailers must carefully research. Much of this information is publicly available and can be found with some online digging.

That said, visiting the location in person can help you to understand minute details such as shop size, frontage, in-store promotional marketing, customer service and the visual display of their products or services.

Be sure to check online reviews of the competition to gain a better understanding of how you can tailor your offering to suit the potential cliental.

For information that is difficult to source or is not publicly available, consider employing the services of retail information experts to help gather the appropriate data.

Once you have completed the Competitor Analysis, its time to put it into action. Use the information gathered to determine your unique product offering and competitive advantages.

Take the gaps in the market that you have established and turn them into marketable strategies for your company. When looking at marketing opportunities make sure to keep them realistic and focussed on solving a particular problem or filling a particular niche.

Shopping Centre Competition

If you are planning to open in a shopping centre, remember, the shopping centre will almost never give you exclusivity of your use. That means you need to prepare for the inevitable threat of competition in proximity to your store.

Is your point of difference strong enough to withstand a direct competitor moving in next to you?

Competitive Rents

Apart from knowing how your competition operates, you need to understand what rent and lease terms your competitors have achieved. If you are paying more than your competition, your business is already well behind the eight ball and may not recover during an economic downturn.

Knowing what your competition is paying can also help negotiate a more reasonable rent during a Market Rent Review or during pre-lease negotiations.

Occupancy Cost Ratio (OCR)

Occupancy Cost Ratio (OCR) is the percentage of rent a tenant pays from their sales. Different industries have different OCR’s to how much rent they should be paying per m² of their premises.

Establishing the OCR of your competition is an extremely important benchmarking tool to help you establish how much rent you should be paying and the maximum you can afford.

To calculate OCR, establish how much rent the retailer is paying and how much they make annually and divide the former over the latter (rent / income = OCR).

Let’s consider the following example of 5 direct competitors:

In this case each competitor pays approximately $2,000 per square meter which accounts for 7.95% of their annual income. How would this compare to a store you were about to open? This information can further help you negotiate rent, for example if your OCR was 10% and your competition was paying 8% then you could use this information to readjust your rent to fit the market standards.

OCR can also be used to predict potential income and rent thresholds. Using the above standards, you’ll want to try and earn more than $2,000/m² (per annum) and not pay more than 8% of your income as rent.

NOTE: This information can sometimes be difficult to obtain so do not hesitate to seek advice from a leasing database or service.

Author

This post was authored by Simon Fonteyn. Simon is one of Australia’s leading experts in retail, childcare and medical leasing and rental valuations. He holds a Degree in Accounting & Finance, a Diploma of Valuation, a Masters of Management and is an Associate of the Australian Property Institute. With over 25 years experience in the commercial property industry, Simon founded LeaseInfo® as a way to provide more transparency to the industry.