Little people become giants

BY JONATHAN DOUGHTY

The shopping center industry is hungry, very hungry. It relies on being fed new tenants and operators to keep the mix interesting and different, to keep attracting the guests to come shopping, and, hopefully, to keep them spending.

When I first started in the industry over 25 years ago, having come from the world of food, not property, I found it fascinating how the owners and developers of shopping centers chose their tenants. In almost every case back then, it was because they were an established name, they were prepared to sign a long lease and their covenant, or financial standing, was strong. Nobody seemed to really ask, or care, if the food was good or if it was what our “customers” (now we call them “guests”), wanted to eat. The primary decisions were based on the tenant’s ability to pay rent and to be financially stable.

Of course, these factors were really important to the landlord or developer and I remember working on project after project in the early years with clients who would pay good money for me to advise on their existing tenant mix and when I presented the work, I was told “yes we know they are terrible, but they have a long lease and pay their rent on time.” It was said in a way that almost made it all right that these operators were providing terrible food and service. Certainly in the UK, there were a group of operations and brands that nobody wanted, that were declining in sales, but held primary positions in shopping centers simply because they were first in and signed very long leases with advantageous terms. I guess we weren’t around early enough to advise the landlords and developers not to sign these leases and they probably had little choice anyway, from a very small pool of talent.

So, coming a little more up to date, many of those sites in the UK are now “released” with new and innovative operators in these locations, providing much more of what the guest wants in great environments with fantastic products. There are still a few “odd” ones, mostly held by the department stores and variety stores who acquired restaurant and café locations on the malls outside their stores, but in general, this phase has passed in the UK.

Turning to Europe, it is fascinating to see that exactly the same thing happened, but that it still exists in many centers throughout Europe and with some pretty painful lease contract terms that mean that operators can renew their leases as well once they have come to an end. This is the worst situation for us, as we can’t really change that many things and deliver what the guests really want and, in some cases, you have to work with operators who you know are terrible and are often not even telling the truth on their turnover.

Turnover leases are a good thing in my view. In theory, they share the risk, and the reward, for the success of a leasing deal and see the landlord do well if the operator does well. A lack of truth and transparency can make this very hard and many times when we interview operators (in their own language) we are told that the unit is not successful, does not make money and is therefore not able to pay rent. When we offer with the landlord and developer to take the unit back, the operator refuses and wants to continue to sell food from it. We now know that many of the smaller, less structured operators, who deal a lot in cash, under-declare their turnover by 15-35%. We know this because we quietly observe their trading, their customer numbers, the average spend, and the take per day and compare either against their submitted numbers or the annual figures. Having access to so much data makes our team very good at assessing this and often then discussing it directly with the tenant or operator. Those are always lively debates!

So, from 25 years ago to now, we have seen a change from large operator to smaller, from global multi-site to regional players, and a much large number of local entrepreneurs who have successful businesses in food, but are a little less structured on the accounts, taxation, and rental payments. You can understand why landlords and developers want to deal with larger companies!

The demands for new tenants, interesting concepts, and new food types mean that progressive landlords and developers will have to engage with new operators, however, and, fortunately, there are many of them now appearing in towns and cities across Europe. They are generally better organized, better structured, and better funded than they used to be, they are there for a reason, in that the founders have quite often seen an opportunity to exploit a gap in the market, or the failure of the international brands to arrive has resulted in an opportunity to create a local or regional players where no national ones exist. Most important, though, is that they have a structured growth plan and are probably looking to attract further investment or to effect a sale at some time in the future. This means that their accounting, their structure, and their outlook are all firmly focused on the need to produce good financial figures to make an investment in, or the purchase of, their businesses attractive. This makes it easier for these small companies and operations to “talk” to the shopping center industry.

The team at Coverpoint is now providing its clients with a localized and focused tenant scouting service as well to ensure that these opportunities are not missed.

The “little men” out there, who have one or two great cafes or restaurants that deserve to be found, also deserve the opportunity to operate in high-footfall locations and the chance to grow into “giants.” After all, this is how our foodservice industry was founded, it’s just that it hasn’t quite made the jump to the shopping center industry yet. There is a very real and attractive opportunity in our sector for new foodservice operators and we are on a mission to find them!

Finally, speaking of “we,” by the time you read this, we will no longer be Coverpoint, we will be “JLL Foodservice Consulting”—the new name for our business that truly reflects the extended services that we can now offer to our clients around the world. It is the next step for us, too, as “little people become giants”—well you can dream, can’t you?