Mini Case:
Read the article, state the problem, list all the important information by bullet points, and write a recommendation summary and tell the reasons why.
La Boca
Stephanie Wilson must decide where to open a ready-to-wear store she’s been contemplating for several years. Now in her late 30s, she’s been working in municipal government ever since leaving college, where she majored in fine arts. She’s divorced with two children (ages five and eight) and wants her own business, at least partly to be able to spend more time with them. She loves fashion, feels she has a flair for it, and has taken evening courses in fashion design and retail management. Recently an old arcade building in the downtown section of her mid-western city had been rehabilitated and had been turned into a new shopping center and was looking for locally based retailers to make this a great local shopping option. This news crystallized her resolve to move now. She’s considering three locations.
THE DOWNTOWN ARCADE
The city’s central business district has been ailing for some time. The arcade renovation is part of a master redevelopment plan for the 1 square mile that constitutes this area. The arcade has a new department store, and the redevelopment already has a design center, and several office buildings already operating. Completion of the entire master plan is expected to take another six years.
Dating from 1912, the arcade building was once the center of downtown trade, but it had been vacant for 15 years. The renovation includes a three-level shopping facility, low-rate garage with validated parking, and convention center complex. Forty shops are planned for the first (ground) floor, 28 more on the second, and a series of restaurants on the third.
The location Stephanie is considering is 900 feet square and situated near the main ground floor entrance. Rent is $25 per square foot, for an annual total of $22,500. If sales exceed $285,000, rent will be calculated at 8 percent of sales. She’ll have to sign a three-year lease.
TENDERLOIN VILLAGE
The gentrified urban area of the city where Stephanie lives is nicknamed Tenderloin Village because of its past life as part of the meat packing area. Today, however, the neat, well-kept brownstones and comfortable neighborhood make it feel like a yuppie enclave. Many residents have done the rehabilitation work themselves and take great pride in their neighborhood.
About 20 small retailers are now in an area of the Village adjacent to the city’s sports complex with a basketball/hockey arena and an indoor tennis center. Most of them are what might be termed new-American restaurants with menu options that reflect the upscale residents. There are also three 2 small women’s clothing stores. The sports complex is located about ¾ of a mile from the center of downtown where the redevelopment plan is taking place.
The site available to Stephanie is on the Village’s main street on the ground floor of an old house. Its space is also about 900 square feet. Rent is $16,200 annually with no percentage of sales clause. The landlord knows Stephanie, but will still require a two-year lease.
APPLETREE MALL
This suburban mall has been open for eight years. A successful regional center, it has three department stores and 100 smaller shops just off a major interstate highway about eight miles from downtown. Of its nine women’s clothing retailers, three are in a price category considerably higher than what Stephanie has in mind.
Appletree has captured the retail business in the city’s southwest quadrant, though growth in that sector has slowed in the past year. Nevertheless, mall sales are still running 10 percent ahead of the previous year. Stephanie learned of plans to develop a second shopping center east of town, which would be about the same size and character as Appletree Mall. But ground breaking is still 18 months away, and no renting agent has begun to enlist tenants.
The store available to Stephanie in Appletree is two doors from the local department store’s location in the mall. At 1,200 square feet, it’s 33% larger than the other two possibilities. But it is long and narrow – 24 feet in front by 50 feet deep. Rent is $28 per square foot ($33,600 annually). In addition, on sales that exceed $480,000, rent is 7 percent of sales. There’s an additional charge of 1 percent of sales to cover common-area maintenance and mall promotions. The mall’s five-year lease includes an escape clause if sales don’t reach $480,000 after two years.
Additional Costs
Stephanie knows that rent is only one of many costs that she will incur in opening a store. Fixturing costs (racks, display units, shelving units, etc.) tend to run about $12 a square foot. While this cost can be depreciated over five years, she would still need to purchase it all at one time in setting up the store. And there would be the cost of the inventory. Stephanie has consulted with a number of people in the industry, as well as some national averages compiled by the National Retail Association, and the turnover rate for women’s clothing should be about 3.5 times a year, with a gross margin of 42%. She knows that this will be useful in determining what would be her initial investment in inventory, since she would have to pay for most of this up-front until she established a line of credit with the suppliers. And then there is the number of employees that she would need. The more hours the store 3 would be open, the more employees and the higher the payroll cost. The location at the Tenderloin Village would allow Stephanie to set her own hours. The Downtown Arcade has mandatory open hours of 10AM – 7PM, Mon.-Sat., with Sunday openings left up to the individual tenant. The parking structure will be open on Sundays with free parking and the department store that is near the arcade is open on Sunday from 12PM to 5PM. However, no stores that are in the arcade are currently open on Sunday. Appletree Mall requires all tenants to be open during mall operating hours, which are 10AM – 9PM Mon-Sat, and 11AM – 6PM on Sunday. Stephanie has about 30 days to make a decision in order to be open by the Christmas selling season.
Stephanie also has a limited budget for opening the store, she has saved up $25,000 and her parents are willing to loan her an additional $35,000 if needed. Stephanie also has a line of equity on her house which could provide an additional $35,000 in funds
