Confidential Instructions to Shop Mart
As the Business Team of Shop Mart, you are reviewing key issues in tomorrow’s negotiation as well as other new issues that may facilitate an agreement with the Board of Directors of Dermastore.
1. FITOUTS
Fit-out costs are expenses resulting from setting up the whole retail operation, including the design and architecture of the store, as well as costs incurred from the constant renovation of the shopping centre facilities. These expenses are usually allocated to tenants based on their total space occupied (measured in m2).
Dermastore has already maintained that fit-out costs are too high in the face of restrictions placed by the landlord on the store design. We have already engaged in negotiations to discuss the price paid for fit-out reimbursements to our partner company responsible for them. It is our company policy to retain a percentage of these costs on a monthly basis to continuously improve the shopping centre infrastructures.
2. COOPERATIVE ADVERTISING
In light of the investment made in a refurbished space on the 3rd floor, our marketing director suggested an advertising campaign to enhance foot traffic in that area. It will consist of producing flyers with special offers addressed to a large number of households, as well as placing advertising panels near strategic entrances of the shopping centre mentioning the advantages of the initiative.
He quoted different prices depending on the desired impact of the campaign. We believe that the effect of the campaign will be to generate more foot traffic for the shopping mall and consequently more sales for Dermastore and their competitors. Since our negotiation strategy is focused on increasing the number of stores that pay their rent based on sales, we estimate an increase in footfall of between 50,000 and 1,50,000.However, the other side may be reluctant to invest in advertising due to lack of immediate liquidity.
3. LOCATION
Dermastore has been located in a 3rd floor space since it moved to Shop Mart 5 years ago. Its management team is now requesting a transfer to a lower floor so as to boost its sales performance, taking advantage of higher foot traffic. Currently, on the 2nd floor Shop Mart possesses three available spaces, but all of them are bigger than the one occupied by the retailer at the moment, which would automatically imply a higher fixed rent. However, there will be a rent-free period while the change takes place, representing a cost for Shop Mart. When it comes to the 1stfloor, occupation rate is at 100% which would oblige Shop Mart to activate a break-out clause and pay a “premium” to one tenant (same size of space as Dermastore) of around 1,00,000. Furthermore, experience has shown you that location is not a key factor affecting revenue, but things such as good management of costs and inventory are of greater importance.
4. MALL SPACE
Dermastore has already made it known that the store intends to place a small stall in front of their shop, for the purpose of inducing visitors to enter the store, where it would place their newest winter collection of cosmetics products, allowing potential customers to try them for free. As far as Shop Mart is concerned, there is not a strict rule prohibiting outside stalls in the middle of the corridors, although they try to avoid large concentrations of these within the same area.
In the past, the few times permission was granted, this initiative has proved successful not only to the store which promotes its products but also to “neighbour” stores. Shoppers appreciate the special treatment coming from “mall spaces”. Therefore, higher sales are expected for Dermastore as well as for other tenants situated in that corridor. The area itself would become more dynamic and busier as compared to what it was in the past, enabling other stores to fill in the unoccupied spaces at the 3rd floor. Occupation rates would become higher generating new rent. Further, allowing Dermastore Mall Space may make it agree to stay on the 3rd floor.
Based on the information that you have received so far, discuss as a group to put down your negotiation strategies and points that you will use during your discussion with the other team .
What is your plan to get the best deal out of the negotiation that is happening tomorrow.