A recent article over on Chief Executive that outlined six questions a CEO needs to ask the Director of Real Estate is a must read for Supply Management. In many companies, real estate flies below the radar, but often accounts for a significant portion of spend, especially when lease terms are factored in. In particular, Supply Management needs to know:
- What are our aggregate lease obligations?
In some companies, only payroll, debt, and cost of goods sold obligations will be greater than lease oligations. For some industries, lease costs will be very significant. Consider the example of how a restaurant chain saved 3.38 Million simply by reducing lease costs at only seven locations.
- What is our key metric for evaluating occupancy costs?
In some industries, market rate is irrelevant. What is relevant is whether or not the occupancy costs of the location make economic sense for the location based on actual performance. In the retail and restaurant industry, it’s typically the occupancy costs as a percentage of sales that matter — and these should be below a given threshold. For example, when occupancy costs exceed 10% of sales, there is a greater than 50% chance that the location will lose money. However, if occupancy costs are less than 8% of sales, there is less than a 20% chance that the location is losing money.
- If our rent is too high, what are we doing about it?
A signed lease should not deter action. In most instances, a landlord has a strong interest in retaining a tenant and the associated rent cheque. A tenant who goes out of business automatically vacates the premises and voids the rent cheque. Even though it can be difficult to engage a landlord in a lease negotiation, there are strategies, and risk averse landlords will often prefer a smaller rent cheque than no rent cheque for an extened period of time.