Sounding Board: The Lease of Your Worries

How do you feel about lowering inventory and labor costs, bumping up sales and traffic and making your store more of a destination? 

If the answer is yes—and there is no reason it should not be—then the time has come once again to look at the potential of leased departments as an opportunity to try on some new categories without actually buying them.

This is certainly not a new concept and no panacea for a bad store. Leased departments were largely responsible for the rapid growth of the discount store industry in the U.S. in the 1950s and 1960s—much to the chagrin of the department stores which also adopted the strategy of turning over floor space to third parties.

More recently, companies like Macy’s, JC Penney—despite its recent missteps—and Bloomingdale’s have successfully turned their stores into mini-malls by leasing space for designer clothes, jewelry, shoes and restaurants, that give consumers a reason to visit stores when they could just as easily shop online. 

Over the years, some supermarket retailers have tested the waters in peripheral categories like cosmetics, toys and housewares—not true leased departments, but giving limited space to rack jobbers. The term is actually in the dictionary but for those unfamiliar with this virtually obsolete cottage industry—Google it.

Some observers would point out that “leased” departments are still big business for retailers that turn over shelf space to manufacturers in return for… well, that is a Pandora’s box we need not open right now.

Could true leased departments get a significant hold in supermarkets?

On the plus side, agile retailing is the order of the day because consumer tastes change rapidly and trying to keep up can be maddening. Leasing gives retailers low cost access to niche markets, and without additional expenses for such things as hiring additional staff, restocking or liquidating inventory. 

With the right partner that department can be seen as part of the store and not just an obvious add-on. In other words, the goal is for customers not to know that the department is run by outsiders.

By adding a new dimension to the store you may be able, not only to being in new categories, but also add new classes of customers. It is the old idea—albeit somewhat elusive—of one-stop shopping. On the other side of the coin, the manufacturers that buy into these leased departments are getting broader exposure for a minimal investment. 

Retailers have to make sure that the products or services in this department are unique and do not overlap with what the retailer may be doing in other parts of the store. In other words, compatible but different.

Deals with lessees will also specify what percent of department sales will go to the host retailer and what percent of operating costs—including taxes and utilities—will be paid by the lessee. 

There are a number of potential pitfalls when it comes to leased departments, starting with the legalities. As everyone knows, a contract is easier to get into than it is to get out of. As such, the exact terms of the agreement and what is expected of each party should be specified before anyone signs on the dotted line or the first shelf is stocked, and make sure there’s an “out” if either party doesn’t hold up their end of the agreement.

Of course, leasing is a joint venture. As such, some decisions have to be made jointly with the lessee even though retailers generally hate ceding control over anything that happens inside the store. On the other hand, leased departments cannot have free reign and must adhere to the retailers’ operating procedures. The key is to balance the concerns of both parties and leverage each other’s strengths.

However, conflict of some kind is pretty much inevitable. Most differences can be settled amicably if they are dealt with immediately and not allowed to tarnish the store’s image. This may be particularly important to anyone thinking about leasing space to a foodservice operator. Food safety is enough of an issue without turning it over to someone else. 

No one ever said marriage is easy.     

Len Lewis is a regular Grocery Headquarters columnist and veteran industry journalist.