The Retail Doctor

How can retailers utilise open-to-buy budgets and what are some useful tips when negotiating lease renewals. The Doctor responds.

I have just opened a small boutique fashion shop and I heard someone at a centre retail meeting talk about 'Open to buy budgets'.Can you advise what this is and how it is used?

Open-To-Buy is a merchandise budget, usually stated in retail dollars, frequently broken into key departments or categories. It is very useful for fashion and seasonal merchandise, where the specific skus may change, but the departments, classifications and sub-classifications remain relatively stable, and inventories are brought in at the beginning of the selling season, and need to be managed down to a pre-determined ending level by the end of the selling season.
The first stage is to have a buying plan.
* An Open-To-Buy begins with a  monthly sales plan,(can be weekly)
* Once a sales plan has been developed, ending inventories need to be planned. You are simply asking "How much inventory do I need at the end of each month to support the next month's sales as well as maintain effective merchandise displays?"
* Once sales and inventory has been planned, an inventory receipt plan can be arrived at. At this point you area asking, "How much inventory do I need to bring in to cover my sales, markdowns and adjustments, given my planned beginning inventory, in order to end up with my planned ending inventory?"
* The open-to-buy is the planned inventory receipts for that month less the current purchase commitments. For future months, especially for future seasons, it quantifies any remaining available open-to-buy for that specific month.
Now that you have the plan
* A well structured Open-To-Buy presents both the plan and actual results, and allows you to track progress as the season goes along. The open-to-buy through any given month is the planned ending inventory less the projected actual ending inventory. For future months, it identifies through any given month whether additional inventory is needed or whether too much inventory has already been committed to.
* Within a season, an Open-To-buy gives you  the information necessary to make decisions regarding what to reorder,
* Open-To-Buy gives you the information necessary to assure that ending inventory levels don't exceed plan, and tie up your cash flow.
Rdq:I am just about to enter into a lease renewal and was hoping that you could provide me with some tips to negotiate my lease renewal?
When negotiating a lease renewal I would recommend that you need to have a thorough understanding of the following:
Firstly, gather as much knowledge as you possibly can about the centre?s performance, category and customer profile as is possible. In this research period it is vital to gain as much knowledge as you can. This is often gained by observation, conversations and to support you there is both industry information available, public records for leases such as the lands title office, that carry past leases records (which can show you the movement over a period of prior years) as there are leasing consultants who can discuss the specifics with you.
For example, do you know if the site rental being asked is comparable on a similar rate per square meter to all other existing competing merchants within the shopping centre in the same category of business? or is the percentage rental lowered to a level so as to not initiate overage rental due to excessive performance from the new lease. (Yours sounds like it will need review, to my earlier point)
 2/ Once you have established this information and have a good understanding of the centres performance; the next step is to really consider your business competencies and point of difference within the centre. Have you evolved over the last 5 years? Is your product easily competed with or does your offer hold a value within the centre tenancy mix that will bring customers into the centre specifically for your point of difference? This could be one of your negotiating perspectives if this can be clearly identified. 

What do your profitability forecasts and cash flow forecasts tell you? This is all important to know in detail as you establish your case. For example do you know your break evens and what level of sales are required to cover your rental and other costs? (* Be conservative with your sales forecasts)

Are you completely familiar with the renewal of lease terms and the financial impact of the lease over its fixed term?

The next stage is to have a clear negotiating position outlined, as it is in any negotiation, What is it that you want to achieve in this lease renewal?

Every site has its merits and there is not such a thing as a standard industry rate as every site is different. It really is a matter for you to secure the best terms available and being prepared and conversant with every possible detail and having a clear understanding, negotiation framework and set of boundaries should help you in the discussions to follow.