Questions To Ask Your Small, Curated Retail Tenant

Here is the type of retailer that certain mall owners want to see as part of their tenant mix: Small, local, offering a unique good or service. Here the type of retailer that often struggles financially in an economic downturn: Small, local and offering a unique good or service. 

As inflation mounts and the prospect of a recession becomes increasingly more likely, mall owners have a dilemma. Bring on board the type of curated retail that many higher-income shoppers want and risk a possible failing tenant, or stick with the tried-and-true national brand that can be found just about anywhere.

The former choice is enticing, says Tenant Risk Assessment CEO Brad Tisdahl, as not only are there more of such retailers to delight shoppers these days, but there is also a clear demand for this type of retail. “There is more foot traffic when there is something interesting,” he tells GlobeSt.com. 

And just because they are small, these retailers are not getting discounts either. They are paying the full market rent despite the restructuring of many retail rents at the beginning of the pandemic. Tisdahl thought, at the time, that such deals, which also included some combination of percentage rent, would have a long tail, but that never happened.

Mall owners, of course, conduct due diligence on their prospect tenants and that is likely doubly true for the smaller companies. Indeed, assessing this type of risk is Tisdahl bread-and-butter and there are a number of conversations he has with the prospective tenant as part of his analysis. 

If, for example, the retailer is one that has a concept and is looking to scale through the use of, for example, venture capital, Tisdahl would consider how the retailer performed in its other locations and what type of locations those were, such as mixed-use or a mall. Other questions: how long did it take for those stores to become profitable? What is the plan to market to local customers? What is the financial condition of the overall company and how much cash do they have? What are the projections of the new location and the rent expenses?

These metrics can be applied, to a certain extent, to an independent story that is truly independent and looking to open its first or second location. “You still can make sure they are well capitalized and have cash coming in from additional sources such as investments.”

A more recent conversation Tisdahl has been having with the prospective tenant is how well are they able to weather rising inflation. For obvious reasons, this wasn’t as much of a concern in years past. Now TRA asks about supplier diversity and the type of pricing it gets from a supplier. It’ll ask how often they address pricing, such as on a monthly or quarterly basis. “If you wait too long it can hurt financials but you can’t be too quick to raise prices either.”

But there is at least one more conversation to have with a prospective tenant that is not part of a general investigation about finances, Tisdahl says. Even the smallest operators have to have good branding and brand identity that reflects well on social media. “You want a company that is tailor-made for sharing images of a store or packaging on social media.” 

“That has come up more and more in our financial analysis and it speaks to the shifting demographics that curated retail and dining are trying to target. If I see a new concept that doesn’t have a strong branding investment that will cause me to wonder.”

Most prospective tenants do talk about their marketing and branding and TRA will try to validate what they present. It’s another digging process, Tisdahl says. “We look at not just the company but also the customers that tag themselves,” he says. “We want to understand what kind of interactions customers are having with the retailer.