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LEASED DEPARTMENTS

An Approach to Expanding Merchandise Diversification

When a customer comes in to shop in your store can that person find those items they might want or need? Or, do you find yourself having to tell the customer that you don't carry some particular type of merchandise that might complete your merchandise offering? When this happens does it register with you that you have just missed the opportunity to make an additional sale? Maybe it does, but you should also be aware that in order to make that additional sale you would necessarily incur an additional investment in inventory, etc. that might not make carrying that type of merchandise profitable for your operation, especially if it is something that you don't have experience in merchandising. Wouldn't it be nice if you could "try on" a new merchandise department to see if it would be profitable without sinking a lot of capital and time into it?

There is a way to do this that you might not have thought of - - operating a lease department within your store. For those who are not familiar with lease departments, they are departments operated within your store by another party. To put it very simply, a lease department operator is your Lessee in that he operates his business in your store and pays you for that privilege. You, as the Lessor, enjoy the benefit of providing for your customers the additional selection of merchandise or service that may make them choose your store over a competitor at some time in the future as well as adding to your sales revenue, while at the same time incurring relatively few additional expenses. A lease department can be operated in such a way that your customers have no idea that the department is not just a new department of merchandise, or service that you have added to your store. For example, you might add a shoe department, a womenswear department, bridal department, tux rental, food service, tailoring, cosmetics, barber shop or hair salon and on and on. Whatever the department may be, all the customer needs to know is that you are presenting to them a more complete selection of merchandise, or additional services.

As with any change to your retail operation, there are advantages and disadvantages to opening a lease department within your store. Every operation is unique in some way so careful  valuation should be given to the advantages, disadvantages and responsibilities of each party involved in a lease department situation.

We think the advantages for the store owner of opening a lease department versus adding the new merchandise are obvious. The store owner is presenting customers a more complete selection of merchandise without putting large amounts of operating capital into the inventory and fixtures for the department. The store owner also avoids the need for learning or hiring someone with specialized merchandising and buying knowledge because the lease department owner already has that knowledge. Likewise, the storeowner is free from the responsibilities detailed above related to "running" the department. However, if at the end of the lease department agreement, the store owner feels that the department has been profitable and would continue to be so, and he has learned how to "run" the department, the store owner has the option either of not renewing the agreement and operating the department himself or renewing the lease department agreement. If, on the other hand, the department has not been very profitable, the store owner may elect to not renew the agreement and discontinue offering the merchandise for sale without having to liquidate the inventory and dispose of the special fixtures, and thus has been able to "try on" the merchandise department to see if it fits.

The primary cautionary comment we have regarding opening a lease department is that it requires a legal agreement which can be more difficult to dissolve than it is to enter, especially if conflicts arise after the commencement of the agreement. Therefore, it is very important that such an agreement be prepared by or at least reviewed by your attorney and/or consultant as well. As much as possible any situation that could arise in the future over which there might be conflict between the store owner and the lease department operator should be addressed, discussed and a method of handling that situation included in the agreement. We have had considerable experience in evaluating lease department opportunities and helping store owners to make this major decision as well as interface with legal counsel toward the preparation of the contract.

When the lease agreement is signed, a type of joint venture has been entered into and like a marriage, it will require nurturing. Many decisions that previously could be made unilaterally must now be made jointly and the store owner needs to be fully aware of this. The commission retained by the store owner, which is based on sales of lease department merchandise, must be adequate to cover all of the expense for the services and facilities provided and still allow for a profit to the store owner and leased department operator.

Now that you know of a possible way to "try on" a new merchandise department for your store, look around your store again and see if there is some new type of merchandise that would enhance your operation and your profits at the same time.

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