19 March 2015 #Commercial Real Estate
It is not a new idea for retailers to seek to diversify their consumer offering in an attempt to encourage consumer activity. Sometimes it succeeds and sometimes it fails.
Many years ago garden centres realised that having a café or restaurant on site would attract people to the centre even when the weather was poor. This in turn would drive their product sales and turn shopping for seeds into an experience.
In fact, Petersham Nurseries in Richmond, London took the garden centre café to the next level when, with the help of acclaimed chef Skye Gyngell, they achieved their first Michelin star in 2011.
Supermarkets have also moved into other sectors most notably offering financial services to their customers and so we have seen the emergence of the likes of Tesco Bank and Sainsbury’s Bank both founded in 1997. Timing and market position have been important to this successful diversification. An individual’s bank and the supermarket that they use are very close to the consumer, mainly because customers tend to interact with them both at least every week and over many years. The reputational damage caused to the major banking brands during the financial crisis resulted in the consumer being ready to try a new provider to look after their finances.
Starbucks recently announced a proposed diversification into the sale of beer and wine and some hot meals in the UK. The coffee store has already rolled out their “Evenings Programme” in 30 locations in the USA and they say it has been very popular. With an increasing number of artisan coffee stores in the UK and a quieter evening trade it seems this plan to entice customers though the door could be a successful shift in customer offerings.
HMV is perhaps the best example of what happens if you do not diversify quickly enough or into the right markets. Many believe HMV went into administration in 2013 due to their failure to quickly embrace the online and digital technologies that consumers were expecting to see. Instead, in 2009, they decided to diversify into cinema, opening a movie theatre above their store in Wimbledon in conjunction with Curzon. If successful their plan was to roll out 20 more cinemas above their larger stores. To date there is still just the one.
We think of Virgin as being a success story having diversified into several different sectors with great plaudits. However, Sir Richard’s group has suffered their fair share of failures probably due to the brand being stretched slightly too far. The last Virgin Megastore closed in 1992 and Virgin’s clothing line never took off. Virgin Cola, Virgin Vodka, Virgin Cars and Virgin Bride also go down as some of Branson’s diversification failures.
Diversification into new markets, particularly the financial sectors requires careful consideration and compliance with the strict regulations connected with operating in such industries.
From a real estate perspective, operators must also make sure they are authorised to carry out the new use at their business premises. Take for example the proposal for Starbucks to sell alcohol and hot food in their stores. There are a number of issues here that would need to be considered:
If the store is held by way of a lease then its terms will need to be checked to establish whether there are any restrictions on the sale of alcohol. The user provisions will also need to be checked as it is likely that they only allow the sale of coffee etc. and it could be that the landlord’s consent is required to expand this use.
The change in use could also impact on the rent review for the store especially if it is deemed that a greater rent can be obtained for a restaurant use rather than a mere coffee shop.
The legal title would also need to be checked. As a result of the strength f the 19th century temperance movement and sometimes to protect the trade of nearby hostelries titles are often subject to restrictive covenants preventing the sale of alcohol. The best course of action in this situation, where possible, is to insure the risk of any person or company who might have the benefit of this restriction taking action for breach.
As with any premises wishing to serve alcohol, Starbucks will have to obtain an alcohol licence from the local authority enabling them to sell alcohol for consumption on the premises.
Change of Use
If the coffee shop is operating under Use Class A1 of the Town and Country Planning (Use Classes) Order 1987 it may be that it will need to change its use to Class A3 to accommodate the proposal to sell hot food on site. This change of use will often require the tenant to seek planning permission to effect the change of use.
Where the area of shop space requiring the change of use to Class A3 is less than 150 square metres the change of use can be effected for a period of up to 2 years without the need to get planning permission by way of the Town and Country Planning (General Permitted Development) (Amendment) (England) Order 2013. It should, however, be noted that the local planning authority has the ability to disapply the permitted development rights in considering issues such as protection of a local amenity or issues affecting a conservation area.
So in conclusion, diversifying out of a problem or into a heavily competitive market does not always bear fruit. However, it seems that diversification can be a positive move for many retailers especially where it is opportunistic, brand appropriate and properly fits the customer’s requirements and expectations.