When Toys R Us closed their Times Square store at the end of 2015—the one with the giant T-Rex and the three-story Ferris wheel—the biggest reason given was the landlords raising the rent from $12 million a year to over $52 million a year.
Yeah, that would be a hard expense for any retailer to cover, let alone one that was already struggling.
While the financial model is certainly different for big-box stores than it is for indie retailers, one thing that is universally true is that there is only so much profit margin you can spend on rent and expect to run a successful business.
For the typical indie toy retailer, occupancy costs (rent/mortgage and common area fees) need to be around 10-12% of gross sales for the store to be able to safely cover those costs. In fact, for a lot of businesses where keystone pricing is the norm, that number tends to hold true.
For Toys R Us, that would mean doing $100-$120 million in sales at the Times Square location. I can see that as a realistic number. But to pay $52 million, they would need to do half-a-billion in sales, over $24,000/sq ft. Even Apple couldn’t do that much in that space.
The 10-12% occupancy cost is a benchmark I use when talking to retailers about locations. Yes, you might pay a little more for a better location, but you should expect a little more in traffic and better clientele. Yes you can find locations cheaper, but you might have to pay a little more in advertising to draw traffic to your store.
But occupancy cost is only half of the equation. Here is one other number I want you to look at.
How much are you paying yourself?
Take your salary (you are paying yourself a salary, right?) and your net profit for the year. Add those two numbers together. Who made more, you or your landlord?
If you made more than your landlord (or even the same), pat yourself on the back. You are self-employed and running a smart business (as long as you’re paying yourself something, and not just reinvesting every dollar back into the business.)
If your landlord made more than you, something needs to change. You aren’t working for yourself. You’re working for him. Better for you to close shop, buy the building, and rent it to some other poor sap willing to pay you to keep their hobby afloat.
I know that sounds harsh, but it is a reality of business. If you aren’t making as much as your landlord, something needs to change. You need to sell more. You need to increase margins. You need to find a cheaper location. Something.
Or you can just accept that your business is simply a hobby and treat it as such.
I want you to make money. That’s the only reason I bring this up.
PS Before you go lambasting me because your numbers don’t match, I fully understand that your industry may be completely different. If you belong to a trade organization, see if they have done any benchmark surveys to give you an accurate picture for your industry. Before you waste your breath on all the reasons why you aren’t making as much as the landlord (the only valid one being you are still in start-up phase), this isn’t about me. It is about you. I want you to be successfully self-employed. The landlords are already making too much. You should, too.
PPS I’ll put my thoughts why you should pay yourself a salary and whether it is better to own or rent in future posts.