Just over three years ago Stuttafords closed its doors in Tygervalley shopping mall in Capetown. This retail space then became available for any new tenants looking to represent their brand in this up market shopping venue. Along came Zara and carved out a significant piece of the space and built a stunning store probably close to 2,000 m2 offering ladies, men’s, and a large kids department to the Capetown northern suburbs shopper.
When I first visited the store my initial thought was “This store is definately far too big for the potential sales which Zara can generate in his location”
In retail terms the size of a store is critical to the profitability of the operation. Go too large and end up not achieving sales budget and your rental becomes too big a percentage of your sales which will impact on profit.
A simple rule of thumb is to spend 8% to 10% of your sales on rental, and 6% to 8% of sales on salaries and your business will achieve profit. Opening too big a store and not achieving sales plan can escalate your rental % to over 20% along with an inflated salary bill as you need to employ more staff to cover the big floor space putting your business into a loss making situation.
It is usually best to go conservative in size when you open a new business and then as you move forward and understand what actual sales you can generate, you can expand your business by enlarging your store or maybe relocating to another bigger site. This way you will always be in control of the rent you pay in relation to the sales you are capable of achieving.
Back to Zara!!!! Any visit I made to this store over the past three years I have always been conscious of the lack of customers paying at the terminals indicating the lack of total sales this store is achieving. A strong financial business such as Zara can carry a loss making store, but no business will do this indefinetly and will eventually close the store. Normally stores are on a five year lease, so let’s see what happens to Zara Tygervalley in two years time.
Your question may be “How do you know Zara is not making its sales plan”. I don’t….. but let’s be realistic for a moment, retail in SA is going through a difficult time. Consumers are under pressure and not spending at the same rate they did 5 to 10 years ago. The recent flood of international brands into our malls has given the customer far more choice which results in a spread of the retail spend putting many stores under pressure. Edgars closing stores, Mr Price, Woolworths, Truworths, poor financial results, tells me sales do not come easy.
Looking at Zara specifically, in terms of the SA consumer it’s not a brand offering low priced merchandise. Generally the product is expensive if compared to stores like Mr Price and Cotton on. Then you have the size curve issue. The merchandise is definately small made and it’s not easy for the larger built South African to find a garment that fits. Further Zara has a specific “Look” from a fashion point of view and often has limited appeal to the local buyer.
Zara Tygervalley is fully on sale today with every piece of merchandise marked down. This is very unusual for Zara to clear all stock at the same time with absoulutly no new season product on offer. The kids department is almost empty.
Is this a red flag?
Enjoy your shopping