How do you feel about low- ering inventory and labor costs, bumping up sales and traffic and making your store more of a destination?
If the answer is yes—and there is no
reason it should not be—then the time
has come once again to look at the
potential of leased departments as an
opportunity to try on some new categories without actually buying them.
This is certainly not a new concept
and no panacea for a bad store. Leased
departments were largely responsible
for the rapid growth of the discount
store industry in the U.S. in the 1950s
to the chagrin of the
which also adopted
the strategy of turning over floor space to
More recently, companies like Macy’s, JC
their stores into mini-malls by leasing space
for designer clothes, jewelry, shoes and
restaurants, that give consumers a reason
to visit stores when they could just as easily shop online.
Over the years, some supermar-
ket retailers have tested the waters in
peripheral categories like cosmetics,
toys and housewares—not true leased
departments, but giving limited space to
rack jobbers. The term is actually in the
dictionary but for those unfamiliar with
this virtually obsolete cottage industry—
Some observers would point out that
“leased” departments are still big business for retailers that turn over shelf
space to manufacturers in return for…
well, that is a Pandora’s box we need not
open right now.
Could true leased departments get a
significant hold in supermarkets?
On the plus side, agile retailing is the
order of the day because consumer
tastes change rapidly and trying to keep
up can be maddening. Leasing gives
retailers low cost access to niche markets,
and without additional expenses for such
things as hiring additional staff, restocking or liquidating inventory.
With the right partner that department
can be seen as part of the store and not
just an obvious add-on. In other words,
the goal is for customers not to know that
the department is run by outsiders.
By adding a new dimension to the
store you may be able, not only to being
in new categories, but also add new
classes of customers. It is the old idea—
albeit somewhat elusive—of one-stop
shopping. On the other side of the coin,
the manufacturers that buy into these
leased departments are getting broader
exposure for a minimal investment.
Retailers have to make sure that the
products or services in this department
are unique and do not overlap with what
the retailer may be doing in other parts
of the store. In other words, compatible
Deals with lessees will also specify
what percent of department sales will
go to the host retailer and what percent
of operating costs—including taxes and
utilities—will be paid by the lessee.
There are a number of potential pitfalls
when it comes to leased departments,
starting with the legalities. As everyone
knows, a contract is easier to get into than
it is to get out of. As such, the exact terms
of the agreement and what is expected
of each party should be specified before
anyone signs on the dotted line or the
first shelf is stocked, and make sure
there’s an “out” if either party doesn’t
hold up their end of the agreement.
Of course, leasing is a joint venture. As
such, some decisions have to be made
jointly with the lessee even though retailers generally hate ceding control over
anything that happens inside the store.
On the other hand, leased departments
cannot have free reign and must adhere
to the retailers’ operating procedures.
The key is to balance the concerns of
both parties and leverage each other’s
However, conflict of some kind is pretty
much inevitable. Most differences can be
settled amicably if they are dealt with
immediately and not allowed to tarnish
the store’s image. This may be particularly important to anyone thinking about
leasing space to a foodservice operator.
Food safety is enough of an issue without
turning it over to someone else.
No one ever said marriage is easy.
THE LEASE OF YOUR WORRIES
Leased departments may provide a boost to supermarkets, but there are things to be wary of.
By Len Lewis
Len Lewis is a regular Grocery
Headquarters columnist and
veteran industry journalist.