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THE SIGNAGE FOUNDATION |
Germantown, TN Study
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Section 5:
The Economics Of Pier 1's Retail Site: Visual Communication Component
We have a series of marketing models for proposed stores. Pier 1's Germantown store projected Gross Sales at $1.2 million in the first year based on extensive market research. Actual projections since opening in April 1991 are below projections by about 25%.
In completing a marketing analysis to determine why our Germantown store was not profitable, we found that we were spending the projected amount on advertising deemed necessary for a first year store. We looked to other forms of advertising in comparable stores to see what kind of signage was effective. In analyzing 168 of Pier 1's other stores we found that 94% of the stores have two faced signs in order to get necessary street exposure. The other stores had either a freestanding sign or a wall sign that could be read from all lines of traffic approaching the enhance to the site.
This request for a variance to put a second wall sign on this site is largely based on the unfilled need for street exposure that is lacking on the building. Pier 1 is losing money with this lack of visual communication. As a direct consequence, the City of Germantown is also an economic loser if the lack of visual communication is not remedied.
Because we are a national chain, we have several historic models to guide us when analyzing our stores. Why is it critical for Pier 1 to reverse its downward sales trend and to gain the an additional 20-30% business generated from impulse buyers? In order to understand this, one must first understand that the fixed costs of opening a retail store are very high. Secondarily, in addition to the high fixed costs, sales in a retail store are highly cyclical. In fact, many apparel manufacturers will receive 50% of their business during the Christmas shopping period alone. If the business loses the chance to sell to a consumer the business takes a loss over many months in order to get to a period where it runs profitably.
We average our sales curve model; our sales curve is a relatively constant demand curve and the Germantown store fits this pattern. Sales average approximately $35.50 per customer. We also incorporate what is known as a 100% markup, that is, a 45% to 55% markup on all goods.
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TABLE 7: PIER 1 IMPORTS GERMANTOWN STORE ANNUAL SALES BY MONTHLY PERCENTAGE |
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| JANUARY | 5.8% | MAY | 8.7% | SEPTEMBER | 8.8% |
| FEBRUARY | 6.2% | JUNE | 10.5% | OCTOBER | 6.4% |
| MARCH | 8.5% | JULY | 8.4% | NOVEMBER | 7.5% |
| APRIL | 7.5% | AUGUST | 8.8% | DECEMBER | 12.9% |
All of our fixed and variable costs are calculated based on a projected $1,200,000 annual gross. Our fixed costs in a typical store of 10,000 square feet as is the Germantown store, is roughly $35,000 per month. Variable Costs are typically 50% of the Gross Monthly Income.
In grossing $1,200,000 annually, we must first recoup $420,000 for the fixed costs which includes rents, lighting as well as general and administrative overhead; we then must take $600,000 out of this gross to pay for the merchandise that has been sold. This leaves us a profit margin of $120,000. That is our total corporate profit for the operation of a store such as the Germantown location. You do not need any imagination to realize that if we have a 20% decrease in business, we will be running at no profit, unless we are able to cut our fixed costs. In fact, we have been forced to lay off store employees in order to keep Germantown operating as a going concern given the decrease in business. If the city has any real concern for the members of its community, what they should realize is that the people of the area suffer economically when the store does not have the volume it requires to remain profitable.
When we talk about our fixed expenses for the Germantown store of $35,000 per month and the variable expenses of 50% of the cost of goods sold, it must be understood that this is by no means the entire cost to recoup our investment. To fully understand the implications of this report, we must add some additional figures which, when averaged in, causes the reader to realize that even at $1.2 million in gross sales revenue, we are not likely to renew our lease unless we have a corresponding and continued increase in sales.
The average economic life of our stores is a ten year lease with three five-year options, with the options at our discretion. The Germantown Pier 1 operates on a ten year lease with three five-year options. When we choose a site for one of our stores, we look at several things when determining whether or not to extend the economic life of that facility beyond the original ten year period. First, we must be able to maintain $180,000 worth of merchandise in the store with appropriate turnover. We must also be able to afford to set up a sinking fund to recoup the capital costs required to set up the store.
Let us explain what is involved in those set up costs. Signs and awnings cost $27,000. Training employees cost roughly $30,000 and real estate and pro rata costs to negotiate the lease was another $32,000, for a total of $62,000 in operating expenses. The fixtures put into the store which will have to be replaced after ten years add another $73,000, while tenant improvements we added to the building were $278,917. The total cost adds to $440,971; this figure is something that we need to bring back and capitalize. If we use a simple 10% capitalization method, you realize that each month we must allow for a $6,326.65 deduction or sinking fund if the store is to be closed at the end of Year 10. We must amortize this figure because the only things that are unlikely recurring costs are the tenant improvements and staff training. However, it must be remembered that we cancel the lease at the end of ten years for approximately twenty to twenty five percent of our stores. Hence it is in our best interest to try to recalculate that figure in some manner if we are unable to work out something to make the site successful and profitable.
Another reason we need to increase gross sales is to build up reserves to refurbish the building when needed. We know that the economic and/or physical life of this store will be less than 20 years. At the end of 20 years, major improvements must be done to the physical parts of the store in order for us to continue in this location. If you realize that with these margins, if we gross $900,000 in a year we are not breaking even, you must do everything possible to allow us to get the last 25% of business that the additional sign will attract. Increasing the annual volume by $300,000 means that $150,000 "profit" will become the bonus we pay on our rent that allows us to pay higher rents in the future so the property can be renovated by our company and the land owner.
The following Tables 8 and 9 show the effect of a 15% reduction in Gross Sales from inadequate signage. These Tables are based on our model for the Germantown store based on the Gross Sales, Fixed and Variable Costs and Recapture of our Set Up Costs. As noted, a 15% drop in projected sales dramatically reduces the Net Income. The Recapture of Set Up Costs calculated for a 10 year period reflects Pier 1's decision to not renew its lease. The Recapture at 25 years reflects Pier 1's decision to continue as an anchor tenant in Germantown Village Square Mall.
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TABLE 8: EXAMPLE WITH SIGNAGE NATIONAL RETAILER GROSS ANNUAL SALES AND COSTS BY MONTH FOR ONE STORE OUTLET USING 10 YEAR AND 25 YEAR RECAPTURE OF SET UP COSTS |
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| ITEM | JAN | FEB | MAR | APR | MAY | JUNE | JULY | AUG | SEPT | OCT | NOV | DEC | TOTAL |
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MONTHLY PERCENT OF GROSS ANNUAL SALES OF $1,200,000 RECEIVED |
5.80% | 6.20% | 8.50% | 7.50% | 8.70% | 10.50% | 8.40% | 8.80% | 8.80% | 6.40% | 7.50% | 12.90% | 100.00% |
| GROSS MONTHLY INCOME W/O SIGNAGE | $69,600 | $74,400 | $102,000 | $90,000 | $104,400 | $126,000 | $100,800 | $105,600 | $105,600 | $76,800 | $90,000 | $154,800 | $1,020,000 |
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LESS COSTS: FIXED COSTS VARIABLE @ 50% GROSS NO. INCOME |
($35,000) ($34,800) |
($35,000) ($37,200) |
($35,000) ($51,000) |
($35,000) ($45,000) |
($35,000) ($52,200) |
($35,000) ($63,000) |
($35,000) ($50,400) |
($35,000) ($52,800) |
($35,000) ($52,800) |
($35,000) ($38,400) |
($35,000) ($45,000) |
($35,000) ($77,400) |
($420,000) ($600,000) |
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MONTHLY AMOUNT TO RECAPTURE $440,000 (PV) @ 10%, 10 YRS |
($5,800) | ($5,800) | ($5,800) | ($5,800) | ($5,800) | ($5,800) | ($5,800) | ($5,800) | ($5,800) | ($5,800) | ($5,800) | ($5,800) | ($69,600) |
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MONTHLY AMOUNT TO RECAPTURE $440,000 (PV) @ 10%, 25 YRS |
($4,000) | ($4,000) | ($4,000) | ($4,000) | ($4,000) | ($4,000) | ($4,000) | ($4,000) | ($4,000) | ($4,000) | ($4,000) | ($4,000) | ($48,000) |
| MONTHLY NET INCOME @ 10 YR RECAPTURE | ($6,000) | ($3,600) | $10,200 | $4,200 | $11,400 | $22,200 | $9,600 | $12,000 | $12,000 | ($2,400) | $4,200 | $36,600 | $110,400 |
| MONTHLY NET INCOME @ 25 YR RECAPTURE | ($4,200) | ($1,800) | $12,000 | $6,000 | $13,200 | $24,000 | $11,400 | $13,800 | $13,800 | ($600) | $6,000 | $38,400 | $132,000 |
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TABLE 9: EXAMPLE WITHOUT SIGNAGE- 15% REDUCTION IN GROSS SALES NATIONAL RETAILER GROSS ANNUAL SALES AND COSTS BY MONTH FOR ONE STORE OUTLET USING 10 YEAR AND 25 YEAR RECAPTURE OF SET UP COSTS |
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| ITEM | JAN | FEB | MAR | APR | MAY | JUNE | JULY | AUG | SEPT | OCT | NOV | DEC | TOTAL |
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MONTHLY PERCENT OF GROSS ANNUAL SALES OF $1,200,000 RECEIVED |
5.80% | 6.20% | 8.50% | 7.50% | 8.70% | 10.50% | 8.40% | 8.80% | 8.80% | 6.40% | 7.50% | 12.90% | 100.00% |
| GROSS MONTHLY INCOME W/O SIGNAGE | $59,160 | $63,240 | $86,700 | $76,500 | $88,740 | $107,100 | $85,680 | $89,760 | $89,760 | $65,280 | $76,500 | $131,580 | $1,020,000 |
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LESS COSTS: FIXED COSTS VARIABLE @ 50% GROSS NO. INCOME |
($35,000) ($29,580) |
($35,000) ($31,620) |
($35,000) ($43,350) |
($35,000) ($38,250) |
($35,000) ($44,370) |
($35,000) ($53,550) |
($35,000) ($42,840) |
($35,000) ($44,880) |
($35,000) ($44,880) |
($35,000) ($32,640) |
($35,000) ($38,250) |
($35,000) ($65,790) |
($420,000) ($510,000) |
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MONTHLY AMOUNT TO RECAPTURE $440,000 (PV) @ 10%, 10 YRS |
($5,800) | ($5,800) | ($5,800) | ($5,800) | ($5,800) | ($5,800) | ($5,800) | ($5,800) | ($5,800) | ($5,800) | ($5,800) | ($5,800) | ($69,600) |
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MONTHLY AMOUNT TO RECAPTURE $440,000 (PV) @ 10%, 25 YRS |
($4,000) | ($4,000) | ($4,000) | ($4,000) | ($4,000) | ($4,000) | ($4,000) | ($4,000) | ($4,000) | ($4,000) | ($4,000) | ($4,000) | ($48,000) |
| MONTHLY NET INCOME @ 10 YR RECAPTURE | ($11,220) | ($9,180) | $2,550 | ($2,550) | $3,570 | $12,750 | $2,040 | $4,080 | $4,080 | ($8,160) | ($2,550) | $24,990 | $20,400 |
| MONTHLY NET INCOME @ 25 YR RECAPTURE | ($9,420) | ($7,380) | $4,350 | ($750) | $5,370 | $14,550 | $3,840 | $5,880 | $5,880 | ($6,360) | ($750) | $26,790 | $42,000 |
Table 10 summarizes the dramatic effect that a 15% reduction in Gross Sales due to inadequate signage:
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TABLE 10: SUMMARY OF TABLE 8 AND TABLE 9 COMPARISON OF GROSS AND NET INCOMES WITH AND WITHOUT ADEQUATE SIGNAGE PIER 1 IMPORTS- GERMANTOWN STORE |
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| GROSS ANNUAL INCOME WITH SIGNAGE | $1,200,000 |
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NET ANNUAL INCOME WITH SIGNAGE WITH 10 YR RECAPTURE WITH 25 YR RECAPTURE |
$110,400 $132,000 |
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PERCENTAGE ANNUAL YIELD OF NET INCOME WITH 10 YR RECAPTURE WITH 25 YR RECAPTURE |
9.20% 11.00% |
| GROSS ANNUAL INCOME WITHOUT SIGNAGE | $1,020,000 |
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NET ANNUAL INCOME WITHOUT SIGNAGE WITH 10 YR RECAPTURE WITH 25 YR RECAPTURE |
$20,400 $42,000 |
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PERCENTAGE ANNUAL YIELD OF NET INCOME WITH 10 YR RECAPTURE WITH 25 YR RECAPTURE |
2.00% 4.12% |
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PERCENT REDUCTION IN ANNUAL NET INCOMES DUE TO LACK OF SIGNAGE WITH 10 YR RECAPTURE WITH 25 YR RECAPTURE |
81.52% 68.18% |
If Pier 1 reaches its projections on gross income, we possibly will generate an income to corporate office before federal and state taxes of 2% to 4% without our needed signage and 9% with signage. The combined real property, sales tax and investing equal more than our highest projected income and Germantown will benefit by no less than 25%. Our highest before tax profit and nearly 50% of our profit in the worst case scenario and this does not include multiplier benefit from our effects on other retailers.
In other words, as with any anchor tenant, Pier 1 is predominantly a destination oriented shopping trip. As a result our clients, tend to other shopping within the immediate shopping center. In fact, we will help other Germantown merchants generate shopping revenues from our approximately 35,000 purchasing shoppers annually. Not only will our shoppers contribute $35.00 plus per shopping trip but other revenues will spent in the adjacent shopping center.
What all of this means is that, if the signage is granted, to allow us to reach our goal of $1,200,000.00 in annual revenues and we reach the projected 9% before state and federal taxes profit, the State of Tennessee will also receive over 9% of the gross revenue in real property and sales taxes and well over 25% of that income will come directly to Germantown. Without the advertising, the business is not in the position to compete against competitive shopping centers surrounding Germantown. Regardless of how much advertising we do for Pier 1 Imports, unless you give us the minimum signage that can be read from the street from both directions, the potential customers for whom we are advertising will not stop at Germantown.
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