What is a Store Within a Store Agreement?
As the name implies, a store within a store agreement provides for a store within a store. In other words, a portion of the larger space is set aside for a second use and provides for shared costs in exchange for additional store traffic.
Usually, one of the stores is likely to be a larger, conventional supermarket. Spaces dedicated to stores supplying prepared foods, like Starbucks cafes or Pharmacies, are common examples. The smaller store solves operational (provision of fresh foods) or profit margin (low margin for prepared foods) problems for the larger store.
Once negotiated , the lease for the smaller space is generally distinct from the larger store lease saving space for a smaller concurrent tenant. The "store within a store" within the larger store benefits from the advantages of being located with the larger store and benefits from the advantages of being a separate "unit".
Store within a store agreements are generally established first as a template that is then adapted to the specific tenant and local conditions. The store within a store agreement usually will provide for a low rental rate. Commonly, rent is based upon a percentage of sales. While it is common for some rent to be paid even if no sales occur, some agreements provide that the smaller store pays rent only once a certain sales threshold is met.
Benefits of Store Within a Store Agreements
Entering into a store within a store agreement can be in the best interests of both the host retailer and the sub-store. The host retailer will benefit by having enhanced customer service from an employee (or in some cases employees) of the sub-store. Alternatively, the sub-store will benefit from the exposure and additional foot traffic created by entering into the store within a store agreement. For example, these benefits have been seen when the sub-store is a sit down eatery or repair service which might otherwise scare some customers away.
Significant benefits for both parties also include the costs associated with sharing various marketing expenses and gaining an increased customer base. For example, a family retail department store may not ordinarily sell tuxedos or wedding dresses. However, by entering into a store within a store agreement with a local prom dress store or bridal boutique, they would find themselves with an added attraction to draw customers into their store. These partnerships can also be a significant benefit for small businesses who might not otherwise have the means to enter into advertising campaigns or operate a store in a location that is more likely to attract foot traffic.
Amongst many other brokered partnerships, these arrangements are found notably in the automobile industry where auto manufacturers or dealers can be found sharing common space with banks, tire shops, paint & body shops and detailing services.
Store Within a Store Critical Clauses
In any store within a store transaction, whether you are granting or receiving a store within a store, there are several clauses that should always be considered for inclusion.
Lease Terms/Agreement – The store within a store agreement should have a provision that states the inside store has the benefit of the master lease – this is critical to grant the inside store some protections. If the master lease is terminated for any reason, the inside store must have time to vacate the space. On the flip side, the inside store must provide notice to the landlord of the inside store’s intent to move out so the master landlord can pinpoint its occupancy. A clause that the inside store will notify the landlord of this intent, in writing and in a timely manner, and that the inside store must provide reasonable written notice of the same to the master landlord is always important.
Push-Back Clause – The push-back clause is the right, after a certain notice and grace period, for the master landlord to terminate or take over the inside store premises if certain conditions of the master lease are being violated by the inside store. After certain notice and grace period (generally 30 days), the master landlord can terminate the inside store if a monetary payment (rent, additional rent, etc.) under the master lease has not been paid, or if the same type of payment is unpaid under the inside store lease for 5 consecutive business days. The inside store lease needs to provide that the inside store will notify the master landlord if it is in a default on the inside store lease that continues for 3 consecutive business days so the master landlord has a chance to mitigate and cure the inside store’s default.
Contingent Termination Rights – This clause would provide that the inside store could terminate the inside store lease and its right to occupy the inside store premises without any penalty if the master lease is terminated due to an event outside of the inside store’s control (such as condemnation or destruction of the entire premises) as long as the interior store has fulfilled all monetary obligations prior to the termination event. This clause would provide additional comfort to the inside store in the event of a condemnation event or casualty destruction event, where the inside store would want to terminate its lease and not take on any further burdens under the store within a store agreement. The inside store also should not be penalized if it terminates its right to occupy the inside store due to a termination of the inside store lease by the master landlord for a default in the inside store lease if the default could not be cured by the inside store and the inside store did not contribute or cause the default (i.e. Events of Force Majeure or a casualty), but otherwise continued to timely pay all monetary obligations under the inside store lease.
Payment Provisions and Security Requirements – We previously discussed how the inside store may be required to pay 1-3 months’ rent and/or security to the landlord, pay CAM and other costs under the master lease, and pay rent and/or other costs/rent under the inside store lease to the landlord. The inside store also may be required to pay the landlord a fee every time the inside store does not pay all monetary obligations pursuant to the inside store lease after the grace period. The inside store lease should consider only having the inside store pay its pro-rata share or allocable share of the CAM and other costs (such as utilities, services, insurance, or other like charges) and only pay such amounts pursuant to the inside store lease and only to the inside store. The inside store should not be obligated to pay the master landlord any amounts from the outside store if those amounts are separately paid by the outside store or are the obligation of the outside store.
Store Within a Store Issues and Challenges
While they may have their benefits, structured store within a store programs can create a number of challenges and considerations that must be evaluated in advance before implementation.
Brand Conflicts
Like any business partnership, issues can potentially arise between the parties with respect to branding and marketing the store within a store. Often, the parties have differing ideas with respect to how the relationship should be marketed, what the visual merchandising should look like, and how sales and strategic business planning between the parties should be handled. Due to the close proximity of the store within a store to the rest of the host retailer’s store, the spacing of the neighboring spaces, and the level of visibility and foot traffic, the parties’ marketing of the store within a store can also affect the host retailer’s brand and customer relationships .
Non-Competes and Exclusivity
If the conciliation process is unsuccessful, what recourse, if any, does the host retailer have with respect to the store within a store? Do the parties have non-compete obligations that would restrict the store within a store from competing with the host retailer if the relationship is terminated? Or alternatively, if the relationship with the host retailer is terminated for any reason or without cause, does the store within a store have the ability to operate as a freestanding store or in-store in its own right?
Operational Conflicts
Most importantly, before implementation, the parties must account for the operation of both the store within a store, and the relationships that the retailer has with other departments of the host retailer – both structure, as well as actual store function. Depending on the scope and nature of the store within a store relationship, there may be several other owner/operators within the host retailer’s space with whom the parties will need to coordinate with. Privacy and other relationship-related conflicts can arguably arise with respect to the sharing of data and customer information within the host retailer system. For example, if proprietary information is shared, are there restrictions with respect to who has access to that information within the store within a store? Also, if the store within a store has direct consumer access to the entire host retailer, this may aggravate other customer relationships that the host retailer has with other in-store departments.
Store Within a Store Legal and Regulatory Considerations
A store within a store agreement should also contain a detailed section that covers the legal and regulatory aspects that could impact the landlord, manufacturer, or retailer. For example, are there any zoning laws in place that could affect what types of items the store within a store may sell? Are there any business licensing requirements that must be adhered to in order to conduct business from the designated space within the larger store? Are there restrictions on the number of sign, logos, or other branding materials the parties can use?
Enforcement of the store within a store agreement should also be anticipated in advance. Will a public function be served if the manufacturer/retailer is not following the terms and conditions of the AMA? If so, the other party may have grounds to enforce the store within a store agreement. In fact, some states have laws regarding private enforcement of public protections. Failing to adhere to an AMA could result in penalties for both the store within a store and the retailer.
It is important to note that while most states’ laws on stores within stores are usually settled, case law interpretation can affect how these agreements can be used, and can even impact tenants, lessors, and distributors.
Examples of Store Within a Store
"WelleCo and H&M Beauty" – a recent store within a store arrangement of beauty supplements within an iconic fashion retail brand. The smoothie-style protein drinks are offered as part of a healthy living lifestyle range which also includes nutritional supplements. The drinks are sold in-store with vitamin supplements also marketed to sellers.
"Verizon Wireless and Radio Shack" – a longstanding relationship since 2009 between the American wireless network operator and consumer electronics retailer. The relationship has gone from strength to strength which has seen both parties benefiting since their inception in 2009. The relationship at present has over 1,400 stores located in 50 states and Washington D.C. with plans to expand to a further 1 , 500 locations in the next two years. The idea came about due to RadioShack experiencing significant challenges in the growing smartphone market alongside Verizon looking for more retail stores to promote its products.
"Fifth Season Foods and Whole Foods" – a relatively recent store within a store arrangement of gourmet frozen food offered in selected Whole Foods stores in the U.S. and Canada. Fifth Season Foods is a North American leader in frozen gourmet prepared meals. Offering a gourmet living lifestyle range with convenient meal solutions. The arrangement has been met with great success by both parties resulting in the opening of new ‘kiosk-style’ in Whole Foods stores to provide increased accessibility to customers.
"Estée Lauder and Clinique" – whereas Estée Lauder was founded in 1946, Clinique was founded in 1968 with cosmetics derivate from the Lancôme line. Clinique was the first department-store line to offer only allergy-tested, fragrance free cosmetics. Clinique’s philosophy to the creation of cosmetics is that they provide a safe solution for people with sensitive skin. The partnership has resulted in both brands continually sharing their respective breakthrough research in dermatology, skin biology and dermatological science.
+ There are no comments
Add yours