Retail Management 12th Edition by Barry Berman ,Joel Evans

Exercise 1

Case 2: Examining Perfumania's Site-Selection Strategy
Perfumania (www.perfumania.com) is a fragrance retailer with 350 value-priced fragrance stores in the United States and an additional 20 stores in Puerto Rico. Despite the weak economy, Perfumania opened 59 stores in 2009, nine in 2010, and 10 to 15 locations in 2011 (including its first stores in Canada). Ultimately, the retailer plans to have as many as 600 stores.
In 2009, Perfumania decided to outsource its real- estate activities and hired RCS Real Estate Advisors (www.rcsrealestate.com) to handle site selection and lease negotiation for its new retail locations, as well as lease renewals and lease termination negotiations for its existing stores. In evaluating Perfumania's stores, RCS found that the chain had a number of locations where it was committed to paying above-market rental rates due to changes in rental market conditions. As a result, many of these locations were unprofitable. To the extent possible, RCS renegotiated lease terms at these locations and/or refused to renew these leases at the old rents when they expired.
Most of Perfumania's locations range from 1,500 to 2,000 square feet. Its regional mall locations are 1,500 square feet (of which 1,200 square feet comprises selling space) and its outlet mall stores are 2,000 square feet in size (1,700 square feet of which is selling space). According to Michael Katz, Perfumania's president and chief executive: "About 80 percent of our stores are in regional malls, outlet malls, or strip centers, and we have a few lifestyle center stores, though those haven't been as successful." Perfumania also has some stores located in major urban shopping districts. The challenge with the urban locations is being able to achieve sufficient volume to offset higher rental and operating costs.
In general, retail locations close to high-traffic destination retailers (which do not have to be apparel-based) have been the most successful for Perfumania. According to Katz, "If every one of our stores could be next to an Apple store, we would be happy!" In some instances, the chain has placed multiple stores in the same center. Currently, Perfumania has two stores with the same inventory, store exterior, and interior design and inventory in the Mall of America (a Minnesota mall with over 500 stores that attracts 40 million visitors per year). These stores are so successful that Perfumania's management is seeking a third location there. As the president and chief executive of RCS says: "The product is so much of an impulse purchase that if you're on two sides of a really big mall, and it's a great mall, why not "
The expansion of its highly profitable locations into outlet malls is Perfumania's most recent growth strategy. Other targeted areas for new locations are western, southeastern, and southwestern states. Canada represents a major opportunity since it does not have a national fragrance retailer. Perfumania is targeting three to four Canadian cities for new store development.
Perfumania is rolling out a new prototype store for its regional shopping center locations. It plans to apply this new contemporary design to its stores located in strip centers and lifestyle centers, but will only make minor changes in its outlet mall locations.
1. Describe the pros and cons of Perfumania's outsourcing its site selection and leasing operations versus conducting these activities in-house.
2. With what types of stores would Perfumania have an affinity Explain your answer.
3. Describe how Perfumania could seek to renegotiate a lease with an above-market rent with a major mall.
4. Comment on Perfumania's seeking a third location in Mall of America from the perspective of trading-area overlap.