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Speaking Out Against the Disconnect Between Landlords and Tenants

Each month, will discuss industry trends—most importantly, leasing issues—with a retail executive. In our first installment, we speak with Larry Sidoti, vice president of development with long-time mall stalwart Mrs. Fields Original Cookies Inc. The company's franchise system operates through a network of 1,200 locations in 23 countries, including many located in regional malls in the United States. In late 2008, the company emerged from Chapter 11 bankruptcy protection and is now looking to grow by bringing new franchisers into the company fold. But with the recession cramping consumer spending, the company has already had to temper its expectations. Mrs. Fields, which also owns the TCBY chain, now plans to open 24 new stores in 2009, down from its goal when it exited bankruptcy in October of opening 40 new franchised stores.

Sidoti, the vice president of development at the company since 2008, has been in the restaurant retail business since 1995, when he founded Juice It Up, a smoothie and juice bar chain based in California. Sidoti has been working with developers, landlords and franchisees to build the company through new development and to keep more troubled franchised locations open for business. He spoke with Site Optimizer about current business conditions.

Site Optimizer: How would you describe the current environment for retailers?

Sidoti: Ugly. It’s very difficult. I think everyone has backed themselves into a corner. I think landlords were trying to get top dollar for rent--which I can’t disagree with--but, at the same time, they’re not doing things that are conducive to the long term survival for tenants anymore. Our franchisees are predominantly in survival mode and landlords aren’t doing much to help. You’ve got accounting people or finance people looking at the ledger and saying, “We’ve got these rents. Let’s keep getting them.”

SO: Has it been even more difficult to be a mall-based retailer right now given the decline in traffic at malls and the drop off in consumer spending?

Sidoti: It’s extremely difficult. There are ebbs and flows in any business and it’s very cyclical. With retail leases in general, they all go one way and that’s up. There’s no accounting for cyclical changes. You have retailers that signed leases 2 to 5 years ago or even 10 years ago and today [as they go for renewals] their rents are typically higher than they were a few years ago when things were thriving.

SO: How have landlords responded when you’ve asked for assistance?

Sidoti: Most of them say, “You know what? We can’t do anything. We’re sorry.” It’s probably 19 out of 20 times. For every 20 attempts maybe one of them will say, “Ok, let’s look at this.” They want you to go through and gather this mountain of information. You do it and the mountain of information tells the story and they come back and say, “We don’t think so.”

SO: Why do you think landlords have been slow to respond?

Sidoti: A lot of them may be financially strapped. I think some of them are in denial and are absolutely convinced that recovery is around the corner. Even with leases, you’d think we’re in the heyday. It’s kind of comical. We tried to do lease renewals, lease extensions, lease renegotiations and everything continues to head north as opposed to level out or drop down. The ironic thing again is the majority of tenants are not expanding nearly as rapidly because of the credit market. In addition to the recession we’re in, you can’t have the landlord standing there and saying, “If you don’t do this, we’ve got 10 other guys standing behind you.” That’s really not the case anymore. It’s kind of like the mortgage crisis, where you wait for the darkest hour to do something. Why wouldn’t landlords take a proactive approach and say “what can we do to help salvage the situation for all our tenants?”

SO: What could landlords do to help you?

Sidoti: I took my top seven landlords and I based that on those that I had the greatest number of locations with, averaged out the average unit volume and created the highest percentage rent we could pay in order to make sure our stores could survive. They don’t seem open to that.

SO: In your opinion, does it seem like the landlords have their heads in the sand and aren’t seeing what’s happening out there?

Sidoti: I think that is an absolute factual statement. I think there’s a lot of denial and I think their heads are in the sand. Even on new lease deals, when you’re negotiating these, they predict the turnaround will be in June 2010. Based on what? Some people say it’s going to be the end of 2010 and we’ll be back where we were in 2011. What are you basing that on?

SO: Before the restructuring, Mrs. Fields had to close stores. Since emerging from that Chapter 11 in October, have you had to close more or are you back in development mode?

Sidoti: We’re back in development mode right now. We’re doing what a lot of people are having to do -- tighten the belt. On the development side, we’re doing everything we can to get our start-up costs down and come up with creative incentives to our franchisees. We’re offering reduced or no franchise fees in certain situations. On the TCBY side, there are all kinds of incentives we’re doing with our franchisees. It goes back to an effort to try to keep everyone operating.

SO: Some retailers say there is a silver lining to this downturn with more space available when retailers close. Do you see any silver lining?

Sidoti: Right now, you’re still dealing with this mentality of I could [charge] the same rent as I did two years ago. Even though the opportunity would be there, if you have to pay the same rent and have the same economic terms, you’re still going to have a difficult time. I’ve come up against situations in the worst economies, the worst cities in America economically in this recession, and I’ve had landlords turn their back on me on any kind of assistance. In certain malls we’ve had drop offs in our traffic in stores as much as 25 to 30 percent. There is a silver lining in that everything’s cyclical and that eventually things come back. I just wish, even once we do get past this, that landlords understood what business tenants are in and instead of just turning this into the highest bidder wins, actually doing what’s good both for the tenant and the mall owner.

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