The Interview: Alex McCulloch, Director of CACI

CACI, the consumer and location intelligence specialist, has launched a data driven, objective model to help landlords and retailers agree new commercial lease terms.

Developed jointly by CACI’s owners’ and occupiers’ teams in partnership with clients, CACI’s approach is to take a collaborative, transparent position in which a store is valued for the role it plays in an omni-channel transactional relationship between a brand and consumer.

TheIndustry.fashion sat down with Alex McCulloch, Director of CACI, to talk about the new leasing model in more detail.

McCulloch has over 15 years industry experience, working for two of the biggest retail consultancies in the country. Currently he heads up innovation and proposition for CACI's Property Consulting Group, working with some of the largest landlords and investors in the UK and Europe.

The implication from presenting a new model, is that there’s something wrong with the existing one – do you agree there’s a problem with the retail renting model currently?

We’ve been saying for over three years that there is a fundamental problem with retail leasing. My single biggest issue is that the model that exists at the moment does not reflect how we use shops – if you want to go shopping or engage with a brand, chances are that you’ve seen some form of digital engagement with them.

You might use click and collect, you might go into a store and buy the product online later. We engage with these brands across multiple channels in multiple different ways, without thinking “oh I must go online and do my digital shop now”, we don’t think about channels, we just think about the brand.

The lease model that exists is absolutely focused on an assumption that a transaction takes place in a store and the reason for that is that it’s written into the Landlord Tenancy Act, created in 1954. It works on the premiss that consumers will get a product by handing money over and receiving that product straight away - We just don’t act or engage like that anymore and the very fact that that is the founding principle of pretty much all of the leases in this country is why we think there’s an issue here.

The new model, how does it actually work? Are there maths behind the model?

The retailer knows what role that store plays in their network and the landlord knows what role their premises plays with engagement in their local catchment, so the principle of the model is based on the idea that we can bring these two groups together into a partnership and collaborate we can do the maths which can calculate the model.

We have five spots which we think are measurable, quantifiable and we think can be tracked over time.

• Transaction - what goes through the till
• Click and collect - how many collections in-store.
• Any functioning element of returns - including in-store and online
• Online halo – a measurement of when a brand has a store, online sales for that brand are higher within that stores catchment then they are beyond it.
• Influencing impressions - including the value of footfall.

We often use the comparison of Coronation Street – an advert on a Tuesday night in between parts of Coronation Street can cost £50,000 and that goes to a couple of million people who are possible mentally switched off and not paying attention, compare and contrast that to inside a Westfield – where you have a footfall passing through, paying attention with their heads up and eyes open. There is an inherent marketing value in the physical spaces. Influencing impressions measures that.

The model only works when we are working in partnership with both the landlord and retailer and everyone pools their data – we become the objective measurer of that data.

Objectivity is quite key – who makes the decision on the value?

We do not set the rent, we are not looking to push agents out – we simply objectively measure and track those numbers so we can say that someone’s online halo has gone up 7% from the previous month for example.

We would still anticipate that the landlords and retailers negotiate how much rent is driven off that change, all we’re doing is measuring that change for them overtime.

You’d still have negotiation around if you were talking to a Samsung who were a totally experiential store – you might put everything on the footfall. If you were talking to a Next – you might try and put as much weight on the value of click and collect services.

Has this model been implemented or trialled anywhere as of yet?

We have been working closely with Hammerson in terms of implementing the model. There are a number of trials taking place, working with property companies who are implementing trials and trying to get this off the ground and working with retailers who are looking to get their brands on that model.

We as a business work extensively with both landlords and retailers and we’ve identified that this has been an issue for a number of years but for various reasons there was a degree of inertia across the industry about implementing this. COVID has massively sharpened everyone’s focus.

We convinced the model and started having conversations about it in late March – we had a round table with 20 of our biggest landlord clients and asked for their thoughts – they responded “we love the idea, but there’s no way the retailers would get onboard”. Separately had the same conversation with the retailers and asked them their thoughts – they responded “we love the idea, but there’s no way the landlords would get onboard”.

We then have spent the last five months working with all parties to nail down the details, working with valuation, working with lawyers, to make sure this all worked and that everyone was onboard with it. It has been developed in collaboration with all parties.

Has the consumer sentiment regarding COVID-19 reported by CACI had any impact on the model, conversations or decision making?

The reason why this model gains traction is because before COVID-19 happened landlords had to do everything to maintain and protect valuations and anything which moved towards a more performance-based lease they felt would impact their valuations. Equally from a retailers perspective they’re in a position to focus their leases effectively just on what the store is and have no intention to share online behaviours with the landlord. In truth, the power in that dynamic was with the retailer.

We’ve had six months where most retailers have been unable to, or haven’t, paid rent which has meant that they’ve started to have conversations with landlords about rent. Equally landlords valuations have been so significantly impacted by Coronavirus that actually anyone who is seen to do something innovative will likely see a positive benefit as opposed to a negative.

This whole cycle of change brought about by Coronavirus has suddenly meant that a model which shares risk and reward equally is beneficial to both parties.

There’s been a lot of movement towards turnover models which aren’t sustainable – is this model the perfect solution and way forward?

Yes. It’s future-proofed. A turnover model is only going in one direction. We as consumers are transacting less and less in physical retail spaces. That isn’t to talk down the role of a physical store – we’re just using them for different things. We saw with COVID-19 that consumers moved ahead five years in the first two weeks of lockdown – we really started ramping up our online behaviours and transactions.

The big shift in consumer behaviour implies that any model which is based on money going into the tills is going down and will continue to go in that direction. The whole point of our approach is that even as that transaction element decreases in terms of its importance, the online halo increases its importance – our model allows for landlords and retailers to capture that shifting consumer mindset and measure it.

I fully see this being a model for the future.