Negotiation Situation - CosmeticCO CosmeticCO CC is a retailer of womens and mens cosmetics and skin care products with locations across Canada. With 100 stores in Canada, theyre in most every shopping centre of significance, starting with only 20 stores 5 years ago. Their demographic appeal is primarily to the most attractive shopping centre demographic women aged 25-40 who are fashion-aware and have the disposable income to purchase premium products. They represent a very different customer and demographic than teenage girls and generally less affluent or fashion aware females, who opt for lower quality and lower cost cosmetics from outlets such as Wal-Mart. CC has a 3,000 square foot space in Red Deer Centre mall in Red Deer, Alberta. The store opened in 2019, with a lease with a five-year initial term, with much fanfare, and generated sales of $600 per square foot in its first year. Covid affected consumers appetite for, and to some degree need for (with more work-from-home) cosmetics. During covid, sales dropped in half to $300 per square foot, and post-covid they are trending slightly better but not back to normal about $400 per square foot. CC pays base rent per square foot of $40. Operating costs per square foot in the mall are $50 per square foot. At the outset, CC anticipated forecast sales in the mall to be $650 psf they always tended to be towards the high end of the range (or above) in the centres they operated in across the country. They also forecast gross margins across their business of 60%, which held until the midst of Covid when supply chain difficulties resulted in additional costs that shrunk margins slightly, to 55%, where they remain today. Corporately, CC has a viability measure for stores that states a minimum operating income must be achieved of 15% on sales. Stores falling below that measure are either targeted for new management, additional promotional budgets, refit or relocation within a centre, or ultimately for closure. Given the difficulty in the post-COVID employment market, finding new management is not considered an option for Red Deer Centre. CC is also facing a minor, not insurmountable liquidity crisis, meaning that investment in a refit is an unfavorable option, and marketing dollars are tight. Negotiation Situation Shopping Centre Management Red Deer Centre is a regional sized shopping centre, being the only one of its kind in its market, and is the largest centre between Calgary and Edmonton. The shopping centre is modern, having been fully renovated prior to COVID, and has been a staple in the community for 30 years. To be profitable, shopping centres such as Red Deer Centre need to maintain a maximum vacancy level of 10% of the leasable area in the mall. Despite having lost some tenants during COVID, a few tenants have been replaced since, and vacancy is hovering right around the 10% level. The Centre is owned and managed by a large Canadian pension fund which invests in retail commercial real estate for its relatively steady stream of income which is in turn forms an investment stream for meeting the obligations to the pensioners who contributed to the fund. The market for renting additional space is somewhat uncertain and of some concern to the management of the Centre. Centre traffic meters indicate that retail foot traffic remains down by about 1/3 from pre-pandemic levels, and theres indications amongst experts that some persons retail shopping habits have changed permanently. The management has done an excellent job on expense control, keeping the additional portion of rents, that cover operating costs, stable, although that as well has meant the Centre has cut back on some promotional activities to meet budget. Impacting the budget even more, is no tenants are paying percentage rent, the real gravy that enhances the return for the centres owners. In addition, there are at least 4 other retailers besides CC asking for rental concessions, which together represent the potential for another 10% of vacancy. Mall management, knowing tenants talk despite confidentiality clauses, is concerned about setting an unmanageable precedent by giving any one tenant rental concessions that cannot also be granted to others. Historically, the Centres management, consistent with the industry, have taken a hard line on granting concessions, and only do so if they get something to their benefit in return. At the same time, they respect some tenants make more of a contribution to foot traffic (or have the potential to) than others, and thus its not necessarily the case all tenants would be treated the same in terms of their requests. The mall management is also cognizant of the fact CCs lease expires in about 18 months time. The rental unit occupied by CC is considered to be of average desirability at best. Being located across from the food court, it gets good visibility, but is in a loud area away from the fashion retailers and generally surrounded by the less desirable service retailers, including some cell phone outlets, a post office, brow bar, hair salon, and video game retailer. There are some units vacant in some of the prime areas of the shopping centre, similar in size to CC (an average sized unit), due to some high fashion outlets going bankrupt during COVID. Whilst tenants signing leases at the same time as CC were all signed with base rents in the $40 range, rents for the newest leases signed, post-COVID, have dipped, to $35 PSF. Average sales in the mall, which were in the $600 PSF range (the Red Deer area has strong incomes in years when the oil and gas industry is strong), they have since fallen to the $450 PSF range, fairly consistent with the overall traffic reductions in the mall. CC has stores in 15 other malls owned and operated by the same pension fund and thus are a significant entity. CC, unlike most national retailers, has no operating covenant in the mall because Red Deer was felt to be a stretch in terms of the market originally, they successfully negotiated that provision out of the lease. That means that CC could simply close the store, but would remain liable for their rent. The legal structure of the lease agreement is such that CCs parent company is a party to the lease, so walking away and suing or being sued for either party, given the relationships involved, is an unpalatable (but real) option.

Primary Issue: The retailers store is underperforming, and only marginally profitable. The retailer would like to present a case for a reduction in their rent, and has decided that it is your job, as VP of Operations, to prepare and execute upon a negotiation strategy.

A) Putting yourself in the position of the retailer, go through all 9 steps of the negotiation planning framework, and prepare your negotiation notes;

B) Prepare a draft agenda to circulate to the Shopping Centre management, to commence negotiations;

C) Prepare a list of your BATNAs, as well as those you suspect the Shopping Centre management would create;