Retailers wondering if a high-rent site is worth it should consider factors like their marketing budget and need for foot traffic

Q: My husband and I are opening a high-end paper-products store, carrying stationery, folios, lamps, jewelry, etc. We're thinking of locating in a fairly new area with a lot of boutique-style stores and a busy monthly street festival. However, this is the most expensive area locally and rent would be about double what we had hoped to pay. Our capital is limited. Would this be worth the extra investment?
-- L. D-N., Portland, Ore.

A: This is a frequent question among startup retailers, but one that's often asked only after a lease is signed! Good thing you're considering it now because most business owners cannot change their locations as easily as, say, their product lines. Typically, you're entering into a marriage of at least a decade when you sign a lease, and there are a number of factors you should consider before signing that document. Among them:

• Traffic: Will being in a less expensive location mean significantly less foot traffic past your store? If so, how will that affect your projected sales?

• Image: What might being in a lower-rent area -- and by corollary, not being in the high-rent area -- signal to your customers? "How many would not shop at your store because you're not in the upscale area?" asks Craig James, a sales coach and business consultant based in Bayside, N.Y.

• Visibility: Do you expect most of your customers to be walk-ins? If so -- and the lower-cost location you choose is not visible or easily accessible -- you'll lose those customers. On the other hand, if you plan to market to your customers and tell them precisely where you are, those who truly want what you're selling will make the effort to find you.

• Competition: Where are your rivals located? If the competition "is in the high-rent district and you aren't, customers might wonder why they should go to your store," James says.

Bob Phibbs, a Long Beach (Calif.)-based sales and marketing consultant (www.retaildoc.com), believes a great location is the foundation of a retailer's success. "You can rarely pay too much for a good location," he says. "I know the people who say: I can do half the business in this other location, and it'll still be better than paying such high rents. However, you get nothing if you're 100 yards from success."

The reason "A" locations have A rents is their high visibility, Phibbs says. "High-end retail only works well where similar businesses are clustered," he points out. "The B or C location will have you nestled with a nail salon, a cheap fast-food outlet, and possibly a dry cleaner -- none of which will spell success for a high-end retailer."

RENT VS. ADVERTISING.  What you really need to do in evaluating this opportunity is take a look at your marketing budget, experts say. Typically, most retailers don't have enough cash flow to allow them a premier location and a hefty advertising campaign -- it's one or the other. And this makes sense: If you're paying top dollar for a high-visibility shop in an upscale area, customers will come through your doors without a lot of advertising.

On the other hand, if you're in an obscure corner of a strip mall without much foot traffic, you'll be saving money on rent, but you'll need to spend a lot letting potential customers know where you are and persuading them to come by your store.

Ask the tenant representatives in the area about traffic counts and demographics. In addition, it never hurts to park across the street or sit in a nearby coffee shop for a few hours and watch foot traffic yourself. Next, figure out how many customers you will need to come into your shop every day in order to break even, estimating that one out of about every three customers will actually buy something.

"Retailers usually spend about half their gross margin towards marketing efforts, which includes three components: location expense, an advertising budget, and sales personnel," says Robert Kramer, a retail business consultant, author, and speaker based in Fairfield, Ohio. "So, if you're working on a 50% gross margin, half of that -- 25% -- should go to your three components," he says. "Let's say it costs 10% for your sales commissions or hourly salaries. That means you have 15% to divide between rent and advertising -- so you can't pay a high rent and also buy expensive advertising."

MANY VARIABLES.  Will the additional sales coming from an upscale, busy location offset the higher cost of rent? "Think about this in terms of percentages, not dollars -- it's easier that way," Kramer suggests. "There's no problem doubling what you planned to pay for rent if your sales will be double what you projected and you can decrease your advertising budget, for instance."

As for the monthly street festival, that could be as much a blessing as a curse. Talk to the existing retailers in the area and ask them honestly whether the event brings in additional sales and helps them develop new customers. If you find that the festival would contribute a significant portion of your total revenue -- such as 30% or more -- that would be a strong argument for locating in that higher rent area, James says.

But some retailers have found that street fairs can actually be a disruption to business. "Often, the streets are closed, and other vendors will be selling their wares in front of your shop," Phibbs says. Just another variable in a very important equation.