Experiential retail costs
A financial guide to opening a store
When a premium or luxury retailer opens a new store, it no longer serves the single purpose of trading. With many brands now operating an omnichannel model, the store can be a brand asset, fulfilment hub and trading unit all in one. This is often referred to as an experiential store.
Despite how common this format has become, many finance functions are still only measuring the trading element, which gives an inaccurate picture of the investment’s actual return. Retailers opening new stores can also neglect to set out that store’s purpose from the outset. On top of this, retailers signing fit-out contracts from now on will be doing so under an altered capital allowances regime and a new lease accounting standard.
This guide sets out how retailers can work through these challenges, so that an experiential store, whatever its purpose, pays back the investment over the long term.
What is an experiential retail store?
An experiential store is a physical retail space designed to do more than generate sales from the shop floor. It sits within a retailer’s wider omnichannel strategy and can support several roles at once, from brand-building and customer engagement to click-and-collect, returns and fulfilment.
Rather than treating the store purely as a place to browse and pay, retailers are increasingly using physical units to give customers a reason to visit in person. That might mean creating a more service-led environment, hosting events, offering product trials, building a sense of community, or using the space to bring the brand to life in a way that online channels cannot.
For premium retailers, this changes how the store should be planned, funded and measured, because its value may not be captured by store sales alone.
Before you commit: What should shape the store decision?
1. Start with the store's purpose
Before committing to a decision or investment, business owners should ask a fundamental question: what is the store’s purpose? It could be a trading outlet, a marketing showcase, a fulfilment point, or simply a way to strengthen the brand. It doesn’t have to be restricted to one of these routes, and most stores end up doing a bit of each.
Nevertheless, a clear strategy should sit behind that combination to prevent the investment from becoming another cost, so its objectives must be established before the store opens.
2. Choose the location around the customer, not the postcode
One of the biggest mistakes retailers make is choosing a store’s location based on the area’s wealth. Whereas they should be testing whether the area delivers the right footfall, the right customer profile, and enough of a market for the brand’s price point and product range.
For example, a retailer might choose a large store in a less affluent town because the surrounding areas are relatively wealthy. If it hasn’t tested whether its pricing and product range suit the local market, the store becomes a capital investment carrying far more risk than the numbers justify.
3. Match the format to the brand model
The right store format depends on where the brand sits in the market. At the volume end, a retailer may want a large site, lower rent and fast footfall, often on a retail park where customers buy quickly rather than browse.
At the experiential, premium end, some brands attract customers who travel specifically to visit a flagship store, because the visit itself is part of the value.
Between the two sit brands using smaller, interactive formats: product trials and in-store hospitality that encourage repeat visits without the scale of a full flagship.
4. Use existing data to support the decision
Existing customer data is often the best starting point for deciding where to open. A retailer that trades online or already has stores can access a live view of where its customers are based and where demand is already concentrated.
For an online retailer, delivery addresses can show where demand is strongest. A concentration of existing customers in a particular city can support the case for opening there, both as a fulfilment point and as a location likely to convert footfall. Customers who can see and handle a product in person may also spend more than they originally intended.
5. Be more precise if the business is smaller
Smaller retailers may have less negotiating power, which makes location choice even more important. Rather than pursuing a broad rollout, they need to focus on specific sites that match the brand’s positioning, audience and commercial model. A business still early in this journey needs to be precise about who it’s targeting and where.
What tax relief can be claimed on a shop fit-out?
The tax outcome of a shop fit-out depends on how the spend is split out and categorised. The project will include structural works, integral features, fixtures, equipment and brand elements, and each of these is treated differently for tax purposes.
Rather than thinking about this allocation after the money has been spent, retailers should seek advice and agree the split before contracts are even signed.
| Spend category | Typical examples | Likely treatment |
| Structural works | Walls, floors, shopfront alterations | Structures and Buildings Allowance |
| Integral features | Lighting, electrical systems, air conditioning, water systems, lifts | Special rate pool |
| Plant and fixtures | Display units, shelving, seating, tills, audio visual kit | Main rate pool |
| Bespoke display and branding | Feature installations, signage | Expert judgement required |
Which reliefs may apply?
- Annual Investment Allowance, which can give 100% relief on qualifying plant and machinery up to the annual limit.
- Full expensing, which can give companies 100% first-year relief on new main rate plant and machinery, with a 50% first-year allowance for qualifying special rate assets. It does not apply to second-hand assets.
- Writing down allowances, which may apply where expenditure doesn’t qualify for one of the first-year deductions described above.
- Structures and Buildings Allowance, which can give relief for qualifying construction and renovation costs over time, rather than immediately.
Do not assume the full fit-out is relieved immediately
Experiential stores can involve heavy capex on lighting, air handling and audio-visual equipment, and it won’t all be relieved on the same timescale. Some falls into special rate categories; other parts are relieved over a much longer period. If the financial model assumes the fit-out will receive all relief in the first year, the cashflow forecast will be far too optimistic.
Points to check before signing
- Landlord contributions and reverse premiums: Clarify who is funding the works and who is entitled to claim any related allowances.
- Dilapidations: Consider whether future reinstatement costs need to be factored into the financial model, and when any accounting provision can be properly recognised.
- Second-hand assets: Check the treatment carefully if the retailer is taking over an existing fitted unit rather than carrying out a full new fit-out.
A worked example can help test the model. Two fit-outs with the same total cost could produce very different tax and cashflow outcomes, depending on how much of the spend relates to structural works, integral features, loose fixtures or equipment.
Opening a store overseas
If the next store is outside the UK, the tax review becomes even more important. Overseas markets can involve very different tax systems. The US is a clear example: a retailer may need to consider both federal and state taxes, as well as employment taxes that operate differently from the UK system.
A physical presence overseas can also raise wider tax questions. Do profits need to be attributed to that market? Does transfer pricing apply to transactions between the UK business and the overseas operation? These points should be assessed at the start of the site-selection and lease process, because they can affect the commercial model as well as the tax cost.
When should a retailer speak to Price Bailey about this?
As early as possible, ideally before contracts are signed. A shop fit-out is a major capital commitment, and the tax position should inform the commercial decision rather than being reviewed after the event.
How should you structure the lease, and what does it mean for the balance sheet?
Choosing the right lease length matters both commercially and for the business’s accounts. Leases now sit on the balance sheet under FRS 102, so a shorter, more flexible lease may not need to be recognised at all, and it reduces exposure if early demand is uncertain. For a retailer weighing commitment against flexibility, that’s a key factor.
That flexibility usually comes at a cost. Landlords, particularly those that own shopping centres or portfolios of units, are rarely negotiating from an equal position unless the tenant is a very large brand. The right advisers, including a lease lawyer, accountant and tax adviser, should be involved before any terms are agreed, not after. Common lease structures include:
- Turnover rent: Rent is linked to performance, so this suits stores whose goal is to build their brand rather than hit a specific sales target. It naturally pairs with a shorter, more flexible lease, but the accounting treatment still needs careful consideration.
- Concessions and standalone stores: A concession can reduce upfront capital exposure and provide more exit flexibility, but it may also affect revenue recognition and how much control the retailer has over the customer experience. A standalone store usually gives the retailer more control but often requires a greater commitment to fit-out costs, lease costs and exit terms.
- Pop-ups and short licences: These can work well for smaller or online-first retailers wanting to test a physical format before committing to a full store. A short licence to occupy may not meet the definition of a lease, which can change the accounting treatment entirely.
A lease short enough to fall within the FRS 102 short-term lease exemption may not need to be recognised on the balance sheet at all. That’s one reason a shorter, more flexible structure can be the better choice, even where a retailer could commit to longer terms.
Where a lease does need to be recognised, turnover rents are often the more complex case. Variable payments linked to sales can complicate both the lease liability measurement and the discount rate used. This requires expert judgement before any terms are agreed.
Retailers wanting to understand the wider accounting change, including the EBITDA and gearing effect across the balance sheet, should read our separate blog on what the revised FRS 102 means for retail businesses.
How do you measure whether an experiential store is working?
Most retailers already run a store-level profit and loss account, so this isn’t new territory. The genuine complication is attributing online sales back to a physical visit, which quickly becomes tricky once a retailer trades across both channels. Therefore, an experiential store that serves a wider omnichannel strategy needs its own measures of success alongside the standard p&l. A few methods that are commonly used include:
- Footfall counting: Retailers can take footfall data from people-counter systems at their store entrances and use it to build a conversion rate, i.e. how many visitors out of every ten go on to make a purchase.
- Geographic sales analysis: If the only material change in a specific area is the opening of the new store, retailers can track online sales in that delivery postcode to see whether the store’s presence has lifted them.
- Delivery-address matching: An alternative is identifying which store is nearest to a given customer and tracking whether nearby online sales increase after a new store opens.
- Loyalty sign-up tracking: Getting in-store visitors to register for a membership scheme, often with a discount as the incentive, creates a direct and attributable link between a visit and a later purchase.
Loyalty sign-up tracking is achievable for most retailers without additional resource. Full postcode and delivery-address isolation is a bigger undertaking that, done properly, benefits from a dedicated data capability, which smaller retailers often don’t have in-house.
Get in touch
An experiential store is a major capital commitment before a single customer walks through the door. Price Bailey’s Retail team brings tax and audit specialists into the same conversation from the outset, rather than treating them as separate engagements, so the fit-out, the lease and the accounting consequences are considered together rather than in sequence. To speak to one of our specialists today, fill in the form below.
We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information on this page is intended as a general guide only. While we work to keep our content accurate and up to date, we cannot guarantee that it reflects the position at the time you are reading it. No responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm. For more information on our editorial process, click here.
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