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Evaluating fashion retailers’ Fashion

retailers’
intellectual capital: key money as a intellectual
capital
part of customer capital
Fabio Fiano
Link Campus University, Roma, Italy
Received 9 December 2019
Jens Mueller Revised 23 March 2020
Massey University in New Zealand, Albany/Auckland, New Zealand 19 May 2020
Accepted 6 July 2020
Niccol
o Paoloni
Department of Engineering, Roma Tre University, Roma, Italy
Massimiliano Farina Briamonte
Link Campus University, Roma, Italy, and
Domitilla Magni
Department of Business Studies, Roma Tre University, Roma, Italy

Abstract
Purpose – The purpose of this paper is to enrich the scientific and managerial debate on intangibles by placing
the concept of key money within the broader concept of Intellectual Capital, and by proposing an evaluation
approach for a portion of the latter, focusing the analysis on fashion retailers.
Design/methodology/approach – This research focuses on the fashion industry, given that key money
gains particular significance and accounted for in fashion retailers’ financial statements. A comparative case
study is presented with regard to the application of two evaluation methods proposed to some fashion retailers
operating in Italy.
Findings – This paper defines a suitable placement for key money within the vast structure of intellectual
capital. The research shows that the two methods give “very close” key money values, thus laying the
foundations for a theoretical articulation of interest to be further explored in future researches.
Originality/value – The document represents a first in-depth examination regarding the evaluation and
inclusion of key money in the intellectual capital. A further element of originality lies in having interpreted the
key money in a perspective closer to the world of intangibles and competitive strategies, to the detriment of the
previous (meagre) settings that placed it within the real estate branches of study.
Keywords Intellectual capital, Intangible assets, key money, Fashion industry, Valuation, Competitive
strategy
Paper type Case study

1. Introduction
Over the last years the definition of Intellectual Capital and the related measurement
parameters have been the subject of intensive research and of a number of academic and
managerial debates.
The “knowledge management” stream of literature (Armistead, 1999; Darroch, 2005; Del
Giudice and Maggioni, 2014; Del Giudice and Della Peruta, 2016; Giampaoli et al., 2017; Papa
et al., 2018) underlines the importance of intangible assets. In a knowledge society, Intellectual
Capital is a key factor (Bukh et al., 2001).
The combination of financial (i.e. tangible assets) and intellectual values (i.e. intangible
assets) is normally considered as the market value of a business (Chen et al., 2005;
Journal of Intellectual Capital
© Emerald Publishing Limited
1469-1930
Dedicated to Roberto Fiano DOI 10.1108/JIC-12-2019-0287
JIC Abdolmohammadi, 2005). Financial statements accounting tends to fulfil needs other than
the valuation of the Intellectual Capital and of the Knowledge Resources (KR) of firms. The
firm’s transparency commitment to shareholders, potential investors and market analysts is
enhanced by the understanding of the real value of the total assets, which provides a more
accurate representation of a company’s worth (Ramezan, 2011). In this scenario, the debate
on firms’ resources (Bozzolan et al., 2003; Abdolmohammadi, 2005; Ramezan, 2011; Biscotti
et al., 2018) is growing up: the challenge for KR, Intellectual Capital, and Knowledge
Management scholars is to understand how the peculiar aspects of Intellectual Capital
integrate with the firms’ resources – tangible or intangible – (Bontis, 2003). Furthermore,
through this paper, we want to enrich the scientific and managerial debate on intangibles by
placing the concept of key money within the broader framework of Intellectual Capital. The
purpose of the paper is part of this academic discussion: the aim is to define the context of
assessment of Intellectual Capital in a KR perspective. There is a lively open debate
concerning the evaluation and definition of Intellectual Capital where the conceptual
structure of representation is agreed upon (Davey et al., 2009). The value of this intangible
asset is considerable for most firms, often exceeding the book value (Edvinsson and Malone,
1997; Yang and Lin, 2009).
A fundamental characteristic of Intellectual Capital is its natural tendency not to respect
the corporate “perimeter” (Petty and Cuganesan, 2005). Many of the intangible assets, in fact,
are not located within the firm, but outside its borders. Here is a first subdivision of the
Intangible Heritage is done by recognizing an external and an internal value. On the outside,
the so-called Relational Capital is identified, while on the inside, Human Capital and
Structural Capital (or Organizational Capital) are often distinguished (Davey et al., 2009).
Moreover, given the growing importance that Intangibles have come to assume in recent
decades, many scholars have proposed different definitions and dimensions of Intellectual
Capital.
According to Leliaert et al. (2003), four communicating vessels form Intellectual Capital:
human capital, relational capital, competitive capital, and structural capital.
Furthermore, a number of other scholars (Lev, 2001; Rezende, 2001; Rodrigues et al., 2009;
Rocha, 2012) essentially use three distinct categories to indicate the intangible assets forming
the Intellectual Capital: market assets, individual competence assets, and structure assets.
Scholars think fit that, the importance of intellectual capital having been confirmed, it is
important (1) to identify its impact on the firm’s value, and (2) to measure said value produced
by a firm’s organizational knowledge (Wernke, 2002).
In order to compete (and differentiate themselves) within the volatile and fast-changing
fashion industry, firms highly dependent on Intellectual Capital.
In fashion industry, value-creating intangible assets are marketing-related (trademarks,
brands, trade names, licences, supplier relationships, know-how, designers) as well as
customer-related – assets used to attract, retain and manage clients (King, 2007; Iyer and
Muncy, 2005; Easey, 1995).
Also, for fashion-luxury sector, intangible assets are therefore corporate resources that do
not have a physical existence, but which contribute to the generation of firm value; in fact,
they participate in the achievement of firm’s sustainable competitive advantages. In this
specific case, the location of the points of sale is also part of the intellectual capital of the brand
(Watson et al., 2005). Fashion retailers must also pay close attention to the choice of adequate
positions for their points of sale when formulating competitive strategies. In fact, one of the
most important factors in commercial development in the fashion-luxury sector is the
opening of new stores, or the takeover of those previously occupied by other brands, in
strategic locations. This requires expertise in the choice of the location and the time. Some
areas and streets are a privy to the most renowned fashion brands and it is thus difficult to
have the possibility to enter into a lease agreement, because customarily, the lessees of a shop
decide to terminate their contracts being aware that in so doing they may obtain an exit Fashion
payment, called key money in the commercial practice, from the new company interested in retailers’
the location.
In common use, there are various uses of the term key money (Vinten, 2005). In
intellectual
management and accounting, the term key money generally means “a premium paid by the capital
new lessee to gain access to a property located in a specific location” (PWC, 2018, p. 7).
In accounting practice “these payments to the incumbent tenants (often referred to as key
money) will generally be classified as an intangible asset” (PWC, 2012, p. 36). The retailer has
rights to renew the lease in the future and expects to be able to recover at least the original
investment from the tenant who takes over the lease when it moves out (PWC, 2012). The
solution of the key money regulates most of the acquisitions of new points of sale in the streets
most coveted by brands, in which the most used contractual form is the lease.
This paper aims to understand how the concept of key money fits into Intellectual Capital
and what are the possible evaluation methods that lead to a precise quantification of key
money as a small portion contributing to the firm’s Intellectual Capital. The originality of the
paper lies in having interpreted the key money in a perspective closer to the world of
intangibles and competitive strategies.
Taking into account the distinction between holistic criteria (which aim to evaluate the
entire Intellectual Capital) and analytical criteria (aimed at evaluating specific components of
the Intellectual Capital) (Lev and Zambon, 2003; Sveiby, 2004; Giuliani and Marasca, 2011),
this paper falls into the second category.
This paper is organized as follows: Section 2 reports the review of the literature that
outlines the tangents between intellectual capital, in regard to the so-called customer capital
component, the world of fashion retailers and the conceptualization and valuation of key
money, while Section 3 presents evidence resulting from this comparative case study. Lastly,
the paper reviews the findings and suggests areas of further research.

2. Literature review
2.1 External – relational – customer capital
In order to identify the fundamental components of Intellectual Capital, it is necessary to
investigate the numerous contributions so far proposed by scholars and consultants who
differ from each other in terms of concepts, purposes and categories used (Bontis, 1998; Chen
et al., 2004; Han and Han, 2004; Tai and Chen, 2009; Del Giudice et al., 2016; Cabrilo and
Dahms, 2018).
The theoretical assumption underlying the development of Intellectual Capital is
represented by the value obtained from the difference between market value and book value
(Del Giudice et al., 2016). Some scholars distinguish Intellectual Capital between Human
Capital (thinking capital, which includes skills, relationships and values) and Structural
Capital (non-thinking capital which constitutes the infrastructure supporting human capital)
(Edvinsson and Malone, 1997; Lev and Zambon, 2003). Within the latter, two other types of
capital are identified: Customer Capital (Ramezan, 2011; Sussan, 2012), understood as the set
of relations between the firm and its customers, and Organizational Capital (Miles and Van
Clieaf, 2017; Belgraver and Verwaal, 2018), in turn structured in Process Capital, relating to
the effectiveness and validity with which firm processes are managed, and Innovation
Capital, pertaining to the performance and results of the activities in charge of creating ting
new products and services to offer into the market.
According to several research, Relational and Customer Capitals are interchangeable (Tai
and Chen, 2009; Han and Han, 2004; Ramezan, 2011; Martin, 2000; Bontis, 1998; Kim et al.,
2010; Wall, 2005). Moreover, Chen et al. (2004) argued that the conversion of Intellectual
Capital into market value is due to Customer Capital acting as a connector and catalyst.
JIC Despite the positive and proven effects of Customer Capital on the firm’s value, several
questions are still open, especially on the management of Customer Capital and on the
relationship between the firms and the external contest (Leal-Millan et al., 2016).
According to Bontis (1998), Customer Capital has a more direct effect on a firm’s value and
organizational performance, unlike Human, and Organizational Capital.
Customer satisfaction and loyalty, customer management and orientation, market share,
and distribution channels may be indicators of Customer Capital (Bontis, 1998; Bontis et al.,
2000; Engstrom et al., 2003; Kim et al., 2010). Thus, current and potential future values of a
firm’s relationship with customers are included in Relational (Customer) Capital
(Sussan, 2012).
Customer Capital is embedded in the knowledge (often implicit) of marketing channels and
clients’ relations. This is the reason why it includes brands, market shares, customer
information, customer access points and business contracts (Bontis et al., 2000).
Some scholars show how:
(1) In market-oriented firms, the “intellectual market value” is strongly shaped by the
various marketing levers (Olavarrieta and Friedmann, 1999);
(2) A company’s performance informs Intellectual Capital management (Marr, 2004;
Chen et al., 2005).
Hence, it is possible to assert that business management itself is also based on the relationship
between marketing assets and Intellectual Capital (Bukh et al., 2001).
As shown, IC and Customer Relationship Management (CRM) are increasingly closely
related (Abdolmohammadi, 2005; Walsh et al., 2008). Thus, one of the components that
make up Intellectual Capital is Relational Capital, that is, the value of a firm’s
relationships with the ecosystem and its customers (Cegarra-Navarro and Dewhurst,
2007). Customers are a fundamental pillar in the components of the IC (Taherparvar et al.,
2014). This is due to the value shared between firms and customers, which is the main result
of CRM (Cegarra-Navarro and Dewhurst, 2007; Biscotti et al., 2018). For a firm, it is vital to
focus the attention on the evaluation and measure of CRM in a strategic and systemic
perspective (Duffy, 2000; Yang and Kang, 2008). In particular, measuring Customer
Capital, following the IC and CRM approach, is fundamental to assessing how successful
an organization is in turning customer relationships into sustainable competitive
advantage (Duffy, 2000).
In this context, CRM became soon the most used term to indicate that process aimed at
creating and maintaining customer relationships and, at the same time, finding, organizing
and managing data and information regarding the customers themselves (e.g. behavioural
patterns, purchasing habits, preferred and most used communication and distribution
channels, consumer needs) (Gebert et al., 2003; Caputo et al., 2016). In other words, knowledge
management solutions and approaches are asserting in the intangible and Intellectual Capital
market: CRM is the most efficient managerial approach to understanding the structure of its
customer base (and therefore Customer Capital) by identifying the most profitable ones, to
develop and consolidate relationships with them (Santoro et al., 2017).
Hooley et al. (2005, p. 19), by considering that marketing assets are “any attribute, tangible
or intangible, physical or human, intellectual or relational, that can be deployed by the firm to
achieve a competitive advantage in its markets” explain that strategic management and
marketing disciplines are aligned. The complexity of the evaluation and of intangible assets
has fostered some scholars to carry out further research on the effects that said assets could
have on a strategic, organizational and accounting level (Bontis et al., 2005).
The most accepted distinction, in terms of accounting, comes from Guilding and Pike
(1990), who identified four categories of marketing assets: value creators – investment in the
creation of marketing assets (e.g. advertising, product development and other marketing Fashion
support); proper marketing assets (e.g. trademarks, brands, entry barriers, information retailers’
systems); value manifestation (e.g. image, reputation); the synthesis of marketing assets –
competitive advantage.
intellectual
From an organizational point of view, the identification and satisfaction of customers’ capital
needs are considered as the primary marketing resource (Day, 1994).
Marketing intangible resources can be classified as (Srivastava et al., 2001, p. 782):
(1) Relational intangible assets – external to the firms – including customer
relationships, distribution channels, strategic partners, supplier relationships;
(2) Internal intangible assets – including a comprehension of the internal and external
environment, the capability to manage intra-organizational relationships.
In the Intellectual Capital – relational capital – field of study, scholars have widened the study of
the aspects of favourable contracts (Beattie and Thomson, 2007; Guthrie and Petty, 2000; Singh
and Kansal, 2011) also in relation to distribution channels (Beattie and Thomson, 2007; Guthrie
and Petty, 2000; Singh and Kansal, 2011; Angel Axtle Ortiz, 2009; Kim et al., 2010).
In summary, through CRM, firms identify a business strategy aim of highlighting and
managing the most valuable relationships with the customer (Del Giudice et al., 2014; Murray
et al., 2016).

2.2 Intellectual capital – fashion industry (and fashion retailers)

The fashion industry is turbulent due to some elements, which have created ongoing changes
(Kilduff, 2005; Bruce and Daly, 2006); the value of the point of sale in marketing studies has
been the subject of previous scholars’ contributions (Hackett and Foxall, 1994; Newman and
Patel, 2004).
Fashion firms base competitive strategy on their own Intellectual Capital (Davey et al.,
2009) in the ever-changing fashion industry. Some specific aspects such as brand
management, product development and, mostly, uniqueness, have been recognised and
integrated into the fashion industry (Wigley et al., 2005).
A rapid market penetration, for fashion retailers, may be of particular importance for it
triggers brand-related “memory effects” in consumers’ minds which shape preferences and
enable retailers to gain first-mover advantages (Michael, 2003).
As Teece et al. (1997, p. 518) stated, “We thus advance the argument that the competitive
advantage of firms lies with its managerial and organizational processes, shaped by its
(specific) asset position, and the paths available to it”; and following “By position we refer to
its current specific endowments of technology, intellectual property, complementary assets,
customer base, and its external relations with suppliers and complementors”.
Following these scholars, a fundamental point of market penetration is carried out
through a targeted choice of the location of the points of sale. A rapid expansion is necessary
in order to secure desirable real estate, as well as specific desirable ambience and mood
features, which may serve as a form of protection from potential imitators (Michael, 2003).
The effects of localization and its possible effects on Intellectual Capital, as well as on the
entire business value, have been studied less. Some intersecting contributions came from the
studies on franchising (Watson et al., 2005).
Once Intellectual Capital values are integrated into an analysis of knowledge assets, there
exist rational reasons for the departure existing between accounted for values of the assets
and a business net worth (Darroch, 2005).
The First-Mover Advantage (FMA) is an often recognised and appreciated entrepreneurial
strategy (Rumelt, 1987; McDougall and Robinson, 1990; Dollinger, 1999; Covin et al., 2000).
JIC Lieberman and Montgomery (1988) identified three possible sources of FMA: a state-of-
the-art technology, a priority access to “scarce resources”, and an effective influence on
buyers’ actions.
In the industries with a lower use of technology, where franchising is included, a priority
access to locations and influence on customers’ behaviour are deemed more significant
(Giacosa et al., 2017). Service providers such as retailing and restaurants must typically be
carried out at a particular place, thus a priority access of valuable real estate is highly
significant (Davey et al., 2009).
Therefore, for firms operating in the fashion sector, retail distribution is to be considered
as an important component of a more ambitious communication system towards the
consumer (Kilduff, 2005; Davey et al., 2009). The store is also the main vehicle for information
from the consumer to the firm, a monitor for capturing market signals in real time and without
mediation. This function of the store is particularly important in a risky business such as
fashion, in which there is often a misalignment between the needs of consumers and the
vision of the market (Gebert et al., 2003; Watson et al., 2005).
In this sense, real estate is a heterogeneous (and scarce) resource, due to each location
having a different potential, which considerably impacts the supply chain (Saderion
et al., 1994).
In the past, scholars (Love, 1986) showed McDonald’s case having effectively priority-
access and valuable real estate through favourable leases. Imitators can easily replicate the
business concept but not the same valuable real estate features.
The choice of a location has therefore a strategic nature deriving from its own intangible
components and an apparent effect on the quantification of a portion of the Intellectual
Capital.

2.3 Evaluating intellectual capital and key money

Many studies, related to intangible assets and Intellectual Capital, have been developed
over time (Stewart, 1997; Bontis et al., 1999; Sullivan, 2000; McPherson and Pike, 2001; Silva
et al., 2002; Milost, 2007).
With regard to intangible assets, various streams of research construe the same
phenomenon although with different definitions (Lev, 2001); accounting literature refers to
“intangible assets”, while economists refer to “assets based on knowledge”, and managers to
“intellectual capital”.
All of the above-cited definitions refer to a non-physical right to future benefits.
Over time, doctrines agreed on the fact that knowledge-based assets are costly and
challenging to manage. Scholars consider that implied knowledge and skills, culture and
values, technology and explicit knowledge, process management, and assets (image,
customer relations, networks) are generators of intangible assets (Osinski et al., 2017).
Monetary valuation and non-monetary valuation represent the two branches of
Intellectual Capital measurement methods (McPherson and Pike, 2001; Han and Han, 2004;
Wall, 2005; Cabrilo and Dahms, 2018). Financial evaluation methods permit an effortless
verification and are often used in standard valuations, while non-financial methods present a
multidimensional Intellectual Capital structure, which encompasses all of its components.
In the last 30 years, various Intellectual Capital measurement methods was developed,
some of which were valuating a single component of Intellectual Capital, while others were
analysing multiple components of it (Cabrilo and Dahms, 2018). Other approaches were aimed
at valuating Intellectual Capital performance based on a holistic perspective; consequently,
these methods did not prove the point in giving values and information for the specific
components embedded in Intellectual Capital (Caputo et al., 2016).
 The expected results that are little confirmed by all the conceptual (constructed) Fashion
methodologies developed to date are listed below: retailers’
(1) Comparability of firms’ performance; intellectual
(2) Calculation of the dimension of the Intellectual Capital elements; capital
(3) Assessment of the influences between Intellectual Capital components.
The knowledge resources to consider when trying to outline the structure and evaluation of
Intellectual Capital cannot be standardised: each firm has to “build” its own Intellectual
Capital structure (Stewart, 1997) composed by small pieces of accumulated knowledge.
In terms of valuation, this leads the industry in which a firm operates to influence the
configurations and valuations of Intellectual Capital, along with the historical moment.
Although Intellectual Capital financial valuation has a long “tradition”, it is the core of an
ongoing debate, probably due to the fact that (1) valuation should express a comparison: this
aspect is problematic due to the fact that each Intellectual Capital is firm specific; (2)
evaluation methods are particularly complex and rarely tested; (3) this issue cannot be
resolved by creating a simple formula, as the mechanism of contribution of intellectual capital
to the value creation is still to be clarified (Andriessen, 2004; Giuliani and Marasca, 2011;
Kaufmann and Schneider, 2004; Seetharaman et al., 2002).
Sveiby (2004) has classified four conceptual categories concerning the evaluation of
Intellectual Capital, the first three being financially based, and the fourth being non-monetary:
(1) Direct Intellectual Capital methods (DIC);
(2) Market Capitalization Methods (MCM);
(3) Return on Assets methods (ROA);
(4) Scorecard methods (SC).
As previously mentioned, this paper aims at identifying financial evaluation methods of a
specific component of Intellectual Capital.
Taking a (conceptual) step back, in theory and practice, the approaches used for real estate
evaluations are significantly varied. Essentially, however, it is possible to form some groups
related to different methods that can be classified as follows (Saderion et al., 1994):
(1) Market methods;
(2) Income methods;
(3) Cost methods.
Market methods assume that the real estate value may derive from the comparison with a
similar real estate asset; the limits of this class of methods derive from the heterogeneity of the
values of buildings and from the great volatility of the market, affected by many factors,
which are often totally unrelated to the industry (Saderion et al., 1994).
Income methods are based on the assumption that the value of a real estate asset is
determined by the income guaranteed by the asset itself (Britto et al., 2014).
These methods are divided into two categories, depending on how they aggregate the
economic flows in the relevant time span:
(1) PDV (Present Discounted Value): considers the current value of the income flows
generated by the asset (Liu and Mei, 1994);
JIC (2) DC (Direct Capitalization): considers, as a comprehensive value, the income flow of
a one- year monetary lease multiplied by a predetermined capitalization rate
(Martin, 1993).
Cost-based methods are generally grounded on the assumption that no rational economic
agent would likely pay an asset more than the amount necessary to reproduce the asset itself
(Guo et al., 2014).
The concept of key money is part of these considerations on the market valuation of a lease
and on the evaluation methods. Therefore, for fashion brands, the key money is the difference
between the market value, i.e. the figure that represents a realistic amount for which the
property (the store) would sell on the market at the time of evaluation and the rebuilding value
(or restoration cost), i.e. the cost of the store’s reconstruction if it were completely destroyed
from scratch (Enever et al., 2010).
According to the literature previously shown, we would like to pose the following research
question:
RQ1. What are the key money evaluation methods, in line with the current
conceptualization and estimation of Intellectual Capital?

3. Methodology: two explorative case studies

Over time, it was realized that key money is in fact an independent value representing its own
portion of equity. In essence, key money valuation difficulties rest on key money being a
portion of goodwill and, namely, a “real estate component” of it.
key money valuation is not the valuation of the tenancy; in fact it is the valuation of an
economic concept, a pure specific intangible portion of equity, subsequent to a decisional
process aiming at precisely (other than randomly) selecting each point of sale, as a part of a
company’s Intellectual Capital.
In this research, the first valuation method (income approach – tenant side) proposed and
used for the calculation of key money aims at quantifying retailers’ loss of profits subsequent
to a hypothetical exit of the point of sale (tenant side); in brief, the method is based on the
potential commercial loss suffered by tenants in case they leave a specific location.
key money, equally to the relevant buildings, is volatile by its nature (Enever et al., 2010);
accordingly, income-based methods allow to better neutralizing the effects of volatility
during the valuation process.
With the intent of verifying the value calculated based on the fore mentioned first method,
a second method is proposed which takes into consideration the landlords’ (residual approach
– landlord side) viewpoint, as opposed to the tenants’. The landlord’s profit is the rent, which is
received. The second method (verification method) determines the residual key money value
as the difference between the building’s value (income-based method) and the rebuilding
value of the tenancy; the residual value is exactly the localisation value expressing the
key money.
In brief: key money 5 (Market Value – Rebuilding Value)
The two valuation methods have been equally applied to two firms operating in the
fashion industry, Phard Magazine S.r.l. and Douglas Italia S.p.a., thus crystallizing a
comparative case study (Yin, 2013). The first firm is a fashion retailer operating in the
clothing industry, while the second one, is a fashion retailer operating in the cosmetic and
perfume industry. The choice of these two firms is that both operate into the retail and
consumer goods industries (PWC, 2012, 2018) – as fashion retailer in Italy – and are subject to
the same budget directives and regulations; this allows to better evaluate the key money by
following the various evaluation methods.
 Moreover, the main reason of the comparative case study methodology (Yin, 2013) is to Fashion
involve the analysis and synthesis of similarities, differences, and models between two or more retailers’
cases that share a common focus or goal in a way that produces knowledge that is easier to
generalize and to identify, in this specific case, any differences on certain market valuations.
intellectual
capital
3.1 First method – income approach – tenant side
As previously presented, the “First method” is defined as the Tenant’s method for it is
approached from the lessee perspective; this approach is basically similar to DC Methods.
According to this approach, the valuation of key money must firstly take into
consideration:
(1) The tenant’s expected income;
(2) The duration of rental;
(3) The Return on Investment ratio (ROI).
A summary of these values per firm is expressed in Tables 1 and 2.
The resulting value essentially reflects the efficiency of a point of sale, as it represents the
expected profit; were this value to be considered as an efficiency parameter, the resulting
value would express the capability of a single venue to produce profits, although with a limit
to be neutralized: the efficiency indicator can be expressed by the ratio between the profits
and the size of the surface of sale.

Store Revenues (V) R%(a) R(b) Duration (Years) Value (V)

Store 1 480.755 5.85% 28.124 18 506.235

Store 2 484.708 5.85% 28.355 18 510.398
Store 3 561.056 5.85% 32.822 18 590.792
Store 4 595.286 5.85% 34.824 18 626.836
Store 5 441.485 5.85% 25.827 18 464.884
Store 6 590.679 5.85% 34.555 18 621.985
Store 7 348.112 5.85% 20.365 18 366.562
Store 8 180.352 5.85% 10.551 18 189.911
Store 9 1.579.908 5.85% 92.425 18 1.663.643
Store 10 1.446.855 5.85% 84.641 18 1.523.538
Store 11 778.573 5.85% 45.547 18 819.837
Store 12 1.411.918 5.85% 82.597 18 1.486.750
Store 13 688.988 5.85% 40.306 18 725.504
Store 14 694.859 5.85% 40.649 18 731.686
Store 15 867.916 5.85% 50.773 18 913.915
Store 16 323.358 5.85% 18.916 18 340.496
Store 17 989.216 5.85% 57.869 18 1.041.645
Store 18 508.608 5.85% 29.754 18 535.564
Store 19 677.059 5.85% 39.608 18 712.943
Store 20 762.614 5.85% 44.613 18 803.033
Store 21 404.494 5.85% 23.663 18 425.932
Store 22 338.944 5.85% 19.828 18 356.908
Store 23 1.035.303 5.85% 60.565 18 1.090.174
Store 24 1.086.212 5.85% 63.543 18 1.143.781
Store 25 232.375 5.85% 13.594 18 244.691
Total 18.437.647
Note(s): (a)The symbol R% represents the operating profitability rate; (b)The symbol R represents the Table 1.
operating profitability in absolute value (euro); R% is a measure of operating profitability, multiplied to Income
revenues leads to the quantification of R (absolute value – euro) approach_Douglas
JIC Store Revenues (V) R%(a) R(b) Duration (Years) Value (V)

Store 1 1.500.000 15.00% 225.000 18 4.050.000

Store 2 1.040.000 15.00% 156.000 18 2.808.000
Store 3 900.000 15.00% 135.000 18 2.430.000
Store 4 650.000 15.00% 97.500 18 1.755.000
Store 5 600.000 15.00% 90.000 18 1.620.000
Store 6 420.000 15.00% 63.000 18 1.134.000
Total 13.797.000
Table 2. Note(s): (a)The symbol R% represents the operating profitability rate; (b)The symbol R represents the
Income operating profitability in absolute value (euro); R% is a measure of operating profitability, multiplied to
approach _Phard revenues leads to the quantification of R (absolute value – euro)

Store V/SQM

Store 1 4.579
Store 2 13.849
Store 3 7.481
Store 4 13.229
Store 5 3.396
Store 6 4.219
Store 7 1.989
Store 8 3.006
Store 9 4.104
Store 10 8.769
Store 11 4.325
Store 12 4.412
Store 13 2.756
Store 14 2.779
Store 15 2.993
Store 16 1.960
Store 17 4.209
Store 18 1.956
Store 19 2.614
Store 20 3.308
Store 21 2.889
Store 22 4.842
Table 3. Store 23 2.724
revenues/ Store 24 4.828
store_Douglas Store 25 2.905

Store V/SQM

Store 1 4.478
Store 2 5.200
Store 3 7.031
Store 4 3.824
Table 4. Store 5 1.447
revenues/store_Phard Store 6 857
Store Revenues (V) Value (V) Adj.Value (V)
Fashion
retailers’
Store 1 480.755 506.235 739.741 intellectual
Store 2 484.708 510.398 2.237.470
Store 3 561.056 590.792 1.208.620 capital
Store 4 595.286 626.836 2.137.262
Store 5 441.485 464.884 548.678
Store 6 590.679 621.985 681.661
Store 7 348.112 366.562 321.385
Store 8 180.352 189.911 485.641
Store 9 1.579.908 1.663.643 663.004
Store 10 1.446.855 1.523.538 1.416.726
Store 11 778.573 819.837 698.830
Store 12 1.411.918 1.486.750 712.860
Store 13 688.988 725.504 445.263
Store 14 694.859 731.686 449.057
Store 15 867.916 913.915 483.531
Store 16 323.358 340.496 316.625
Store 17 989.216 1.041.645 680.093
Store 18 508.608 535.564 316.049
Store 19 677.059 712.943 422.349
Store 20 762.614 803.033 440.039
Store 21 404.494 425.932 466.798
Store 22 338.944 356.908 782.301
Store 23 1.035.303 1.090.174 534.402 Table 5.
Store 24 1.086.212 1.143.781 779.968 Key money valuation
Store 25 232.375 244.691 469.294 (KMV)_Douglas
Total 18.437.647 18.437.647 (income approach)

Store Revenues (V) Value (V) Adj.Value (V)

Store 1 1.500.000 4.050.000 2.705.189

Store 2 1.040.000 2.808.000 3.141.626
Store 3 900.000 2.430.000 4.247.991
Store 4 650.000 1.755.000 2.310.019 Table 6.
Store 5 600.000 1.620.000 874.325 Key money valuation
Store 6 420.000 1.134.000 517.850 (KMV)_Phard (income
Total 13.797.000 13.797.000 approach)

The aforementioned indicator allows the understanding, together with the profits, of the
“actual productivity” of a point of sale considering that each venue produces a different
income, as each one of them has a different surface area.
Therefore, income must be interpreted as an element connected to the size of the business
area; Tables 3 and 4 presented below shows the per-square-meter productivity (V) of each
point of sale.
The application of the incidence percentage of the per-square-meter productivity to the
estimate value previously calculated results in an “Adjusted” value; Tables 5 and 6 presented
here show the estimate value which takes into account revenue and the “Adjusted” value per
each point of sale:
JIC Ranking
Store Efficacy weight Efficiency weight

Store 2 40% 60%

Store 4 40% 60%
Store 10 40% 60%
Store 3 40% 60%
Store 22 10% 90%
Store 24 10% 90%
Store 1 10% 90%
Store 12 10% 90%
Store 11 10% 90%
Store 6 10% 90%
Store 17 10% 90%
Store 9 10% 90%
Store 5 10% 90%
Store 20 10% 90%
Store 8 10% 90%
Store 15 90% 10%
Store 25 90% 10%
Store 21 90% 10%
Store 14 90% 10%
Store 13 90% 10%
Store 20 90% 10%
Store 19 90% 10%
Table 7. Store 7 90% 10%
Efficacy_efficiency Store 16 90% 10%
weight_Douglas Store 18 90% 10%

Ranking
Store Efficacy weight Efficiency weight

Store 3 40% 60%

Store 2 40% 60%
Store 1 10% 90%
Table 8. Store 4 10% 90%
Efficacy_efficiency Store 5 90% 10%
weight_Phard Store 6 90% 10%

Essentially, the Adjusted values obtained outline what the value of each point of sale would
be if this calculation was only based on the per-square-meter income of each venue; the
“Adjusted” value is mainly shaped by the efficiency level of each one.
Subsequently, we have outlined the significance given by each component, (efficiency/
effectiveness), to each point of sale; this valuation was carried out taking into account the
specific features of each venue.
This element, shown in Tables 7 and 8, allows the classification of three distinct categories
of points of sale:
Tables 9 and 10 presented below shows the final calculation of key money, in the wake of
the concepts mentioned above:
Following the application of the method reported above, the comprehensive key money
value of Douglas Italia S.p.a. would total V 18.649.043, while Phard Magazine S.r.l.’s key
money value would total V 14.240.974.
 Efficacy Efficiency Weighted
Fashion
Store V/SQM Adj.Value (V) Avg.Value (V) weight weight Avg.Value (V) retailers’
intellectual
Store 1 4.579 739.741 622.988 10% 90% 716.390
Store 2 13.849 2.237.470 1.373.934 40% 60% 1.546.641 capital
Store 3 7.481 1.208.620 899.706 40% 60% 961.489
Store 4 13.229 2.137.262 1.382.049 40% 60% 1.533.091
Store 5 3.396 548.678 506.781 10% 90% 540.299
Store 6 4.219 681.661 651.823 10% 90% 675.693
Store 7 1.989 321.385 343.974 90% 10% 362.044
Store 8 3.006 485.641 337.776 10% 90% 456.068
Store 9 4.104 663.004 1.163.323 10% 90% 763.067
Store 10 8.769 1.416.726 1.470.132 40% 60% 1.459.451
Store 11 4.325 698.830 759.334 10% 90% 710.931
Store 12 4.412 712.860 1.099.805 10% 90% 790.249
Store 13 2.756 445.263 585.384 90% 10% 697.480
Store 14 2.779 449.057 590.372 90% 10% 703.423
Store 15 2.993 483.531 698.723 90% 10% 870.877
Store 16 1.960 316.625 328.560 90% 10% 338.109
Store 17 4.209 680.093 860.869 10% 90% 716.248
Store 18 1.956 316.049 425.807 90% 10% 513.613
Store 19 2.614 422.349 567.646 90% 10% 683.883
Store 20 2.724 440.039 621.536 90% 10% 766.733
Store 21 2.889 466.798 446.365 90% 10% 430.019
Store 22 4.842 782.301 569.604 10% 90% 739.762
Store 23 3.308 534.402 812.288 10% 90% 589.979 Table 9.
Store 24 4.828 779.968 961.875 10% 90% 816.350 Key money valuation
Store 25 2.905 469.294 356.992 90% 10% 267.151 (KMV)_Douglas
Total 18.437.647 18.437.647 18.649.043 (income approach)

Efficacy Efficiency Weighted

Store V/SQM Adj.Value (V) Avg.Value (V) weight weight Avg.Value (V)

Store 1 4.478 2.705.189 3.377.595 10% 90% 2.839.670

Store 2 5.200 3.141.626 2.974.813 40% 60% 3.008.175
Store 3 7.031 4.247.991 3.338.996 40% 60% 3.520.795
Store 4 3.824 2.310.019 2.032.510 10% 90% 2.254.517 Table 10.
Store 5 1.447 874.325 1.247.163 90% 10% 1.545.433 Key money valuation
Store 6 857 517.850 825.925 90% 10% 1.072.385 (KMV)_Phard (income
Total 13.797.000 13.797.000 14.240.974 approach)

3.2 Second method – residual approach – landlord side

With the aim of verifying the value calculated by applying the first method, it is possible to
use a valuation method not based on the tenant’s point of view but on the landlord’s side; the
landlord income is the rent fee received.
The key money value obtained from the second method (verification method) is the
residual value given by the difference between the building value and its rebuilding value;
this residual value is the one value of the localisation, which expresses key money.
Briefly: key money 5 (Market Value – Rebuilding Value).
This method also resorts to an income-based approach; this criterion can be defined as the
PDV adjusted by a rebuilding cost component.
JIC Therefore, we carried out:
(1) The estimate of the rebuilding value;
(2) The calculation of the real estate market value;
(3) The calculation of the key money given by the difference between the two values.
This approach takes into account the value of the rent fee and of the square meters of the
different points of sale in order to comprehensively valuate the firm’s key money.
By virtue of the departures existing between the real estate estimates and the actual
contract-based payments agreed between the parties, the key money value given by this
method is deemed reliable; the comprehensive key money value is impacted by the
mitigation effect on the rent fees given by the great number of venues included in the
valuation.
This aspect characterises the second method as one of complementary nature and solely
finalised at verifying the congruity of the comprehensive value of key money calculated with
the main method.
In details, the procedure carried out for the calculation of the rebuilding value took into
consideration the official average market values presented by the Italian Civil Engineering
Department and by the average prices of each venue; the estimate resulted as follows.
Rebuilding Value Douglas 5 2.885.700 V Rebuilding Value Phard 5 2.330.300 V
Firstly, in order to estimate the value of use, the rent fees agreed have been discounted for
each venue; the discount rate was subsequently calculated based on the customary estimate
criteria. The value of each venue has thus been calculated with the perpetual annuity method
(R/I) where the numerator is the current rent fee and the denominator is the discount rate; the
result was:
Market Value Douglas 5 21.638.393 V Market Value Phard 5 16.476.075 V
Following the measurement of the real estate and of the rebuilding values calculated based
on the average market values of reference, it is possible to estimate the comprehensive key
money as follows:
key money Douglas (21.638.393 V – 2.885.700 V) 5 18.752.693 V
key money Phard (16.476.075 V – 2.330.300 V) 5 14.145.775 V
The details of the calculations given by the verification method are presented in Tables 11
and 12.
The following Table 13 shows the percentile departure between the two methods applied
to the firms:

4. Discussion
The two methods took into consideration the two different viewpoints of “key money”: tenant
and landlord. Both cases were mainly income-based.
Once the definition of the termination of the lease has been compiled and the conditions
precedent governing its payment, the tenant receives a new contact with the owner to check if
the new brand is welcome and consequently the availability of the same announcement
including an early withdrawal with contextual takeover/enters into a new lease. The amount
of the contract is determined by the combination of different elements (residual duration of
the contract, store size, location, prices per square meter of similar locations). From these
determinants, the key money will also be evaluated following the two approaches. The
similarity of the values resulting from the methods led to posit that the firm’s intellectual
value underlying the decisional process is confirmed when the estimate process is applied to
cases deemed similar to the one in question.
Store Rebuilding value (V) Lease fee (V) Market value (V) Key money (V)
Fashion
retailers’
Store 1 103.500 62.915 1.017.315 913.815 intellectual
Store 2 41.500 62.545 1.011.339 969.839
Store 3 90.000 39.517 638.979 548.979 capital
Store 4 31.500 39.185 633.615 602.115
Store 5 111.500 45.371 733.641 622.141
Store 6 97.000 46.030 744.298 647.298
Store 7 144.500 25.000 404.243 259.743
Store 8 37.500 20.724 335.107 297.607
Store 9 227.000 67.000 1.083.371 856.371
Store 10 88.500 100.200 1.620.207 1.531.707
Store 11 117.000 62.016 1.002.782 885.782
Store 12 178.000 104.387 1.687.912 1.509.912
Store 13 168.800 33.294 538.351 369.551
Store 14 126.800 106.187 1.717.008 1.590.208
Store 15 157.000 40.745 658.842 501.842
Store 16 112.500 17.851 288.649 176.149
Store 17 125.600 113.370 1.833.160 1.707.560
Store 18 164.500 38.400 620.918 456.418
Store 19 158.900 61.270 990.719 831.819
Store 20 143.000 51.276 829.119 686.119
Store 21 76.000 34.573 559.039 483.039
Store 22 45.000 29.686 480.016 435.016
Store 23 169.100 66.240 1.071.083 901.983 Table 11.
Store 24 120.000 57.509 929.898 809.898 Key money valuation
Store 25 51.000 12.912 208.784 157.784 (KMV)_Douglas
Total 2.885.700 21.638.393 18.752.693 (residual approach)

Store Rebuilding value (V) Lease fee (V) Market value (V) Key money (V)

Store 1 474.000 275.000 2.842.377 2.368.377

Store 2 450.000 294.380 3.042.692 2.592.692
Store 3 239.400 424.398 4.386.541 4.147.141
Store 4 256.100 222.000 2.294.574 2.038.474 Table 12.
Store 5 424.800 237.600 2.455.814 2.031.014 Key money valuation
Store 6 486.000 140.682 1.454.078 968.078 (KMV)_Phard (residual
Total 2.330.300 16.476.075 14.145.775 approach)

Method Phard DEVIATION (Phard) Douglas DEVIATION (Douglas)

Income approach (V) 14.240.974 0.67% 18.649.043 0.55% Table 13.

Residual approach (V) 14.145.775 18.752.693 Comparative

To sum up, if the values of the two methods match, it can be confirmed that the choice is
correct due to the fact that the value expressed by the key money calculated with the tenant
method, which is more suitable to the competitive strategy of the tenant, may be verified
through the value expressed by the landlord method which better represents the effective
profitability of the venue rented by the tenants to carry out their business.
The two different viewpoints also bring up the definition of a different time frame, used
for discounting: the first method takes into account a “definite” time frame (consistent with
JIC the business concept), while the second one is based on a “perpetual” time frame (consistent
with the useful life of the buildings).
It should be interestingly noted that the two methods converge, even though the two cases
differ in the amounts of points of sale.
The results make it clear that the importance of the key money, weighed heavily on entering
a prestigious location. This is a decidedly important trend and must be read in a positive key,
because it means that the cost of the shopping spaces is brought back to values consistent with
the turnover potential. Therefore, in many cases, brands chose to accept to pay a key money
issue and to open in a certain location following a pure marketing investment prospective.
Moreover, the evidence in the paper shows that, even by evaluating the value of the
leasing contracts following different methodologies (from the landlord point of view and from
the brand point of view), the key money could match, highlighting a budget and
methodological alignment. This implies that the localization of the brand’s store is a central
point of the bargaining power and, all the leasing actors are willing to evaluate the key money
in a positive way. In particular, from the brand’s point of view, the payment of key money
implies an increase in the value of Intellectual Capital, but also an increase in the market value
that can be capitalized.

5. Conclusions, implications, limits and future research streams

The paper represents a first in-depth examination regarding the evaluation and inclusion of
key money in the Intellectual Capital. The mere quantification of a portion of the Intellectual
Capital leads to some considerations. The findings of this paper help to improve the Customer
Capital by concentrating the analysis on key money in the fashion industry. In this way, the
different evaluation methodologies used are analysed in detail.
The choice of the localisation, where “choice” means when to “enter” a precise area and
when to “leave” it, highlights the key money cognitive component, to the detriment of its “real
estate component”. The key money recorded in the financial statements are considered, only
in the case of a limited number of selected points of sale whose contractual characteristics and
location of the store make this accounting approach reasonable.
This paper represents a pioneering sign in the Intellectual Capital literature (Customer
Capital), thus outlining and measuring a specific intangible asset of fashion retailers. Firms
are increasingly aware of having to devote more care and attention to their customers. This is
the logical result of the move from one product-focused economy to another focused on
customer service. Meeting the new challenge is not easy: in a rapidly changing technological
context, most firms continue to use strategies and systems based on inadequate models. It is
therefore necessary to build a framework capable of developing the most important resource:
the value resulting from the relationship, precisely, with the customers. For this purpose, the
paper wanted to investigate the role of key money by analysing it with the lenses of
Intellectual Capital, in particular the Customer Capital, in order to analyse the effect of leasing
contracts on the value of the fashion retailer brands.

5.1 Managerial and theoretical implications

Several managerial and theoretical implications derive from the paper. The main managerial
implications relate to the Customer Capital, and the manage of key money can take advantage
of the business field studies and use it to guide practitioners on administration in Intellectual
Capital in order to implement the value of the fashion retailers in innovative issues.
The managerial aspects have somehow previously been outlined as the two methods,
object of this comparative case study, have been confirmed by two of the big four audit firms
for the accounting of customers’ firms. The two methods may certainly be proposed as the
first actual best practices available to calculate fashion retailers’ key money.
 In addition, the paper defines several theoretical implications. Based on the Intellectual Fashion
Capital, the study allows us to put the key money framework in the Customer Capital retailers’
perspective. This result expands theoretical studies on Intellectual Capital by laying the
foundations for a holistic theoretical approach. The theoretical implications of this study fit
intellectual
both the Intellectual Capital literature and strategic management studies; the valuation of a capital
single component of the Intellectual Capital gives an overall image differing from the
past research. In fact, here, the creation of a specific evaluation model of the Intellectual
Capital of fashion retailers is assumed, developed by grouping all the elements that
characterize this type of business.

5.2 Limitations and future research

The study is not without limitations. The main limitation of the paper lies in the data sample.
In fact, just a small number of firms included in this paper represent the first limit. The
reproduction of the study on a wider group of companies would certainly be of interest. In
addition, being the study based on the sole Italian context, it would unquestionably be useful
to carry out the same study by comparing stores situated in different countries.
The second limit is represented by the application of a method leading to financial values,
which lack qualitative aspects. For a more complete assessment of the concept of key money
in fashion retailers, a qualitative analysis is also required.
Third, we were able to provide just a snapshot of key money processes. Consequently, we
were unable to explore the processes over time. Future research should include a wide study
that takes measures at different situations over the firms and allows us to verify better and
better the relations established in the theoretical model.

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About the authors

Fabio Fiano received a Ph.D. in Entrepreneurship and Innovation from the Second University of
Naples, Italy. He graduated from Second University of Naples with a bachelor’s in Business
Administration; he also holds a Master’s degree in Management Control and Information Systems
from the University of Naples Parthenope. Currently he is Professor of Digital Technologies for
Business and Business Strategies at Link Campus University in Italy. He has published articles on
prestigious journals (including Small Business Economics, Management Decision, Journal of
Knowledge Management, Technological Forecasting and Social Change, Business Process Management
Journal) as well as in international conference proceedings. Fabio Fiano is the corresponding author and
can be contacted at: fabiofiano1@gmail.com
Jens Mueller, MNZM, is Professor of Management Practice at Massey University in New Zealand and
blends a long academic career with 30þ years as CEO/Chair/Leader in global corporations from $1
million to $1 billion in sales. He has published 100þ journal papers and 7 books. Jens has taught MBA
students in more than a dozen countries and holds multiple Professor of the Year awards. His areas of
expertise are Governance, Global Innovation Strategies, Cross-Border Trade and Sustainable
Entrepreneurship and he is the Managing Editor of several global academic journals and at a
UK-based publishing house.
Niccol
o Paoloni, is a Ph.D. in Business Administration. Department of Engineering of the University
of Roma Tre. His main research topics are: general management, Bank-business relationship, company
critique and restructuring, female entrepreneurship, Knowledge Management and intellectual capital.
Massimiliano Farina Briamonte received a Ph.D. in Business Administration and Corporate
Governance from Parthenope University of Naples and has been visiting Ph.D. at Washington
University in St. Louis. He graduated in Economics at the Federico II University, and obtained a master’s
degree in business management from SDA Bocconi Milan. He is currently a postdoctoral fellow about
the role of business networks in internationalization processes; formerly Professor of Accounting and
Financial Statements, balance sheet analysis, business valuation, project financing, international
accounting. He is a member of the Italian Evaluation Committee (OIV) at Luigi Bocconi University
in Milan.
Domitilla Magni is Post-Doctoral Research Fellow in Strategic Management at Department of
Business Studies at RomaTre University and a Visiting Professor at various top tier universities across
the world (e.g. New York University, Montpellier Business School, South-Western University of Finance
and Economics). She is also Lecture Assistant at RomaTre University for the classes of Management and
Business Planning. She obtained her Ph.D. in “Management, Banking and Commodity Sciences” at
Sapienza University of Rome. Research interests include, among others, Innovation Management,
Knowledge Management, and Open Innovation.

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