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| Rent revolt: how to win |
   
Posted Date: 02/02/2012
By Stuart Bennie
We have heard how retail is under threat in Australia and we have heard the reasons why.
Undoubtedly there is not a retailer out there who will disagree that rent and wages are the killers. In this column we will examine how to reduce your rent to help retail survive, unlike manufacturing which has been slowly dying for years. Wages we will leave till next time.
The landlords are a law unto themselves, regardless of the size of the retailer. They have got their formula down to a fine art and they are past masters at squeezing retailers of every drop they can. That's their job, it's their business. That's how they are.
Their formula includes having smart people on their payroll who probably know more about your business financials than you do and these folk calculate exactly what the traffic will bear. If they get it wrong, so what? You leave and someone takes your place.
Having said that, their intention is very much that you will survive.
Just - and just when you think you are getting somewhere - bang, the rent goes up or they want to move you to a worse location (at the same rent) or they want to move you to a better location (at a much higher rent). You simply cannot win.
To counter the possibility of heavyweight negotiations at the top, they push the rent issue down the line to their shopping centre managers so that if you are a multi store retailer, you have to deal with several individuals all with their own agendas on how to extract what they can from you.
In July 1997 a crisis started in Thailand, with the financial collapse of the Thai currency, the baht. The government had tried hard to keep the baht pegged to the US dollar but eventually had to allow it to float in the face of severe financial over extension - largely real estate driven. Foreign debt had bankrupted the country even before the collapse of the baht.
The crisis spread quickly to other Asian countries. In Indonesia the Rupiah had been steady at about Rp2,500 = USD1. Overnight it fell to 4500. To put this into perspective, this would be like the Australian Dollar falling from USD1.06 to USD0.59 overnight. But that wasn’t the end. The Rupiah then went into freefall and hit almost 17,000 (16,800 to be precise) in the weeks that followed. Again to put this into perspective this would be like the Australian Dollar falling from USD1.06 to USD0.16 within a few weeks.
Indonesia like its neighbours had foreign debt. Shopping centres had been built on borrowed US dollars and repayments were therefore in USD. Clearly they could not afford to meet their obligations and what made it even more complicated was that some of the retailers were part owners in the centres.
Retailers met and made a unilateral decision. For the sake of repayments, they would peg the Rupiah at 3500 to the USD. End of conversation. Off to have a cup of tea.
So why is this relevant?
Let us look at a scenario: A medium sized retailer in Australia gathers some support from fellow retailers and hires a firm to mediate with a landlord. We can start with one landlord and one shopping centre. Before any mediation the firm retains a reputable large accountancy practice to calculate how much revenue can be lost by the landlord so that they break even. No profit, no loss – just even.
Let’s take a hypothetical percentage of 33 per cent for the purpose of this example. The retailers in that centre now reduce their rents unilaterally by this amount so that a rent that was 15 per cent of sales now drops to a more manageable 10 per cent. This requires support from most retailers but not necessarily all. Kind of like a class action.
One cannot expect shareholders to accept a break even situation and so the landlords will need to look at their operation carefully to establish how they can return a reasonable return on investment. This may include a significant reduction in expenses including reducing executive salaries, disposing of private jets, selling a soccer team or two and so on.
The landlord meanwhile, if intransigent, which will most likely be the case, will resort to legal means and may even lock out a whole bunch of tenants.
Imagine the scenario: A shopping centre with a significant number of shops in darkness.
But it gets better. Those locked out retailers and their now unemployed staff picket the shopping centre not allowing customers or deliveries in. The entrance to car parks and delivery docks are closed with retailer’s vehicles blocking all traffic. The police are in a frenzy and the television crews are fighting for coverage.
Of course, it will never come to this. Common sense will prevail. Government will intervene and something like the Qantas mediation will kick in.
Before you rush to leave a comment below suggesting that I am not of sound mind, please ask yourself this question: What solution do you have to bring rents into line on an ongoing basis so that Australian retail can compete in a global environment?
How would you get the attention of landlords and government to sort out this debacle once and for all and with a quantum leap? |
Friday, February 03, 2012 by Anthony Wilson
Great contribution to the discussion "Thinker"!!! Well done!
Friday, February 03, 2012 by Thinker
What utter one-sided drivel.
Friday, February 03, 2012 by Mike Holtzer
It is the landlord's responsibility to get people to the shopping centre - that is what the retailer pays for. It is the retailer's marketing department that is responsible to get those people into the store itself. It is then the sales people (and buyers) that need to convert those customers. If you know these statistics, it goes a long way to negotiating better. If your average sale is $50, 8,000 people walk through the centre, 10% of them go into your store and you convert 15% of them, then your sales should be $6,000. Before you talk with the landlords, you should know these facts and make sure that the fall in sales in not internally caused. Assuming you have done this, then the other factor is the amount of traffic in the centre. If you can show that is has reduced, you have a case.
It would be great if landlords would have the confidence to charge you rent based on actual traffic figures.
Thursday, February 02, 2012 by Luke hickman
This seems to me like an opportunity for small independent retailers rather than a death sentence. The opportunity being increased communications and synergistic relationships being built between small independent businesses. So that specialist nodal destinations for product families can be developed in micro centers. In todays highly networked world the big box theory is coming to an end and new customized shopping and lifestyle landscapes are brewing as the next step. It will be interesting to see how quickly shopping centers adapt to the decentralization of retail and the growing discontent amongst independent retailers.
Thursday, February 02, 2012 by John
Stuart - What about the fact that leases are legal documents, most often with personal guarantees. Do you have an idea about how leasors would be safe from loosing their homes? - John
Thursday, February 02, 2012 by Andy
A contact at a major Landlord had once advised me that 2/3 of all lease offers they send out come back signed, with no negotiation. Many small retailers believe they have no bargaining power and just accept what's offered to them, the Landlords then tell the major retailers that the high rents they're asking are justified because other tenants are already paying it.
Thursday, February 02, 2012 by Anthony Wilson
Good on you Stuart for challenging the status quo!
Of course shopping centres strive to build profitable spaces. The fundamental issue is that shopping centres continue to get away with collusion!
We all know this but for the purpose of the exercise.... Centre retailers, as a lease requirement, must report their turnover figures to the centre. The centre in turn reports those figures to Urbis and voila - Urbis retial averages! Speaking of negotiating table - How fair is it for the retailer to be told that their "type" of retail can sustain XX% occupancy costs for this type of centre? No wonder we don't have a hope in hell!!!
Where's the ACCC in all of this?
It's a form of price maintenance isn't it?
Thursday, February 02, 2012 by Julian Josem
I am entertained by the stories Stuart, but my experience with the Australian shopping centre industry is that they genuinely strive to build facilities that generate profitable spaces for retailers - that is their reason for being after all.
Whilst rents are unquestionably high, the challenge they face is to live up to their promise of reducing a retailer's marketing costs and increasing a retailer's revenue base. If they don't do this, I wonder how many retailers genuinely negotiate with their landlords - I've seen plenty of examples of improved outcomes with fierce but genuine negotiations enhanced often by industry specialists.
Thursday, February 02, 2012 by Scott
Every tenant in every shopping should read this and understand that this form of protest to exorbitant rents maybe the only option.
The landlords will listen to nothing less, they will continue to rape and pillage and are quite content to see small business owners go broke. There is always another mug out there to take the site who thinks their business is different and things will be different for them....I did.
Thursday, February 02, 2012 by The Rat
Brilliant Article Stuart. Well done.You've nailed it and the pity is that most tenants have no right to put their retail businesses in their balance sheet as an asset... REASON ... because of leases and the blackmail involved, it's a liability and it's going to get worse. I wonder today if the landlords think their are queues forming outside their leasing office like in the old days? And the chains who opened stores just about wherever they could for market share sake and have now started to cannibalize themselves with online stores themselves... there are going to be more holes in many centres.
Might I suggest and this is never going to happen but that all new retail leases should include a clause to be determined that your rental is based on an occupancy rate in the centre of let's say 90%. Fair request.... but should occupancy rate fall below a certain per centage then the tenant either gets an automatic percentage reduction or has the right to terminate the lease.
Wish you luck. Remember you are dealing with landlords and when you are finished with them you still have to get past your banks. Brave People... best of luck, I'm behind you all the way. Sock it to them.
Thursday, February 02, 2012 by Toby Darvall
Good on you Stuart. All of us have trodden the same well worn path to the landlords door and tried to negotiate - a complete waste of time. As you point out, they are experts in fobbing us off - that's their job. This plan, albeit dramatic, would work. Regards, Toby
Thursday, February 02, 2012 by Sandra Ferguson
It is even harder for the small independent retialer to bargain like this. They just say pay up or leave. When larger brands gang up and get there rents reduced the indepentds get slugged more.
Thursday, February 02, 2012 by Sam
every tenant at the Civic in Canberra should read this.
Thursday, February 02, 2012 by Jin Kazayama
Excellent article Stuart,
To get the rent/conditions suitable for the tenant, sometimes extreme steps need to be taken. I have had a retail business in the past and the sales were falling dramatically during the gfc. The landlord of this shopping centre would not reduce the rent or let me exit the lease. I went to the local govt, then to media. The landlord did not want to be in the spotlight so they finally agreed to terms and conditions. The conditions that we face are now ripe with cases like these and I think people should piggy back on the success cases and built their own from there. There is hope out there people. If I can do it - and rest of my fellow tenants that followed suit after me did it, so can you.
Wednesday, February 01, 2012 by Mike Holtzer
Stuart, at least you have thought about the situation and offer some solution. I still think you are not of sound mind - but that is another story. Keep up the good writing. It is good to stir this up and get people to think about it instead of just griping about it. Mike
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