The COVID-19 pandemic has caused the bubbling tension between retailers and landlords to boil over – but the crisis has cleared the way for a new paradigm, writes Arabella Roden, Assistant Editor, Jeweller Magazine.
Leasing premises is one of the highest fixed costs associated with traditional retail, alongside staff. Yet unlike staff contracts, lease agreements are largely inflexible – often with fixed minimum terms of five years – and can increase beyond inflation for years at a time regardless of trading conditions, demanding tenants sacrifice margin or constantly increase sales.
During good economic times, these fixed terms were somewhat tolerable for businesses. However, the retail environment has become increasingly challenging in recent years; changing consumer habits, shrinking margins, and increased competition have all served to erode profitability.
Simon Fonteyn, managing director of retail leasing data firm LeaseInfo Group, says, “Over the past five years, there has been an increasing amount of capital required for retailers to do business. In terms of leasing structures, rents have generally been outstripping sales. Typically, rents have escalated between 4–5 per cent per annum, whereas retail sales have increased by, on average, 2 per cent per year.”
Fonteyn says there was already a “shake-out” occurring in the sector prior to the COVID-19 pandemic, pointing to the high-profile collapse of several fashion and footwear retailers – such as Bardot, Ed Harry, and Ziera – in 2019.
The arrival of the virus in January 2020 “accelerated and amplified cracks that were already visible” in the retail sector, according to the KPMG white paper Beyond COVID-19: The Shifting Foundations in Retail Property, which was published this June.
“Retail precinct footfall had been in decline for years as e-commerce penetration grew – recording 8.1 percent in cumulative footfall losses over the three years to 2020. Retailer profit margins and retail landlord yields were being squeezed since 2017 and consumer confidence had been in decline for most of 2019,” the paper’s authors note.
By mid-year, the Australian economy was in recession for the first time in nearly three decades, and the effective unemployment rate had reached 13 per cent, according to Federal Treasurer Josh Frydenberg.
Consumer spending see-sawed, with the Australian Bureau of Statistics (ABS) recording the most precipitous fall and meteoric rise in retail trade figures consecutively in April and May.
At the same time, foot traffic at shopping centres and retail precincts collapsed by up to 80 per cent, leaving businesses out in the cold.
In the midst of the unforeseen and turbulent conditions precipitated by the virus, Paul Zahra, CEO of the Australian Retailers Association, notes that some landlords have been unwilling to accept this new reality.
“The challenges endured by retailers over the course of the pandemic have put a spotlight on the high cost of rents,” he explains.
» Download: Jeweller’s Rent Negotiation Checklist
“Unsustainable annual increases to rent have been a persistent problem for some time now, with rents far outpacing revenue growth amid a changing retail environment. We expect many stores will require ongoing rent relief to help them recover – and when retailers win, landlords win.
“Landlords need to remember that we are in a recession. It’s a false economy for landlords to try to extract rent from retailers that need cash reserves to survive,” he adds.
Indeed, Scentre Group, Australia’s largest shopping centre landlord, recorded a $3.6 billion loss in the first half of the year, including a $4 billion reduction in the value of its property portfolio.
Notably, while it was able to successfully reach rent agreements with thousands of tenants, negotiations with Mosaic Group – which owns Rivers, Katies, and Noni B, and is a long-term tenant – collapsed this month, resulting in the temporary closure of 129 stores by Scentre Group.
This article was partially republished with permission from Jeweller, Australia and New Zealand’s leading jewellery industry magazine. To read full article, please view the original version here.