Retailers and landlords have never been so involved in each other’s business. The COVID-19 driven revision of leasing laws has seen them clash head-on amid unprecedented circumstances, highlighted by the recent battle between shopping centre giant Scentre Group and fashion retailer Mosaic Brands.
The stoush saw Scentre sticking to its guns over the long-standing principle of fixed square-metre rent and Mosaic shut out of 129 of its stores after disputing such arrangements, given the effects of the pandemic on its business.
This week however the pair reached an agreement. While details are confidential, the deal was hailed as a step that could smooth the way for similar negotiations between other landlords and retailers, at the heart of which is the ability to strike agreement on new ways of calculating rental payments that fairly reflect the impact of the economic downturn.
New ways forward
The on-going issue of leasing laws is providing fertile ground for consultants and business analysts to spring forth with potential solutions. David Gordon of Kepler Analytics believes that even prior to COVID-19 the way in which retail rents were calculated was somewhat flawed, and proposes a concept whereby retailers and landlords instead set rent levels based on foot-traffic - the number of people who pass by a store.
“The problem is that retailers want traffic and landlords want dollars for their square metres, so a natural conflict exists anyway,” Mr Gordon told commercialpropertyguide.com.au.
“So what I’m suggesting is that we work out a minimum rental that the landlord requires – a realistic minimum rental. We then convert that minimum rental into what it looks like from a sales perspective. This concept is not that complicated.
“If I’m a retailer and I say I need $50,000 a month in order to break even the way I get to that figure is thus: my average transaction value is $100 so I need to make 500 sales a month. In order to make those 500 sales I know my conversion rate is 10% so I need 5000 people in my store. I know that to get those 5000 people in my store my average conversion from a passer-by to an in-store visitor is 5 per cent so it’s 20 times X 5000 is 100,000 SO I need the landlord to bring me 100,000 people past my store. Then it’s my job to bring 5000 of them inside.”
Mr Gordon explains that in order for this to be workable, the landlord needs to be held accountable for their marketing spend and – most importantly - delivery of foot traffic to a shopping centre as opposed to simply delivering a “nice, clean environment” in which retailers can locate their stores.
“The shopping centres maintain they are attracting a lot of visitors,” Mr Gordon said. “But our data is showing people aren’t browsing and they’re not visiting as many stores as they were before.
“So those visitor numbers are a little misleading.
“There may well be a lot of visitors to shopping centres, but whereas once, one visitor would visit 10 stores per visit, now they’re visiting 3 stores only.”
This trend was occurring even before COVID, too, showing that the changes detected were not purely pandemic-driven but shifting consumer behaviour per se. “We saw this fall in visitors to stores happening for the 18 months prior to COVID but it was very gradual,” Mr Gordon said. “It tells us that a landlord needs to start being held accountable for their expertise - and their expertise is now no longer ‘I have a nice clean centre for you’. A landlord has to have the right mix of stores, entries at the right places and employ certain techniques to attract visitors.”
Fair and square
Ultimately, any leasing agreement must prove fair to both landlord and retailer, Mr Gordon said, particularly due to requirements for landlords to satisfy the financial models on which their business structures are based.
Still, the impact of the pandemic on shopping habits cannot be ignored. While Australia Posts’s 2020 eCommerce Industry Report forecast prior to COVID that online shopping would account for up to 18 per cent of total purchases by 2025, pandemic-driven purchases has seen this scenario revised substantially, brought forward to 15 per cent of all retail purchases by the end of this year alone. Online purchases are skyrocketing, up 41 per cent year-on-year to April 2020, more than double the 17.2 per cent rise in 2019.
Business advisory firm KordaMentha is another keeping close watch on retail’s changing landscape. In a recent paper, analysts point to a precedent set by UK based Legal & General with its new commercial leasing framework for retail and leisure occupiers. This new framework focuses on turnover rent options, marking a departure from traditional and rigid long-term leases to a fully flexible approach that “brings optionality to occupiers from start-ups all the way to superstores”.
“While this model is not yet prevalent in Australia, Australian retailers are recognising the opportunity it offers,” the KordaMentha analysis states. “One example may be ASX-listed retailer Premier Investments, which has reportedly renegotiated to pay rent as a proportion of sales across its 130 UK based stores.
“This precedent highlights how the lease is a practical instrument through which to manage and foster mutual interest at this pivotal point in retail's evolution. Beyond immediate commercial terms, the leases can guide a landlord-retailer partnership by binding each party to shared initiatives that transcend commercial terms for desirable mutual benefits.”
Whether or not such a scenario as the one created by Legal & General is ever seen in Australia, at the end of the day the changing economic landscape and the required initiatives to facilitate a soft landing for retail property assets will bring landlord strategy and asset management approaches into sharp focus, KordaMentha analysts maintain. “Those landlords who are well-capitalised, with clear and effective tenant partnership strategies will be best positioned to build brand equity and success in the new world of retail.”