No winners in retailers vs landlords battle
Something has to give with retail tenancy. The way they’re going there will be a catastrophe, with receivership on both sides.
The war between landlords and retail tenants is currently being fought as a sort of duel between two “champions”, like the war between the kings of Mycenae and Thessaly in the movie Troy.
In this case the champions are Peter Allen of Scentre (Boagrius) and Scott Evans of Mosaic Brands (Achilles), with Solomon Lew holding his spare spear. Allen locked Evans out of 129 of his stores (biff!); Evans said he’ll close 500 stores (whack!).
Unlike the one between King Agamemnon and King Triopas, this proxy battle is likely to develop into something bigger and bloodier, and the problem is that both sides are fighting yesterday’s battle, using yesterday’s ideas.
Scentre’s Peter Allen is desperately trying to preserve the principle of fixed square-metre rent because he and other landlords can only think in terms of space. Their world revolves around occupancy, rent per square metre and valuation.
Mosaic’s Scott Evans and other retailers know they are entering a world of uncertainty where the size of the store is less relevant, and where they have to balance customer acquisition between online and bricks and mortar, and where cost flexibility will be everything.
Fixed rent per square metre simply isn’t going to work in retailing any more with the surge in both online shopping and unemployment, and with infection control and customer preferences resulting in more space required between customers and therefore fewer shoppers per square metre.
But landlords are horrified at the idea of rent as a percentage of sales, as suggested by the retailers, because they would lose control of their income and instead be hostage to the quality of shopkeepers, many of whom are hopeless, or else just corks tossed on the seas of fortune.
David Gordon of the retail data firm Kepler Analytics is mounting a campaign to get both sides to accept foot-traffic-based rent, and he is both onto something and up against it.
It seems to me it would be a good compromise for retailers to pay for foot traffic — that is, the number of people who walk past the store. At least then the retailer would be paying for something she needs, rather than square metres of space, which she clearly doesn’t need.
As Gordon says, it would line up the two models of retailing — bricks and mortar and online — because paying for passing traffic in a shopping centre would be like paying Google and Facebook for traffic to a website. It would then be up to the retailer to get the shopper into their store and then sell them something: the landlord can’t control that and shouldn’t have to participate in that transaction.
But the landlord can control how many people it gets to the shopping centre and how they are herded around it. And the thing about people in a shopping centre is that they are qualified leads — they are usually there to do some shopping, unlike someone who stumbles onto a website.
A landlord’s job is, or should be, to deliver people to a retailer’s door; the retailer’s job is to get them in the shop and sell them something at a sufficient margin to pay rent and wages and leave a profit.
Mosaic Brands CEO Scott Evans at their offices in Sydney. Picture: John Feder/The Australian.
The landlord should get paid for the number of people delivered, not for the space rented. David Gordon acknowledges that landlords require some level of rental certainty so he is suggesting a base rental calculated on historical passer-by traffic and a 25% to 35% “top up” based on additional traffic.
The mechanics are quite simple but would require some co-operation between retailer and landlord, with the landlord delivering “clicks” (passer-by traffic) and the retailer working on conversion to achieve sales targets. Multichannel retailers could more easily measure and compare cost of acquisition (COA) between physical stores and online.
It’s true that some customers go to the mall specifically to shop at a particular store because they have been captured directly by the retailer’s own marketing, so maybe the landlord should not be paid for that customer. But that could be dealt with in the negotiation over the price per passer-by, or perhaps the marketing costs could be shared.
It would also be more complicated in strip shopping centres, where each store is owned by a separate landlord. But the landlords should join the retailers’ local traders’ association that aims to attract people to that strip: charging a COA for the people attracted would get the landlords involved and sharpen up the traders’ association’s act.
Working with tenants creatively rather than chaining up their shops would help landlords defend against online incursion long term, because retailers need to properly measure the benefits of a physical store, asserted by landlords. That is, of course, unless they don’t exist, in which case nothing will save them.
But if landlords think they can keep hiding behind square metre leases so tenants can’t compare the cost of acquiring customers, they’re dead wrong: they’ll end up losing tenants who will go with the channel that provides flexibility and data — online. Occupancy will decline; so will rents.
And when (or rather if) interest rates and capitalisation rates start rising again there’ll be disorder and disaster, as lending covenants are breached and the banks appoint receivers.
Both Peter Allen and Scott Evans need to ask themselves: would either of them rather be dealing with a receiver? No, they definitely would not.
They might think that if their opponent is on his knees they can go in for the kill, but it won’t work like that. They are all in this manure together.
Alan Kohler is the editor in chief of Eureka Report.
This article originally appeared on www.theaustralian.com.au/property.
