Rents rock retailers hardest: report

Pedestrians in Sydney’s Pitt Street Mall. Picture: AAP.

Out-of-control rents and reduced sales volumes are placing pressure on the profit margins of the nation’s listed retailers, with a growing number of businesses planning to close loss making stores in the face of the crippling headwinds, says a new survey from Macquarie Wealth Management.

Indeed, underlining the concern over how skyrocketing rents are crunching profits, almost one quarter of retailers surveyed say they plan to decrease shopping centre space over the next 12 months by shrinking floor space.

In a new report to its clients, the financial adviser also argues that a time when the consumer backdrop is challenged by a range of factors there is “a lot to worry about” as households remain cautious about the year ahead.

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Macquarie Wealth Management says its retailer survey (taking in around 2300 stores) shows that Christmas was not jolly and things could get worse as 49% of retailers indicate trading was negative for retail sales (versus 28% a year ago), with apparel particularly weak, food mixed, and electronics a bright spot reporting stable conditions.

But it was when the survey dug deeper to see what forces were pinching profit margins for Australia’s retailers that the survey revealed excessive rents had risen to become one of the most painful areas for retail tenants.

“We asked each retailer to list the key factors currently contributing the greatest pressure on margins. Amongst all respondents, reduced sales volumes were cited in around 33% of responses causing the greatest pressure on margins, compared to rent at 26% and wages at 22%,’’ Macquarie the report says.

If landlords don’t understand that they need to reduce the rent in the competitive landscape, well then we will just vacate stores

But the issue of excessive rents has rocketed up the charts for retailers in terms of the greatest pressure on profits, with rent only featuring as a factor for 11% of those surveyed in 2017. For large retailers the high cost of rent ranked equally with the sales downturn (25%) for causing the most margin pressure at the moment.

The survey found that 8% of retailers are looking to close down loss making stores, up from no respondents last year, as they scurry to slash their rent bills.

“Retailers are far less bullish on their space requirements today than they were five years ago, when we first conducted this survey. Only around 7% of large retailers currently intended on increasing space on a one-year view.

“This compares to around 61% back in 2014. In fact, 24% expect to decrease space over the next 12 months.’’

Some shopping centre landlords were acting by offering rental incentives to some retail tenants.

“A key change from when we first completed this survey in 2014 is the level of incentives paid by landlords to tenants. In 2014, 12% of respondents stated landlords were paying incentives of over 10 per cent of rent. This has now changed to 21% of tenant’s receiving an incentive of over 10%.’’

Shopping centres are feeling the hurt of reduced traffic at their sites which is encouraging many retailers to demand lower rents. Last week one of the nation’s leading corporate restructuring experts, Ferrier Hodgson partner James Stewart, warned that the collapse in shopping centre traffic in the two weeks before Christmas is the worst he has seen in more than 20 years.

We asked each retailer to list the key factors currently contributing the greatest pressure on margins. Amongst all respondents, reduced sales volumes were cited in around 33% of responses causing the greatest pressure on margins, compared to rent at 26% and wages at 22%

Shoppertrak, an analytical tool widely used in the retail sector, particularly by shopping centre landlords, showed foot traffic in the last two weeks of 2018 was down 15% and 23% respectively.

In November retail billionaire Solomon Lew, whose Premier Investments has hundreds of stores under brands such as Just Jeans, Portmans and Peter Alexander, said his company would close down its Dotti, Smiggle and Just Jeans stores in Chapel Street, adding to the more than 40 empty shops along the prime Melbourne shopping destination.

Lew says at the time of announcing the closures, “If landlords don’t understand that they need to reduce the rent in the competitive landscape, well then we will just vacate stores.’’

In March last year Lew’s top fashion retail CEO Mark McInnes flagged Premier Investments would escalate closures if it did not get fair rent deals.

“In particular, we sought, and we continue to seek, rents in line with centre performance,” the Premier chief said.

This article originally appeared on www.theaustralian.com.au/property.