Just how short sighted are some of our landlords?

Mall, shopping centreWithout wishing to sound too much like a bad spy novel, I had a coffee with a secret leasing agent James Blond# (not his real name) the other day and the subject turned to the competitive context posed by international fashion brands. While we worked our way through the extensive list of issues that many domestic fashion brands find it hard to compete against, the big one that came out of the conversation was rents and rental differentials.

Several of the major international fashion brands are alleged to have rent deals that are based purely on per cent of sales formula – some as low as three per cent of sales – with no guaranteed floor. If that is true, then it delivers those international fashion brand monsters a better deal than most of the majors. There are so many things that are wrong with these kinds of deals.

To start with, the economics of a mall are based on the historical notion of majors and supermarkets drawing foot traffic to be capitalised on by specialty retail, convenience food, entertainment, casual leasing, promotional leasing and increasingly media and shopper activation campaigns. Fashion brands may – for a short period of time – drive foot traffic but fashion brands are specialty retail and eventually they become leeches of foot traffic as the initial allure wears off.

Lowering rental yields from large space allocations in the specialty fashion category changes the mix and requires the rental income to be made up somewhere else. Department stores – who rely heavily on fashion in non-CBD locations – will have an already advancing reduction of space hastened. Australian brands that have long sustained the profit growth of malls, end up paying a rental differential of anywhere up to fifteen per cent of sales. This will hasten the demise of many of those brands as they simply cannot cover the cost of doing business variance and remain competitively priced.

This is either a clear case of short-term opportunism or poor strategy. While some landlords have a stated aim of dealing with fewer tenants in more locations around the world, eventually that tactic leads to homogenous shopping experiences from a handful of the same brands, offering the same product everywhere. That won’t drive foot traffic and yield will retreat.

Australian retailers are being hit by the perfect storm. Global brands can source cheaper and afford more efficient supply chains. International competitors over-inflate wholesale prices into this country to ensure they make no profit here and zero tax. They get free kicks that lower their cost of doing business. They conduct online sales that do not attract GST and we have governments at all levels that seem oblivious or reluctant to offer any form of assistance or help to ensure both jobs and tax revenue are assured for the future.

The concept of free and open trade is a myth. There is no such thing as a level playing field and the big, global fashion brands are experts at exploiting every loophole possible to extract the greatest retained profits for their shareholders, regardless of where that pool of cash resides. Rent is the highest cost item for specialty retail after cost of goods. Location is still the number one strategic asset in retail. But landlords beware. Bad long-term deals have a history of coming back to bite you and if the lifeblood of the mall – specialty retail – is overburdened, everybody loses. Including the shareholders of malls.

Peter James Ryan is head of Red Communication and can be contacted on (02) 9481 7215 or at [email protected].

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Comments

2 comments

  1. Jasoos posted on February 13, 2017

    Great Article Peter but do you think even if Landlords read your article, it will make a difference?, Shareholders are the ones that will lose out. reply

  2. Peter Buckingham posted on February 14, 2017

    Excellent article. Nothing like a good bit of transfer pricing to keep the profits down (and tax paid within Australia to close to zero). Maybe the ACCC should be keeping an eye on it, not unlike how the oil industry did their maths many years ago. reply

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