Even before Covid-19, retail landlords’ yields were being squeezed, and they were grappling with how to increase revenue to underpin an increase in value. Retail precinct footfall had been in decline for years as e-commerce penetration grew, recording 8.1 per cent in cumulative footfall losses over the three years to 2020.
Retailers, too, have been grappling with declining retail profit margins, and for most of 2019, consumer confidence was in decline following increased concern about the cost of living, stagnant wage growth, and prolonged drought and bushfires.
Bricks-and-mortar retailers that pay rent have also had to grapple with increased competition from online companies such as Amazon, as well as new business models due to the growing acceptance of online shopping.
Covid-19 has merely added to the already complex relationship between retailers and landlords.
Bricks-and-mortar retail is a volume game: the higher the footfall, the more time consumers are in their financial wellbeing, the more money they spend with retailers, which can then pay rent to landlords and make a profit. The Covid-19 physical distancing measures and the resulting recession work against all three of these value drivers: footfall, dwell times and consumer confidence.
While retailers will need to rebalance their operating models and better connect their physical and digital experience, there is no doubt landlords already understood that retail was changing, even pre-Covid 19. Many larger shopping centre owners were already seeking to diversify their centres by incorporating things such as office and leisure spaces.
However, converting space and tenants takes time.
Furthermore, landlords’ virtual vacancy list is now long gone and replacing tenants will become increasingly difficult, even for the short-term periods. So, although we have seen empty stores before and the ebb and flow of hopeful new businesses, landlords will have to work harder to attract new tenants and repurpose their centres to make them relevant to their communities.
Ordinarily, this would not be of great concern for landlords due to their long investment horizons and the relative stability of their tenancy mix. What is different here, however, is that despite the current level of optimism in the wake of government stimulus initiatives, Covid-19 could precipitate a wave of concurrent retailer consolidations, failures and exits from bricks-and-mortar that could shake even the steadiest investor and lender stakeholder.
The rapid acceleration of e-commerce growth as a result of lockdowns is also one of the most critical changes impacting the viability of retail property in Australia.
Retailers are taking the opportunity to reset their market strategies, with a greater focus on online delivery. Although there is a level of optimism that everything is going to go back to the way it was, there are still big unknowns. One big concern is what will happen once the government stimulus ends, with consumer spending likely to slow due to falls in wages, higher unemployment and higher savings ratios.
Both sides are under significant pressure, and achieving a win-win outcome will require give-and-take on both sides. Those pairings that can achieve this will ultimately succeed.
Retailers need landlords to gracefully release them from long lease tails to enable them to rebalance their cost base to offer profitable omnichannel experiences.
Landlords need retailers to survive and pay rent until they can repurpose the space once it is no longer required. Given the robust nature of tenant and landlord negotiations, both sides will be carefully thinking of ways to shift the balance of power in their favour.
Resolving the retail property issue is, therefore, about trust: a challenge in an industry well known for being adversarial at times. However, the Covid-19 context creates a unique opportunity for retailers and landlords to find more collaborative and innovative ways to transform the industry without unnecessary duress.
Ultimately this may mean the introduction of more flexible lease models akin to those in Singapore, Europe, the UK and the US, where there are often no minimum lease terms and a higher proportion of turnover rent. But it cannot be a one-way street.
Retailers perhaps need to consider offering a portion of online sales revenue with their landlords, particularly if landlords provide supporting infrastructures such as curbside pick-up zones, dark stores/floors, shared click-and-collect counters or parcel lockers.
This could create great local solutions for consumers who are shopping both online and physically, increasing their loyalty to both the retailer and the landlord’s shopping precinct.
Rent negotiations will be a major priority for retailers to navigate, in what is still an unknown impact of Covid-19 and rent moratorium periods implemented by various state governments will be coming to an end. Keeping in mind the requirement to enhance relationships with landlords, retailers should carefully think about their approach and strategies to ensure both parties reach an acceptable resolution.
Some key points to consider are:
● Be honest: It may take a leap of faith, but being open and transparent about financial aspects and plans for the business should enhance negotiations and set a solid base for trust between the parties.
● Demonstrate attempts to remain viable: Showing adaptability by using lateral and innovating thinking to ensure a continuation of revenue streams, or adjusting business operating models, will be a big tick for landlords.
● Open the dialogue early: The longer it takes to communicate with the landlord, the worse the problem may become. Communicating problems early on may help ease the pressure and provide quick solutions.
● Approach negotiations commercially: Try to anticipate and look at the circumstances from the landlord’s point of view, and strategise commercial outcomes that provide a win-win for both parties before you commence negotiations. Plan the approach and ensure you have several various options in your negotiating bag for each issue that may arise. Be able to demonstrate what will happen if you are not able to reach a mutually agreed position.
● Beware of not paying rent: Failure to pay rent risks the landlord locking you out of the premises once government-imposed moratorium periods cease. Refusing to pay rent is also likely to create animosity, making future negotiations difficult. Retailers and landlords need to work on their relationships to achieve a win-win outcome and succeed in transitioning their respective operating models for a long and prosperous future together.