Following a tumble in profits, the retail powerhouse behind fashion clothing brands including Just Jeans, Jay Jays and Portmans threatened to close as many as 50 underperforming stores if shopping centre landlords don’t come to the party on rent reviews.
Pressure from a major retail player to reduce rents could conceivably deliver a much-needed knock-on effect for jewellers suffering under exorbitant rents but some jewellery chains have already demanded rent reductions.
In an announcement last week, Premier Investments chief executive Mark McInnes said full-year earnings before interest and tax would be between $64 million and $66 million, down from its previous guidance of $80-$85 million. He added that the group would be forced axe jobs and close up to 50 of its 900 stores as rental contracts expire.
McInnes said some landlords are expecting rent increases, even when centre performances did not warrant them, adding: "I see rent as a constant tension between ourselves and the landlords. Some centre owners would have to lower costs or risk losing some of Premier's iconic brands.”
The Daily Telegraph appeared to interpret his statements as a thinly-veiled criticism of major shopping centre operators such as Westfield, and more generally as an attempt to pressure landlords over standard rent increases despite the weak retail spending environment.
Peak retail industry body the Australian Retailers Association (ARA) threw its support behind McInnes’ comments that shopping centre rents are excessive.
ARA executive director Russell Zimmerman said smaller retailers have even less bargaining power at the negotiation table over excessive tenancy costs as they contend with falling sales due to low consumer sentiment and they are often left defenseless at the negotiation table due to the imbalance of power between landlord and tenant.
“The Premier Retail [group] has used the threat of closing stores as a tactic for negotiating a fairer lease. However, it would be unthinkable for a smaller retailer to use this same tool which leaves them with even less power to keep their rental costs manageable,” Zimmerman explained.
Although smaller retail groups and independent operators like jewellery stores would likely welcome pressure on landlords by larger groups, some of the mid-sized jewellery chains have already acted.
Wallace Bishop’s chief finance officer, Ian Winterburn believes that, for some jewellers, the tables have already turned.
“Research would show that jewellers pay some of the highest rates per square metre of any retail category in a shopping centre. Shopping centres have to balance their usage against presenting a product mix to consumers that includes large tenants that usually pay very low rates of rent per square metre.
“Now that we’ve had a major shift in demand, for all sorts of reasons, the favorable trading conditions no longer exist for jewellers, so the reality is that the shopping centres have to take a different view based on what the tenants are able to pay,” Winterburn said.
He adds, “They [shopping centre landlords] haven’t got this yet. They need to get used to what the true value of their assets are.”
Wallace Bishop has 63 stores (56 Wallace Bishop and 7 Hardy Bros) and Winterburn says the group has been having “lots of conversations with landlords” and they are no longer about rent increases.
“The conversations we’re now having are at the stage of reducing rents at renewal time. The incidence of unrealistic increases has evaporated. They [landlords] might still send you a letter asking for an increase but you can go back saying, ‘well that’s not going to happen under these economic conditions, we’re not going to give you an increase when retail sales are in decline’”, Winterburn said.
He added, “The conversations have now moved ahead to reducing the rent when the lease comes up for renewal.”
Frank Salera agrees with Winterburn. As managing director of the 23-store Saleras Jewellers, he says that retailers absorbed and sustained predetermined rent increases and hefty market reviews in the good times but that caused a rent escalation that far exceeded the increase in the retailer’s turnover.
“But now comes a time where we’re looking at turnover decreases and most jewellery retailers are going back to landlords saying, ‘forget the increases that you’ve asked for, forget CPI or fixed increases on the renewal, now we require a realignment of our rent based on the performance of the jewellery category’ and in most cases the landlords are absolutely resisting any form of reduction because it annihilates the value of their assets and they’re struggling the same as everyone else,” Salera said.
However, he added, “If you insist hard enough you’ll get the reduction. Even the A-grade centres are agreeing to rent decreases because there’s no sense in them setting the rent on artificial turnovers. You should go to them saying, ‘Here’s my offer’ and if you don’t like it, I’m leaving.’ A lot of traders are reluctant to do that but those with multiple stores are doing it.”
The important point to note is that while that option might be available to multi-store operators, one retail analyst cautions smaller business owners not to hold their breath over rent reductions.
“Premier Investments is looking to shut 50 stores, and each of those stores is loss-making at store level, and they are going to be shut at the end of their lease,” senior analyst at Citigroup Investment Research Craig Woolford told Jeweller. “So it’s not as radical a headline as it may appear.”
According to Woolford, the retail industry would need to undergo a much larger upheaval, with tenancy rates dropping across the board before landlords consider lowering rents.
While the focus of Premier’s announcement concentrated on the struggling retailers, McInnes acknowledged that some centres still perform well. "There are some excellent centres where you have no problem paying market rent, (but) then there are a whole host of other centres not performing, where they are trying to pass increases through to manage their business model," he said.
Woolford agrees in part, explaining that from a retail perspective, shopping centres aren’t seeing a significant increase in vacancy rates.
“Now that’s an overall statement about retail property but generally the vacancy rates that are lowest are the high A-Grade centers and department stores,” said Woolford. “There is some sign of increasing vacancy rates for second tier shopping centers, but I’m still talking very, very low levels by historical standards right across the board.”
Woolford points out that even though it’s widely reported that Australian retailing is suffering, with a number of high profile liquidations, shopping centres are still filling vacated space.
“Even though retailers like Colorado or Borders have gone into administration or shut down, those sites have been re-leased very quickly,” Woolford explained. “So while there is an argument that rents are very high and retail sales trends are difficult we are seeing landlords able to release space very quickly.”
The problems in retail, however, are not universal. According to Woolford some categories are finding it more difficult than others.
“The categories that are exposed to the higher Australian dollar and haven’t passed on the currency gains are struggling,” he said. “Categories that aren’t able to offer new inspiration to buy are also struggling, so a lot of fashion categories haven’t had the strong fashion trends in the last 12 or 18 months. Even the TV category has become a lot slower because of the innovation cycle.”
Not all landlords are sensible or even recognise the difficult retail environment says Albert Bensimon, managing director of 40 Shiels and Grahams stores.
Bensimon cites a recent case where he’s been negotiating over a new store. “I’ve got an example where the existing jewellery store is moving out of a centre and was paying $150,000 a year but the landlord is asking me for $250,000. That’s like a trade union putting in an ambit claim for members. The centre doesn’t expect $250,000, they’d thought they’d just ‘try it on’ anyway.”
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