The rent trap: jewellers versus landlords

Bevilles announced its decision last week, with CEO Michelle Beville telling Jeweller that the 80-year-old retailer was constrained by “a changing retail environment in which the current business model wasn’t viable due to higher operating costs and customers seeking specialist boutique experiences.”

High rents on larger stores have also been cited as reasons for the retailer being placed into voluntary administration but Bevilles is not the only jewellery chain that has an issue with shopping centre rents. 

Toby Bensimon, managing director of South-Australian-based Shiels Group, which owns and operates 50 stores across both the Shiels and Grahams brands, has been rallying for support both privately and publically against what he calls the “crippling” issue of shopping centre rent.

“Jewellery retailers are struggling under the same pressures as the wider retail sector but we also have the additional and significant cost burden of higher rents, where we pay 20 to 50 per cent more than other retailers,” he says. “It’s an unsustainable model that has to change.”

The cost of tenancy in shopping centres is a hot issue for all retail sectors. 

Whispers of lease dissatisfaction rose to a roar in March 2011 when leading retail group Premier Investments pushed back against landlords, threatening to close multiple outlets across its almost-800-store portfolio if rising rents weren’t addressed. 

The group, which controls Smiggle, Dotti, Portmans, Just Jeans, Jacqui E and Jay Jays, managed to negotiate rent decreases of up to 30 per cent at some stores; however, Premier Investments CEO Mark McInnes hit the headlines just six months later, savaging landlords after the company reported a 50 per cent drop in its full-year net profit.  

“There is a disconnect between the CPI-plus rent increases and centre performance at the moment and all retailers are having this argument with landlords,” McInnes told Sydney Morning Herald in September 2011. “We don’t come to work every day just to make money for the landlord; we are trying to find a balance in the relationship with landlords where our shareholders make money and they get a return on their equity.”

McInnes implied that the inflexibility of landlords had increased to the level that the only way retailers could approach any negotiation was from a “now or never” standpoint. 

Illustrating the point, Premier Investments closed 14 stores in the six months to end 2012 and McInnes warned that the retail group wouldn’t hesitate to close more: “Further store closures will occur if the rents expected by the landlords are not in line with the performance of the centre and the market generally,” he told Property Observer.

With the gate ajar, other major retailers followed. Myer reported improved profits in 2013 on the back of successfully renegotiating new leases for a number of stores, while rival department store group David Jones flagged plans for the group to explore “less robust demographic locations” for six DJ stores set to expire in the next five years.

Underpinning the push for rent relief has been an overall softening of the retail environment. Retail sales rose by just 1.1 per cent in the year to June 2013, failing to achieve pre-Global Financial Crisis glory days when high household debt propelled high discretionary spending. 

In fact, Australian Bureau of Statistics figures show that the average growth in non-food retail sales over the past three years has dwindled at approximately 1.3 per cent annually, contrasting sharply with an annual average of 4.7 per cent across the previous 25 years, while other data shows a notable shift away from discretionary spending to non-discretionary.

Yet, despite lacklustre retail sector performance, there’s been no end in sight to the seemingly ubiquitous demand from landlords for 5 per cent year-on-year rent increases (or 2 per cent plus CPI rent rise). No end, that is, until recently. 

Sustained centre underperformance coupled with a strong push from major “anchor” tenants has finally caused some centre landlords to buckle under the pressure. First to concede was Stockland, followed closely by The GTP Group, the two companies announcing plans to lower rent on new leases by six and 10 per cent respectively. 

Next came the big one: Westfield Group, which announced plans in August 2013 to drop retail rent for new tenants by as much as 10 per cent. The move was surprising but analysts such as David Gordon, partner at Lowe Lippmann Chartered Accountants and Business Advisors, agreed that Westfield had “no choice” but to provide some relief. “It is extremely well known that Australian shopping centre rentals are massively higher than everywhere else internationally,” Gordon told The Age at the time.

Backing Gordon’s claim, Sydney, Melbourne and Brisbane have all been named as three of the world’s 10 most expensive prime global retail markets in a survey from global real estate services firm CBRE. The 2013 survey placed the three cities at five, seven and nine respectively, prompting Josh Loudoun, CBRE regional director of retail services, to remark that Australia’s high, super prime rents “are now the major barrier for new market entrants”.

Craig Woolford, senior analyst retail sector at Citi Investment Research, says the upward pressure on shopping centre rent is easing slightly, but suggests that the figures are driven by the underperformance of lower-grade centres rather than any change at premium centres, such as Bondi or Chadstone. 

“Certainly the case that rent has been rising faster than retail sales for quite a few years now is starting to unravel,” he says before explaining, “It’s tied up in weaker sectors – it might be a centre in a catchment area that’s too competitive or one that lacks attracting tenants so they’re having to drop their rents – and it’s mainly in higher rent-paying categories like jewellery and clothing where you’re hearing about rent reductions.” 

Woolford denies that rents have peaked; however, and says retailers should treat any relief as cyclical change and not as evidence of the rental landscape altering indefinitely. 

“Is there evidence to say we’re hitting a rent ceiling? That’s a big call,” he says. “We think that there is potential for flat rent for the next three years or so while retail growth pauses, but retailers won’t see a ‘big bang’ of falling rents – businesses will be able to negotiate a reduction only when they come up for renewal; it’s a slow-burn issue.” 

South Australian Lease Management is a firm that negotiates leases for a wide variety of retail clients including Shiels. Director Brian Scarborough agrees there are more concessions available now but suggests that these concessions are tied to new leases rather than existing ones. 

“A sitting tenant with a renewal proposition will always be worse off than a new tenant coming in,” he says. “With much of the expansion work we’ve done for Shiels, the rent we propose will be well under what’s being paid by a sitting jeweller and, more often than not, we’ll have our proposition accepted.” 

Walking away isn’t an option for most small jewellers, according to Stephen Matthews, owner and director of five-store New South Wales chain Matthews Jewellers, and the landlords know it. 

“The centres know that we can’t walk away,” he says. “Every time a lease rolls around, they come to us with ridiculous mandates on rent increases and it becomes a long and arduous task to try to negotiate it down. Our last situation was at Westfield Kotara where we initially faced a 46 per cent increase in a shopping centre with reduced traffic figures since the Charlestown Square shopping centre was developed. We still ended up having to accept a 32 per cent increase on top of the 5 per cent year-on-year that we already pay.” 

Part of the problem is the long-held belief that jewellers operate high-margin businesses, according to Rick Jobson, owner and managing director of eight-store Queensland chain Anthonys Fine Jewellery. 

“Shopping centres used to believe, erroneously, that jewellers had very high margins but margins are much smaller now and it’s impossible to pay 20c in the dollar to the landlord and have anything left over,” Jobson says. 

Matthews believes the charm and bead jewellery boom of the past five years fuelled the high-margin perception and says landlords are yet to accept that the trend has dwindled considerably in recent times. 

“We’ve got sites that enjoyed that Pandora phenomenon and centres are still reflecting back on those turnovers regardless of the fact that sales have dropped by 30 to 40 per cent since that bubble burst,” he says. 

Exacerbating woes are many other factors that Bensimon says landlords leverage in order to extract maximum rent from their jeweller tenants. These include demands for costly fit-outs, clauses that force retailers to use the centre’s own contractors, high premiums for preferential locations such as corner spots, and high insurance and security costs. Bensimon also believes shifting gold prices are partly responsible for recent pain. 

“Jewellers encounter pressures that differ from other industries and this is what sets us apart as an industry,” he explains. “Gold and precious metal prices have increased dramatically, putting our prices up and making us an unattractive proposition for customers so we’ve had to look at innovative ways of making our product more palatable. Also, diamond prices have increased by 30 per cent in the past five years. Jewellery is becoming extremely expensive, and it takes a while for the retail landscape to adjust to that.” 

Jobson agrees that jewellers have it tougher: “Those sorts of costs have put jewellers in a situation where they are paying rents that way outstrip the trade that’s available in the stores. You can have a store that is turning over $1 million and you could be paying $250,000 in rent. Everyone knows 25 cents in the dollar is just not affordable for a jeweller. Rent should be where most other retailers are and that’s down around eight to 12 cents in the dollar.”

Surely the landlords are aware of these circumstances though. “Oh, they’re aware, and they use that to our disadvantage, because they know it’s going to be difficult to walk away from a store once you’ve spent $400k on a shop fit,” Bensimon says. 

So what options are available for jewellers looking to improve a restrictive lease? 

Scarborough believes the most important action a jeweller can take with a landlord is to speak out. 

“It’s never a wrong time to talk to the landlord about your rent being too high. It’s almost a conditioning process – if you say nothing, the expectation is that everything is fine,” Bensimon says.

Matthews declares; however, that any attempt to negotiate favourable terms with his landlords has failed: “We put a submission to National First State, who operates the Salamander Bay shopping centre, to show the pain we’re experiencing and that we are at 21.5 per cent occupancy costs. They just ignored it. There was no negotiation except a note to say the request for rent relief had been denied.” 

Background reading: Jewellers squeeze shopping centres over rents

Australian Retailers Association executive director Russell Zimmerman says retailers need to be aware that obtaining lower gross rent is not the only way to benefit from a negotiation. 

“Rent free periods and shop-fitting allowances are far more common in leases now,” he says. “It’s not uncommon to see a landlord contribute $50,000 towards a new shop-fit and then offer up to six months’ free rent.” 

Jobson sees fit-out concessions as double-edged swords, stating, “Centres contribute funds towards a new fit-out to keep the value of the building up – they’d rather we were paying a 5 per cent increase on base rent of $100,000 than a 5 per cent increase on base rent of $50,000,” he says. “Secondly, centres will now opt to give retailers money to cover category one costs, such as new air conditioning and sprinklers, and then claw it back by forcing you to use their own contractors.” 

Scarborough is also quick to point out that such concessions are again used to attract new tenants rather than help existing ones. 

“The contributions for fit-outs are only being offered with new leases; there’s nothing like that being offered in renewals,” he says. “The only way you’ll get concessions is if you put the landlord in a position that they either have to do a deal or bankrupt their tenant, leaving them with another vacant area.” 

Even with these concessions available, what chance do small to mid-sized retailers have to secure them when even the super-sized retailers are struggling to renegotiate better terms? The answer is none, according to Jobson. 

“If you’ve got 200 stores, you have far better bargaining power when you could potentially walk away from 40 Westfields or 40 AMP centres,” he says. “For the likes of myself and guys smaller than me, we have no power at all; we simply can’t change the leases.”

Zimmerman suggests single-store retailers must be prepared to play hardball at the negotiating table, and should be prepared to walk if landlords refuse to improve conditions. “You don’t have to be a giant retailer to negotiate better terms,” he says, “but sometimes you do have to be prepared to say ‘This is my final offer before vacating the premises.’” 

Furthermore, Zimmerman urges retailers to employ experts to negotiate for them: “The savings we’ve seen by using lease negotiators are terrific. Talk to a negotiator 18 months before the lease is due. The negotiator will search out the right information, call existing tenants to find out what they’re paying, and negotiate a lease in line with the best deal in that centre.” 

For Bensimon, the key to any negotiation remains knowledge. 

“We need to unite to put an end to this practice of charging jewellers too much,” he says. “We need to increase our knowledge base so we can go into these negotiations with a fighting chance. If anybody wants to ring me about any rents I’m paying, I will happily give that information away. We don’t need to look much further than our comrades in retail who do this on a regular basis – they have a much better handle on this than the jewellery industry.” 

The evidence is there to suggest that landlords are conceding more ground, particularly on new leases. What’s left is for retailers to go forth and secure the best deal, even if it means changing locations. The time is right for retailers to reject the notion that they must be in a certain centre to succeed and instead address the reality of whether the rent on offer will still allow them to make a decent living. If not, then the whole thing may not be worth the headache.