Rent Revolt: How to Win!
- Written by Stuart Bennie
The landlords are a law unto themselves, regardless of the size of the retailer. They have got their formula down to a fine art and they are past masters at squeezing retailers of every drop they can. That’s their job, it’s their business. That’s how they are.
Their formula includes having smart people on their payroll who probably know more about your business financials than you do and these folk calculate exactly what the traffic will bear. If they get it wrong, so what? You leave and someone takes your place.
Having said that, their intention is very much that you will survive.
Just – and just when you think you are getting somewhere – bang, the rent goes up or they want to move you to a worse location (at the same rent) or they want to move you to a better location (at a much higher rent). You simply cannot win.
To counter the possibility of heavyweight negotiations at the top, they push the rent issue down the line to their shopping centre managers so that if you are a multi store retailer, you have to deal with several individuals all with their own agendas on how to extract what they can from you.
In July 1997 a crisis started in Thailand, with the financial collapse of the Thai currency, the baht. The government had tried hard to keep the baht pegged to the US dollar but eventually had to allow it to float in the face of severe financial over extension – largely real estate driven. Foreign debt had bankrupted the country even before the collapse of the baht.
The crisis spread quickly to other Asian countries. In Indonesia the Rupiah had been steady at about Rp2,500 = USD1. Overnight it fell to 4500. To put this into perspective, this would be like the Australian Dollar falling from USD1.06 to USD0.59 overnight. But that wasn’t the end. India’s Rupiah then went into freefall and hit almost 17,000 (16,800 to be precise) in the weeks that followed. Again to put this into perspective this would be like the Australian Dollar falling from USD1.06 to USD0.16 within a few weeks.
Indonesia like its neighbours had foreign debt. Shopping centres had been built on borrowed US dollars and repayments were therefore in USD. Clearly they could not afford to meet their obligations and what made it even more complicated was that some of the retailers were part owners in the centres.
Retailers met and made a unilateral decision. For the sake of repayments, they would peg the Rupiah at 3500 to the USD. End of conversation. Off to have a cup of tea.
So why is this relevant?
Let us look at a scenario: A medium sized retailer in Australia gathers some support from fellow retailers and hires a firm to mediate with a landlord. We can start with one landlord and one shopping centre. Before any mediation the firm retains a reputable large accountancy practice to calculate how much revenue can be lost by the landlord so that they break even. No profit, no loss – just even.
Let’s take a hypothetical percentage of 33 per cent for the purpose of this example. The retailers in that centre now reduce their rents unilaterally by this amount so that a rent that was 15 per cent of sales now drops to a more manageable 10 per cent. This requires support from most retailers but not necessarily all. Kind of like a class action.
One cannot expect shareholders to accept a break even situation and so the landlords will need to look at their operation carefully to establish how they can return a reasonable return on investment. This may include a significant reduction in expenses including reducing executive salaries, disposing of private jets, selling a soccer team or two and so on.
The landlord meanwhile, if intransigent, which will most likely be the case, will resort to legal means and may even lock out a whole bunch of tenants.
Imagine the scenario: A shopping centre with a significant number of shops in darkness.
But it gets better. Those locked out retailers and their now unemployed staff picket the shopping centre not allowing customers or deliveries in. The entrance to car parks and delivery docks are closed with retailer’s vehicles blocking all traffic. The police are in a frenzy and the television crews are fighting for coverage.
Of course, it will never come to this. Common sense will prevail. Government will intervene and something like the Qantas mediation will kick in.
Read more: Inside Retail