Last month, a new code of conduct went into effect in NSW with the aim of levelling the playing field between landlords and retail tenants. But is it a step in the right direction, or just empty promises? It depends on whom you ask.
“Any benchmarking data we can get is valuable,” Russell Zimmerman, executive director of the Australian Retailers Association, told Inside Retail recently.
As Zimmerman sees it, most retailers already need to give up their sales data to shopping centres as part of their lease agreements. Why not ensure they get something in return?
Critics say code has holes
Under the code of conduct, which was developed in consultation with the ARA, National Retail Association, Pharmacy Guild of Australia and Shopping Centre Council of Australia, shopping centres promise to provide a variety of benchmarking data to their tenants, such as moving annual totals, door counts and sales per square metre by category.
But the code is voluntary, so it only applies to the shopping centres that sign it, and only in NSW. These are major weaknesses in the code of conduct, critics say, as is the fact that many retailers already receive this type of benchmarking data from shopping centres.
“In practice, the large retail landlords already provide category sales data,” said Martin Matthews, CEO of Brand Collective, which operates Superdry, Volley, Hush Puppies, Clarks and other brands in Australia.
“Like most retailers of our scale, we receive that information already,” he told Inside Retail.
The code of conduct is likely to have the biggest impact on small retailers, who may not be able to make the same demands in their negotiations wtih landlords.
“The big retailers are probably getting the [benchmarking] information as a matter of course. The smaller retailers aren’t,” Zimmerman said.
He believes the code of conduct will also increase pressure on landlords that don’t currently provide benchmarking data to start doing so.
“The thing to remember is that smaller shopping centres are not bound by the code. We’d be encouraging them to look at it,” he said.
But even if the code results in more shopping centres providing benchmarking data to more retailers, it may not help retailers where they need it most: negotiating fair rents.
Rent rising faster than sales, foot traffic
“Will it [the benchmarking data] include occupancy costs?” Matthews asked.
“In NSW, there’s a requirement to register leases, but it’s difficult to access that information, and they’re often not kept up to date. Market rates are difficult to come by for retailers that don’t have property agencies or leasing managers.”
Matthews said the biggest power imbalance between landlords and retailers, especially smaller retailers, is in lease negotiations. Knowing what other tenants in the centre are paying would help retailers negotiate fairer rents.
“For me, the major issue is that there’s still no incentive for a landlord to come to meet the market on renewal for a retailer that’s trading well,” he said.
According to Matthews, based on the typical five-year lease of CPI (consumer price index) plus 5 per cent, a retailer would see their rent go up by 60 per cent over 10 years.
With many retailers’ same-store sales increasing less than 5 per cent year on year, the cost of rent is rising faster than they can keep up.
“The only way to get back to a market rent is to close profitable stores, which is extremely disruptive,” Matthews said.
“If you’ve done the hard work to build the customer base and business and it [profit] gets eroded by the landlord…it doesn’t provide a good incentive to perform.”
Hoarding says it all
The rising cost of rent is particularly galling for retailers, since foot traffic in many shopping centres is declining. According to Shoppertrak, foot traffic in December 2018 was down by double-digits year on year.
“Some centres where demand has dropped of significantly are being forced to meet the market. And some centres are absolutely A-grade and in demand, and frankly they can justify their rent,” Matthews said.
“But there are a few below that, where landlords see themselves as being in-demand, but they’re not. You can go to brand new shopping centres around Sydney and Melbourne and see hoarding up.
“Not for building, but for vacancy, because landlords are trying to hold the rent [above market rate].”