Tenants in store wars

Many retailers at Burwood Westfield are resigned to rents increasing by the standard inflation plus 2 per cent, whatever the retail conditions. Photo: Quentin Jones

Perhaps it had been a while since this middle-aged shopper had last bought a pet. After all, they can live for years. Nonetheless her reaction to the $40 asking price for a blue speckled budgie at a pet store in Burwood Westfield in Sydney’s west seemed indicative of the problems many Australian retailers face.

“Geez!” she gasped. “They’ve gone up a lot since last time.” And with that she turned about face and walked out of the store.

Similar exchanges are happening in shops nationwide every day. Customers now have a greater selection of outlets and as monthly shopping surveys reveal, they are increasingly moving online.

Margins are being squeezed. The turnover of stores in shopping centres is rising, which logic would dictate would result in cheaper rents but for many retailers, negotiations with landlords remain difficult. Relief has not been fast coming.

“It’s been like a pressure cooker – it’s been building and building and building,” the founder of retail consultancy Retail Oasis, Steve Kulmar, says of the difficulties facing retailers. Kulmar says major shopping centre landlords have been slow to respond to this in their rental pricing. But he thinks the reduced competition for space inevitably will drive prices down.

“The ridiculous rents that have been charged will be harder to justify,” he says.

At Burwood Westfield, many retailers are resigned to rents increasing by the standard inflation plus 2 per cent, whatever the retail conditions. They say these rates prevailed even in 2007 and 2008, in the worst of the financial crisis, so they expect them to continue.

“They will always win,” is said over and over by retailers about landlords. Many are resigned to these rises as the trade-off for operating in a premium mall. But not everyone agrees.

“By and large, the balance of power has swung towards tenants,” the executive director of the Shopping Centre Council of Australia, Milton Cockburn, says. He says many retailers that have reached the end of their leases are renegotiating improved terms, either in rent reductions, marketing packages or other lease incentives.

The managing director of Hairhouse WarehouseTony Lattouf says landlords will negotiate, given the right approach. “If you’re not confident enough or you’re shy or you’re scared, of course they take advantage of you,” Lattouf says. “They need to lease space and I need to rent space. So we sit together and negotiate.”

He says that in the past few years, Hairhouse Warehouse – which has 142 stores, including one in Burwood Westfield – has been able to negotiate significant rent reductions at many sites. But he acknowledges that many other retailers have not been as successful. To these he offers a three-step guide.

First, explain your situation with a clear business plan. Second, be honest about your numbers. The centre will do its own research before meeting you. And third, treat landlords respectfully but be firm. “And they’ll respect you,” Lattouf says.

The chief financial officer of Retail Zoo (which includes the Boost Juice and Salsas franchises), Mark Slattery, says there has been a shift in relationship between tenants and landlords in the past two to three years, although it varies from store to store. Slattery says he has been able to negotiate slight rent reductions in many new leases and renegotiated deals.

But he says the more notable trend is the availability of space. Once if a site in a centre fell through, it might take two years for another to open up. Now opportunities are far more common. “It seems now something else comes up quickly,” he says.

Both Hairhouse Warehouse and Retail Zoo’s franchises offer things that cannot be delivered over the internet – haircuts and styling, freshly squeezed juice and wholemeal tortillas.

Anecdotally, the highest-margin store in Westfield Sydney Shopping Centre (in Sydney city) is Snag Stand, which sells “haute dogs”.

Retail Oasis’s Kulmar says retailers that offer in-store experiences are going to increase their share of the mix of businesses in shopping centres. In some cases, their ability to attract people to centres may result in discounted rent.

Kulmar says another indication that some stores have had been able to negotiate better deals is the flocking of international chains to central business districts.

Hugely popular clothing stores such as Zara, Topshop and H&M, have been slow to open in Australia, in part due to high rents.

Kulmar thinks they, too, have been able to negotiate better deals because of their allure to customers. “In some respects they’ll replace the pulling power of department stores,” he says.

The head of retail operations in the Asia-Pacific for Numensa Retail Consulting, Beverley Chambers, says that these international openings may prop up rents in premium areas.

“But I think where landlords are going to struggle is in secondary shopping malls,” she says.

Meanwhile, in the rest of the suburb of Burwood there are noticeably more vacant shops than inside the shiny Westfield mall.

The occupancy rate for the Westfield portfolio in Australia and New Zealand has been higher than 99 per cent for more than a decade. In the six months to June 30, it exceeded 99.5 per cent.

Westfield’s manager of corporate affairs, Julia Clarke, says the company works closely with its retailers. “It’s in everybody’s interests that good retailers succeed,” she says.

While vacancy rates stay that low, negotiations will be difficult. But reductions are possible. Businesses need to look at their margins, know their limits and negotiate sincerely.

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