Sunday 12 February 2012

Why Retail Rents Must Come Down

1. The old model for retailers was to obtain a substantial bank loan, often backed up by home ownership, which enabled expenditure on things like elaborate shop fittings, container loads of stock direct from overseas suppliers, and a cash flow able to handle seasonal sales variations. Banks no longer see the value in retail enterprises and have toughened up lending rules. In short, retailing is not the cash cow it used to be and high cost items like rent are no longer sustainable.
                2. Online trading is becoming more significant and retailers are increasingly reliant on sales outside the traditional bricks & mortar stores. Predictions for Australia include 30% of retail sales coming from online. If you are getting more of your sales outside the physical store, why should you pay so much rent for that store?
                3. Consumers have become scrooges. Spending is at an all time low as consumers reassess their needs and buying patterns. The combination of lower spending and increased competition (with lower margins) means that there is strong pressure on reducing costs.
                4. Customer traffic numbers are declining as consumers find alternatives to “walking the malls”. The prime role of shopping centre managers is to get customers past the retailer’s door. If those numbers are declining, surely rents must decline as well.
The challenges for retailer going forward are immense and the cost of adjusting to the new conditions must be shared by all including landlords.