Retail rent battle reflects transition to a radically different world....
Image sourced from Shutterstock on 19 October 2020.
There’s more to come out of 2020 than just the virus – there are seismic economic and social shifts occurring.
Long story short, an ASX-listed commercial property group, Scentre (owner of Westfield Shopping Centres) has dramatically upped the ante with retailers in recent months by physically locking retailers out of their own stores. In return, one of the smaller retail groups caught out by that move, Mosaic Brands, has announced one of its own – namely, that it will shut 300-500 of its total 1333 stores nationwide (https://www.abc.net.au/news/2020-08-25/retailer-mosaic-noni-b-rivers-katies-to-close-up-to-500-stores/12592676).
The bone of contention here is whether or not retailers should pay fixed rents (as argued by landlords like Scentre) or pay a share of store profits instead. Scentre has been able to reach agreement with around 70% of retailers in its centres to pay the old model, but I’d guess that many (all?) of these agreements are with the very smallest retailers, who are just desperate to get on with business. Mosaic is a relatively small corporation, but it has infinitely more negotiating power than your average stand-alone store. And there are other, much larger retail corporations who also want the share-of-profits model implemented in future lease agreements, notably Premier Investments (https://www.afr.com/chanticleer/how-solly-lew-won-big-in-covid-19-20200813-p55ldp).
The other interesting thing that Mosaic said was that “the 32 per cent of its stores in regional areas, where the company said "consumer confidence has been particularly fragile" – in January, well before the virus. All else being equal, I would estimate that these regional stores are likely to close first.
I have blogged about the broader retail changes before, both in terms of why businesses are memorable (https://www.soupthink.com/blog-page/2020/4/20/which-businesses-will-make-it-through-covid19-and-why) and what impact these retail sector changes will have on our cities (https://www.soupthink.com/blog-page/2020/5/26/how-will-our-cities-look-and-act-after-covid-19). In light of the two rental models, though, these trends are going to play out unequally.
If a retail location has a reason to exist beyond merely shopping, it might do OK. What reason beyond shopping? Well, as a place to be entertained, to learn, to do exercise, and to meet friends on the basis of any of these activities. After all, part of going out relates to looking at others, and in being seen ourselves. I think that the share-of-profits model would fit this type of area well, as the novelty of pop-up shops and turnover would likely suit this demographic.
But the old fixed-rent model? Well, the big box stores can work with this, and depending upon what they are selling, they could do OK, as this article shows: https://www.commercialrealestate.com.au/news/big-box-aventus-centres-defy-the-downturn-981243/. But for how long will people spend on homewares? After all, how many cushions/throws/sofas/table settings can people buy? I can see this being radically different 10 years from now, with some central showrooms in trendy locations, probably in the big cities. However, I think that most of the stock will be in a warehouse somewhere, and it will be delivered from there once the customer has had a chance to view the “real thing” in the showroom.
These potential changes raise all sorts of questions. What happens to local government revenues if their commercial rates vanish? What happens for people in regional Australia who used to be able to buy stuff from the nearest city (even if that was 3-4 hours drive), who now face potentially higher costs for goods delivered from the capital cities? What happens to communities if people no longer need to leave their homes for anything much at all?
Part of the historical dynamism of cities has been around people from different jobs and industries coming into daily contact with each other. The serendipity of such chance meetings can lead to new conversations, new ideas, new businesses, new friendships, and even romances. But if we only bother to venture out of our cocoons to meet people in our existing social circles, how does such serendipity occur? After all, many of us seem to have echo chambers online, where we only connect with people who think like ourselves. Surely, it’s a logical next step to disconnect from the broader world around us?
What would our communities look like if things evolved in this manner? That old line about “if a tree falls in the forest, but nobody hears it, did it really happen?” stops being a philosophical question. Change the words “tree” for “car” and “falls” for “crash” or “bomb” and the concept suddenly becomes quite real. How would we know, and how would we react to it?
I sincerely hope that nothing along these lines happens, but I think it’s useful to be aware of the possibility, however slight, that it could. The future we want to have, is up to us, and the choices we make.
