Time to ditch rental principles

For a long time the commercial property industry was a relatively straightforward place within which to operate. The rentals for shops and restaurants on the high street were set according to the levels achieved by similar nearby units and these deals were always agreed on the basis of upward-only rent increases at future renewal and break dates.

But things have changed radically – as a result of the internet pulling customers away from the high street and delivery becoming part of everyone’s lives. This has decimated certain town centres as retailers and foodservice companies have gone bust and left lots of vacant units. Many Company Voluntary Arrangements (CVAs) have also been undertaken with the result that landlords have taken a hit from not only store closures but also the rental levels on the remaining units being significantly reduced.

The more successful operators have now come out fighting against the fact that they are competing with companies that have negotiated these lower rental levels through CVAs. The likes of Primark and Next are starting to demand lower rentals from their landlords by as much as 30%.

This is clearly a nightmare scenario for the property industry as well as retail and foodservice. Roger Wade, CEO of Boxpark, suggests the industries are on the “edge of a precipice” but he says it does not have to be an “apocalypse” if the landlords and the tenants can abandon their long-held adversarial relationship and instead come together and bring about change – with leases and covenants up for debate.

He argues for shorter lease lengths, suggests little value should be attached to covenants, and calls for more of a focus being placed on attracting the right brand mix that will contribute to a rich, attractive environment, which then draws in customers. He also argues for more turnover-related rents.

But it might not be quite as simple as this and the foodservice industry can probably learn something from what the retail sector is experiencing. With turnover-related rentals, or any other rent for that matter, there is an argument that we have to move away from the historical reliance on simply charging retailers rentals based on sales per square foot.

There needs to be some level of customisation of the metrics because as retailers have begun to diversify their store types they have different requirements for each outlet. Whereas some large units could be all about brand building others could be based more around providing a predominantly click & collect-type function.

The underlying point is that they do not operate as purely drivers of direct sales and thereby warrant different rental levels. These new indirect trading elements are also becoming a part of the foodservice landscape – with a growing number of players opening experience-led units such as Starbucks with its massive Reserve Roastery outlets.

Willy Wonka style – a Starbucks Roastery

Other are opening units on smaller footprints that are skewed towards fulfilling orders taken online. Among those experimenting is Tossed, Tortilla, and McDonald’s that has just opened its first ‘McDonald’s To Go’ on London’s Fleet Street having removed all the seats from the site and installed lots of touchscreens for taking orders.

The increased complexity is highlighted by Julie Villet, director at Unibail-Rodamco-Westfield – one of the world’s biggest shopping centre operators, who says that a physical store can be a major driver of online sales, which arguably could be factored into the metrics for rents. For foodservice companies this scenario has some resonance because of the growing percentage of sales ordered online for home delivery.

“The cost of media spending online is high and the returns [achieved] from this are decreasing. Media costs are increasing by 40% each year but e-commerce click-through rates [leading to sales] are more like 10%. A digital [online-only] retailer going into physical space can see their web traffic increase by 52% and for those retailers with less than 30 stores the increase can be 84%,” she says.

This rapidly changing scenario where online and physical spaces are becoming ever more intertwined will clearly cause landlords lots of headaches but until they give some serious consideration of how they manage their square footage and charge rentals on it then life will continue to be difficult on the high street and in the shopping malls for both retailers and increasingly foodservice companies too.

Glynn Davis, editor of Retail Insider 

This piece was originally published on Propel Info where Glynn Davis writes a regular Friday opinion piece. Retail Insider would like to thank Propel for allowing the reproduction of this column.