Landlords 'setting up retailers for failure'

Major shopping centre landlords, aided by “unscrupulous retail leasing executives”, are setting up small retailers for failure by demanding they absorb rental increases of 20 to 30 per cent to stay in their malls, despite having no tenants to replace them if they leave.

But according to 30-year retail franchise veteran Stan Gordon, the launch of Amazon on Tuesday in Australia and the success of food delivery businesses like Uber Eats will take foot traffic away from malls and force landlords to accept the new reality of lower returns.

Currently though, he said the major listed landlords were being held to ransom by the returns demanded from their shareholders and were letting successful retailers leave their malls rather than negotiate a fair rent.

Mr Gordon, who founded and runs The Franchised Food Company (FFC), which includes popular ice-cream brands Cold Rock, Mr Whippy and Trampoline and cafe chain Healthy Habits, said some mall landlords would rather have a vacant shop then offer a fair rent to retain a good tenant.

“Shopping centres are setting up retailers for failure, aided by unscrupulous leasing executives who are taking advantage of mum-and-dad operators. Landlords’ expectations have to change,” he said.

He said occupancy costs needed to remain at no more than 15 per cent of revenue “otherwise we don’t have a business”.

FFC operates a network of 200 stores turning over $50 million a year. In FY17 it generated sales growth of 6 to 7 per cent, well above the 1.8 per cent year-on-year growth recorded across the retail sector, which enjoyed a surprise 0.5 per cent bounce in October, according to Tuesday’s ABS figures.

But despite FFC’s success, Mr Gordon has put a virtual halt on new store expansions because of rising occupancy costs, which have doubled to about 20 per cent in the past five years, lifting FFC’s annual rental bill to around $10 million.

“We used to open 15 stores a year. Now we are opening maybe three or four,” Mr Gordon said.

He said there was little incentive to open new stores given the unrealistic rents and fixed five or six-year lease terms with no renewal options.

“One of our Healthy Habit franchisees was a tenant in a shopping centre in Melbourne. The lease came to an end and despite the landlord having no tenant to replace them, they demanded about a 30 per cent increase to stay,” he said.

FFC’s landlords include major listed players like Westfield operator Scentre Group and Vicinity Centres, both of which have reported sharp falls in specialty sales growth in the past 12 months.

Despite this slump, the growth of online retail, the arrival of Amazon and the tepid retail environment, Mr Gordon said mega malls like Chadstone (owned by Vicinity and Gandel Group), were demanding $160,000 to $200,000 a year in annual rent for a tiny kiosk, meaning the tenant would have to turn over $800,000 to $900,000 a year to keep occupancy costs manageable.

“None of our retailers, which operate good businesses, are turning over that kind of money. Who wants to spend five or six years just paying off the landlord? It’s better to go on social security,” he said.

The launch of drew mixed reactions from shoppers and retail experts due mainly to high pricing on some products, but Mr Gordon expected the longer-term impact on malls would be significant.

“Go into a mall and watch how people shop, what bags they carry and what’s inside them. They are not carrying many shopping bags. Online has had a huge impact and Amazon will make it even bigger. The days of the big department stores are over,” he said.

He added that while the growth of food delivery businesses like Uber Eats had been largely beneficial to his franchisees, it had also reduced foot traffic in malls because more people were ordering online.

Mr Gordon is not alone in demanding retail landlords rein in their rents. In his address to Premier Investments shareholders at last week’s AGM, retail billionaire Solomon Lew took aim at the excessive rents charged by some landlords.

“We closed eight unprofitable stores during FY17. This represents our promise to landlords – if store rents are excessive and result in shops being unable to trade profitably, we will close the stores in the interests of shareholders,” Mr Lew said.

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