Home' The Channel Magazine : National Newsagent April 2012 Contents LEASING
cost to demolish the premises and restore
and still make a profit after financing, do not
sign that lease.
Survival Means Being Better Than
Average, Especially Gross Margin.
Average just won’t cut it in shopping
centres. To survive, shopping centre
retailers must have higher than average
industry gross margins to pay the premium
rent the landlord demands. They must
cut out any superfluous supply margin
and either import direct, manufacture
themselves off-site in cheaper premises,
have products that transform low cost items
to high value products, or manufacture
on-site specialist items on demand for
customers. Many apparel operations have
shifted manufacturing overseas because
of the uneconomical rents demanded
by landlords as the only possible way to
increase margins and to survive in shopping
centres. Buying groups have become so
critical, one large shopping centre owner
is creating buying groups for its retailers
so they can afford the rents! The name
retailers you see are mostly vertically
integrated—even they are struggling. In
the cut throat world of retailing, a fat gross
margin is key to survival.
Your Lease Is The Most Important
Document Your Business Has.
Shopping centre leases don’t just rent
property. They can cover every aspect of
retailing including opening hours, uniforms,
merchandising, marketing, insurance
and importantly, what you can or can’t
sell. Failure to navigate every aspect and
model the financial implications will see
your potential profits evaporate in the fine
print. Your usage must be wide enough to
offer customers a range of goods to make
a profit. Beware of redevelopments which
are common in shopping centres; they can
have a disastrous effect on your business.
You could be forcibly relocated, have your
lease terminated or trade could be severely
affected without compensation. Care with
lease and disclosure documentation can
save a lot of headaches later on.
One Store Is Not Enough.
Single store operators are at the mercy
of the landlord. One problem and they can
be wiped out. Small chains can grow larger
because they can survive if a store is forcibly
closed or a lease is not renewed. The risk of
more stores is high, but more stores means
greater buying power when negotiating
Time Is Not Your Friend.
On average, rents in shopping centres
escalate at 5% per year, which is above
inflation. This means that a lease with a
commencing rent of $100,000 per annum
will start year five paying $121,550.
Additionally, you pay marketing and a
proportion of the landlord’s expenses.
Industry averages show that 20–23%
occupancy costs is not unusual. Retail net
profits are mostly 3–6% or 3–6 cents for
every dollar through the till. Eventually, the
rent will catch up over time to be such a
burden that unless your sales and margins
increase dramatically to cover an increasing
rent bill, your profits will decrease and you
will run at a loss. Do not underestimate
how hard it is to increase sales volume and
profit every year to cover the rising costs of
your largest expense—rent. This is the one
reason why the double whammy of annual
escalations and falling sales is killing
many retailers. In some industries, the
technological changes mean less customers
and price deflation. A lot can happen in five
Size Does Matter, As Does Frontage.
Shopping centre space is so incredibly
expensive, each square metre must pay
its way. It’s a fine balance. If the shop is
too small, range will suffer and customers
will go elsewhere. If the shop is too big the
rent will kill you. Shop sizes are generally
shrinking as Australian retailers squeeze
more and more out of their space to be
more productive. A larger shop does not
necessarily make more sales, but the shape
of the shop can dictate success or failure.
It’s better to pay for exposure through
frontage with a smaller shop and turn stock
faster than pay super expensive rent for
space you can do without.
Beware Of False Promises And Expect
Little From The Landlord — Because
That’s What You Will Get.
There is a legal obligation that landlords
not lie to tenants when negotiating leases.
However, there are many tricks and traps
for unsuspecting tenants that are not strictly
lies. Landlords are out to sell retail space
and will be friendly, but they are not your
friend. It is highly unlikely that they will do
you a ‘favour’ unless there is one in return
for them. It pays to be suspicious and you
should assume nothing. Once the lease is
signed and the landlord provides you with
the space in a centre that is reasonably
clean with reasonable amenities and does
not disturb your trading, it expects you
to pay (and has a legal right to) the rent
irrespective of whether you can make profits
When I am called to help retailers in
trouble, the root causes are nearly always
vested in those issues described above.
Don’t end up working for the landlord. After
all it’s your business, not theirs.
Stephen Spring is a retail
and retail lease expert at
Australian Retail Lease
Management. Contact him
on (02) 99044875 or at www.
National Newsagent April 2012
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