SOME ISSUES FOR RETAIL BUSINESS IN 2020

Robert Toth | Partner | Marsh & Maher Richmond Bennison

SOME ISSUES FOR RETAIL BUSINESS IN 2020

As Crowded House sang “things ain’t cookin’ in my kitchen, strange affliction wash over me” and so it is in retail, strange afflictions are washing over the retail and franchise sector.

Most of us would still remember the famous line made immortal by Paul Keating on the 29th November 1990 - "Well may we say this is the recession we had to have" and we did have it with eight-quarters of declining economic growth.

I was working at my brother Ted’s Camera Stores in Elizabeth Street CBD Melbourne part-time at that stage and remember Ted being somewhat unfussed by all this talk of recession.

Retail has always been tough, but back then it was fun as well, maybe because we didn’t have on-line sales, mega Shopping Centres, speciality stores and consumers were actually happy to shop in-store?

It was the era when retailers did their own advertising on Radio as did Ted, Brian’s Speed Shop, Kevin Dennis Motors and who can forget “Grand sale Grand Sale” Franco Cozzo furniture in Footascray?

Retail is tough now, due to several new age “afflictions” but on the other hand there is always going to be gaps in the market and opportunities for those that adopt the new age of retailing and see an affliction as an opportunity to benefit.

Retailers and franchisees are suffering from “profit compression” a term we constantly hear nowadays. Compression is one thing but bottom line many business and franchisees are operating at breakeven or below and unsustainable levels.

Ted’s view back then was “Yes retail is tough, so when things get tougher you need to market harder, buy better and do something different!”.

Maybe those three basics still apply now?

Ignoring what’s going on and being frozen with fear or reluctant to change is a “not so slow death” for business nowadays.

WHAT WE ALL KNOW TODAY IS THIS:

  • On line sales are expected to grow a further 15 per cent over the next 12 months;
  • One out of 10 items will be bought online;
  • More International Brands are coming into the Australian market;
  • Australia’s eCommerce market value will be A$35.2 billion by 2021;
  • Interest rates will stay likely low with the Reserve Bank expected to lower the cash rate from 1.50 per cent to a predicted 0.50 per cent by February 2020;
  • There are more platforms to access credit such as AfterPay, Certegy, Ezi-Pay and ZipPay; which allow you to order or buy a product immediately and delay payment or pay by instalments over time;
  • Retail sales in Australia increased 2.40 per cent September 2019 on the same period last year and is projected to increase around 2.80 per cent in 2020;
  • Brand recognition is more and more important to consumers, and Mono Branded dedicated retailers offering a specialist retail experience attracts consumers.

So, if you are not factoring these things into your new year’s projections and 2020 /21 business plan, you will likely be cycling at the back of the peloton!

Here are some eye-opening statistics as to who leading sales in Australia is:

  • Ebay.com.au — 404.67 million;
  • Amazon.com — 111.82 million;
  • Ebay.com— 80.46 million;
  • JB HiFi.com.au — 74.02 million;
  • Bunnings.com.au — 68.87 million;
  • Woolworths.com.au — 53.65 million; and
  • Amazon.com.au — 52.44 million.

The concerning aspect of this is that Amazon AU will continue to grow its market share, and those sales will take revenue off the smaller retailers.

ACCESS TO PAYMENT- MAKING IT EASY FOR THE CONSUMER

As a retailer, are you embracing the new technology and making it easier for consumers to spend?

Apart from the debit and credit cards we all use there is, of course, a merging of our phones with apps with the likes of AfterPay, Certegy, Ezi-Pay and ZipPay allowing consumers to order or buy a product immediately and delay payment or pay by instalments over time.

These services can be offered in-store via a mobile app. which encourages spending.

Request for Payment technology is being trialled in the UK the concept being that the person or entity that wants to be paid for goods or services asks to be paid via a trusted third party who then routes the payment request to the consumer’s bank. 

The bank uses a secure mobile app to present the ‘Request for Payment’ to the consumer so they can choose an account, check the balance and make the payment.

The point here is that technology change is rapid and failing to be up with it will mean a retailer may lose sales to a competitor who offers it.

RETAIL LEASING MARKET - IS THE TIDE TURNING A LITTLE?

The word is that retailers may be gaining back some negotiating ground with landlords with rising landlord incentives due to declining rents and vacancies.

This comes at a time when retail spending is expected to grow, despite subdued consumer sentiment and business confidence.

Nearly half of centre managers polled in a recent Jones Lang LaSalle survey indicated they expected rents to decline over the next 12 months and that incentives of 15 per cent or more were on offer to attract new tenants.

Negotiating rent-free terms and capped occupancy cost clauses are now being considered by Landlords.

What’s likely in retail next 12 months?

  • Australia’s retail turnover to still grow around three per cent;
  • Grocery, clothing, cafes, restaurants, takeaway food likely to grow 3 to 4 per cent;
  • Household goods and department store growth is below 0.5 per cent per annum;
  • Store networks will be rationalised;
  • Centres will focus on attracting the right tenancy mix and upgrade centres;
  • Competition between Centres means tenants may have a little more leverage in negotiations;
  • On line market is also affecting shopping centres;
  • National chains account for a smaller proportion of tenant enquiries at shopping centres (dropping from 14 to 8 per cent);
  • While mum-and-dad retailers continue to dominate tenant enquiries, accounting for 57 per cent of the total;
  • Casual mall leasing is on the rise for tenants who want to test the market and create brand awareness with pop-up shops before committing to a larger space;
  • Jones Lang LaSalle’s latest survey showed 73 per cent of managers have casual leasing opportunities in their centres, and 72 per cent had received an enquiry in the past six months.

What does this mean to you as a Franchisee or retailer?

Centres are open to negotiation and discussion, and with reduced rental and greater incentives it may give retailers a better chance.

We have not seen this happening to the extent reported by the media with Centres still holding tough on negotiations but more so on retail tenants having to exit unviable sites due to their current occupancy costs and falling sales revenue.

The bottom line is you still need to do your numbers and keep your occupancy costs within a reasonable percentage of your turnover to make it work.

The ideal occupancy cost range as a percentage of turnover should ideally fall within 12% to 18% of gross turnover to remain viable in a location.

Landlord fit-out contributions and incentives

Although the tide may be turning tenants should be aware of Landlord fit-out contribution and incentives and the terms on which they are offered as they can come back to bite you!

We have seen leases where the Landlord can recover a portion of the fit-out contribution if the tenant is in minor default or looks to sell their business within a certain period from their lease commencement.

Consider these issues when entering into a retail lease:

  • Giving a larger security deposit or bank guarantee rather than personal guarantee’s which can impact on your family home and personal assets;
  • The lease term, for example, signing up to a 7-year lease is a huge commitment;
  • Centres are now open to pop up stores and shorter-term leases where a retailer can test the market.

PRE- LEASE AGREEMENTS

A pre-lease agreement which generally involves development of a future site, Landlord works, and tenants fit out requirements can be full of unknown tricks and traps for a Tenant.

Get Specialist legal advice before you sign as it may save you thousands of dollars down the track far more than the cost of that advice.

LETTERS OF LEASE OFFER

Once a letter of offer is signed, it is usually impossible to renegotiate or add in terms afterwards.

There are many forms of Lease offers by Real Estate agents and Shopping Centre managers; some say they are binding; some say they are not.

We recommend you get specialist Legal advice before you sign a letter of lease offer to ensure all necessary terms and important issues to you are covered in the Lease offer.

SUMMARY

In summary 2020 looks like another year of dynamic change and challenge for the franchise and retail sector but I can hear Ted say - “What’s new, it was like that 30 years ago, so get on with it”!  

 

Contact:

Robert Toth | Accredited Business Law and Franchise Specialist

03 9604 9400 |  robert@mmrb.com.au