Making the rent a major headache

The problem of small retailers being able to make their rent each month is a ticking time bomb within the sector and must be addressed, says an industry specialist.

Chris Wilkinson, managing director of retail consultant, First Retail, says that while rent has traditionally accounted for about 10 per cent of a retailer's turnover, the proportion has increased over the past decade.

That's due to increased retail competition, falling pedestrian counts and restrained consumer spending.

With rent the major cost for most retailers and one which is generally inflexible, they are forced to find savings in other areas such as wages, utilities and refurbishment budgets.

"In truth, many businesses have already dealt to these variables with little left to achieve savings from," Wilkinson says.

"The issue is a ticking time-bomb as profitability is vital for sustainability and growth.

"Many retailers have had to resort to a sinking-lid policy around maintenance, training and multi-channel development. This could impact consumer's store experience and compromise long term, goodwill for traditional retail channels."

Wilkinson's views are backed by John Albertson, CEO of the NZ Retailers Association, who says rent now accounts for closer to 16 per cent of retail margins and the changing nature of retail, with the ever-expanding growth of e-commerce, means the figure is unlikely to reduce.

"It is definitely something we need to keep a close eye on," Albertson says, adding there needs to be new thinking and greater flexibility in the relationship between landlords and retail tenants.

"The risk for landlords is empty space which doesn't do them any good either."

But Wilkinson offers some hope that conversations between landlords and retailers over rent affordability are starting to happen.

"We have worked on a number of recent deals where the rent has related more towards performance," he says.

"This 'shared risk' model is ideal for helping fill sites that would otherwise be difficult to lease - or where the landlord is anxious to get their retail mix correct.

"Anecdotally we understand some larger landlords are assisting retailers through rebates, rent deferrals and other 'off balance sheet' strategies that maintain property values, but help retain tenants.

"We know this is happening frequently in provincial areas where options to replace tenants is more remote."

Albertson says there is some evidence that rents are pushing more retailers into an e-commerce-only business model, abandoning a bricks-and-mortar shop entirely.

But Wilkinson warns retailers considering such a move need to make sure they have good online shopping systems already in place.

"To achieve success in this channel they will have needed to already have a strong web presence - and seen strong performance," he says.

"Online success takes time, it's not simply a switch that can be turned on."

Meanwhile, the CEO of the NZ Property Council, Connal Townsend, says clever retailers can take advantage of the opportunities new technology brings to the sector.

"We're going to see a much closer more integrated relationship between retail and wholesale," he says.

Townsend says consumers often prefer "intelligence gathering" on an online consumer product before buying it and still like to have a physical connection with the product.

"They still want to see it and hold it," Townsend says.

That could lift the number of showroom-style retailers, and an increase in the number and locations of warehouses. Consumers can go and look at the product, pay for it with a tap of their smartphone, and have the product delivered from a local warehouse, he says.

"The face of retail is changing and it's providing some interesting challenges but also some great opportunities if you're smart."