COMMENT: Sergio Bucher is right. Retailers and landlords must rethink leasing models for the sector to thrive, says Polly Troughton, head of retail markets at Landsec.
Bucher’s column in EG yesterday outlined the retailer’s hopes for more cooperation from landlords in preparation for the “hard choices” that need to be made on where it will and won’t operate in future.
A broader rethink of leasing models could help strengthen the ties between retailers and landlords.
Reports of major retail brands facing difficulty have been a frequent feature of this year’s news.
Company voluntary arrangements have also dominated the headlines, accompanied by a narrative of adversarial relationships between retailer and landlord.
These are complex times for physical retail; a rethink of the fundamental parts of the traditional relationship could benefit and future-proof both landlord and tenant.
The tension point between retailer and landlord is often rent, and it’s easy to understand why: it is simultaneously one of the biggest overheads for retailers and the biggest source of revenue for landlords.
Clearly, events this year show that traditional leasing models are not always fit for purpose in today’s retail climate. So rather than a zero-sum relationship between retailer and landlord, the sector should aim to develop a more holistic and collaborative approach.
One such approach is turnover leasing: a model through which retail brands pay landlords a percentage of their revenue, either totally or on top of a reduced flat rate. Proponents of the model argue that both parties benefit significantly, with landlord and retailer alike invested in the success of the retail store. This may seem true at a glance, but shop sales are largely dependent on areas beyond the control or influence of the landlord. Furthermore, stores are increasingly being treated as de facto showrooms by shoppers, so simply linking rent to sales may not reflect the true value of the store.
Devising a new framework together
Instead, the sector must work to develop a model that offers a better solution, valuing a store fairly for both parties and focusing on collaboration in areas that will create a sustainable business environment for all involved.
As the saying goes, many hands make light work, and retailers and landlords have more shared interests than they do differences: footfall, conversion, effective marketing and sustainable practices all benefit the bottom line of physical shops as well as the shopping centres, retail parks or outlet malls that they are based in.
Rather than a flat base rate and accompanying proportion of turnover rent, landlords could offer flexible levels of base rent which are lowered if retailers fulfil criteria such as data and store value transparency, collaborative marketing initiatives, customer service approaches or sustainability commitments. The scale achieved if both retailer and landlord were aligned on these behaviours could be significant.
The intricacies and challenges of the retailer-landlord relationship are undoubtedly complex, but certainly not unsolvable. And while these questions may not yet have clear answers, there is no doubt that a fundamental rethinking of what the relationship means in the first place is long overdue.
Landlords and retailers work at two ends of the same sector, with far more to gain than lose from close collaboration.
Physical and online retailers continue to invest huge amounts of intellectual and financial capital into innovative ways to get their products to consumers. It’s time that landlords and retailers did the same with the basics, such as leasing. Rather than nice-to-have, it will play a significant role in their respective futures.
