The retail industry has taken a major financial blow due to the lockdown restrictions across the UK. In spite of the government offering business rate holiday, grant funds, loan schemes, commercial rent protection, the PWC and Local Data Company reported that 17,520 chain stores closed down in 2020, while only 7,655 opened; they expect a further 18,000 stores to close in 2021, leaving more retail spaces vacant.
With a global recession imminent, the demand for these retail spaces is expected to remain low, forcing down the market price. The government has reacted with a call to review the landlord and tenant legislation, including alternative renting models.
Similarly, landlords are under pressure to provide attractive deals to tenants should they want to avoid forfeiting of leases and attract new tenants for vacant units. If landlords fail to fill vacant units, they will become responsible for paying business rates (following the business rate holiday), building insurance, security, repairs, maintenance and more. Among tenants, turnover-based rent model is popular during times of austerity as they can get some relief by paying a percentage of their turnover rather than the traditional fixed rate.
Savills says retailers are requesting between 1% and 15% but the reality is far more complex; for instance, retailers with high profit margin can accept higher percentage, while retailers with low margin must pay a lower percentage to survive.
A few turnover-based rent models that currently exist are:
1. The classic model, which expects tenants to pay a percentage of the market price (usually 75% or 80%) plus an agreed percentage of their turnover.
2. Only a percentage of turnover with a minimum amount guaranteed.
3. Percentage based on turnover with an agreed base rent. Annual uplifts based on an increase in turnover will also be agreed
Turnover-based has been gaining popularity over the years but there are some issues landlords and tenants need to work in order to sustain a mutually beneficial partnership.
Risk averse landlords are reluctant to adopt turnover-based rent because of the uncertainty. Furthermore, being in the middle of a pandemic, with a high chance of a global recession in the near future, landlords know it may be a while before they can profit from such partnership.
There is the added concern of retailers artificially deflating their turnover and not sharing the full, or true, profits and losses. And for retailers, sharing income and revenue-based information with landlords can be uncomfortable.
Moreover, attributing sales to individual stores is a very difficult job especially for omnichannel retailers. 90% of UK shoppers are expecting to do most of their essential shopping online post pandemic; there’s also click-and-collect, curb side pickup, gift vouchers, returns, staff discounts, and many more sales methods that make it difficult to calculate the true value of a store.
As a result, valuers will need to be re-trained to assess a company’s prospects and risks, as well as understanding the true role of the store in the company’s success.
Customer analytics is one of the key drivers of effective marketing. To attract new customers and reengage existing ones, retailers will need to understand their customers’ behaviour and target them with appropriate marketing tools at the right moment.
Measuring, for example, the effect of your window displays on shoppers. How long did they observe the display before entering? How many didn’t enter the store after seeing the display? Is the data different for different demographics and at different times of the day or week? Having answers to these questions will help retailers improve footfall through the use of effective window displays.
Once the customer is inside the store, further marketing efforts are made to help guide them through the shopping journey. Knowing your customers’ likes and dislikes will help you promote the right products and place promotions in the optimal way.
To stay competitive and relevant, many retailers have changed marketing tactics. So, in order to figure out which marketing is effective on specific buyer personas, rely on data to give you an accurate answer. By precisely targeting your marketing towards customers, retailers can improve conversion and cut costs at the same time.
The partnership created by turnover-based rent incentivises both landlord and tenant to seek improvements in tough times and enjoy the rewards in good times. The responsibility is thus shared by both stakeholders.
This alliance can help repair the strained relationship between landlords and retailers following a period of conflicted interests – Remit Consulting data reveals 50.5% retailers’ quarterly rent due in June was paid 35 days late.
The flexibility and affordability of turnover-based rent will attract smaller innovative businesses to trade offline.Pop up models can further encourage businesses to test before signing long-term leases. This will eliminate weaker retailers and retain stronger, more advantageous retailers, who can attract and covert more consumers.
In summary, it is clear that there are many benefits of switching to turnover-based rent for landlords, retailers, and consumers. The biggest issue had been valuing the properties, which can be solved by harnessing data.
Collaboration has always been a large factor in business success. Therefore, if the terms of the partnership are fair, the collaboration between landlord and tenant can only be favourable for all.
In summary, it is clear that there are many benefits of switching to turnover-based rent for landlords, retailers, and consumers. The biggest issue had been valuing the properties, which can be solved by harnessing data.
Collaboration has always been a large factor in business success. Therefore, if the terms of the partnership are fair, the collaboration between landlord and tenant can only be favourable for all.