Occupancy costs out of kilter with trading densities

Posted On Thursday, 11 August 2011 02:00 Published by
Rate this item
(0 votes)
For retailers the ongoing squeeze between turnover and operating costs implies a change of thinking

Before you’ve even started paying rent, space at a Super-regional centre will typically cost you ±R100/sqm: an average R50 for Op costs + R22/sqm for electricity + R14/sqm Municipal charges + >R10/sqm towards Marketing Fund. Ouch!

And these costs are increasing well above the Retail Liason Committee’s figures for retail sales growth: >20% in the case of electricity, while Municipal charges have risen over the last 10 years from R4/sqm to >R14/sqm (mostly in the last 5 years).
On top of that, there’s the increasing rental spiral - Investment Property Databank, which collects data from the main shopping centre owners in SA, reported that in 2010 actual base rentals (not asking rentals) increased 11.9% at Super-regionals and 16.4% at Community Centres.

Staff isn’t getting cheaper either and there’s always capex pressure to retrofit stores to the latest look-and-feel, not forgetting the need to make them simultaneously more “green”.
BUT, trading densities increased only about 7% at Super-regionals in 2010, over 2009. Which means rapidly shrinking margins/profits for most retailers.

What to do?

• “Small is beautiful” – the discipline retailers apply to store design and merchandising when faced with the steep rentals at the top 5 centres in SA, needs to be applied across their portfolios. Small-footprint stores limit the ability to showcase an exhaustive product range (with the attendant loss of sales opportunities), but if Pareto’s 80/20 principle applies in retail too, then trimming 15-20% of SKUs shouldn’t hurt the topline much.
• Get onto the web: for some categories of merchandise, selling via the Internet can be hugely profitable. What does your consumer web presence look like?
• Run your business better (said with humility): improve your buying and improve the skills of your sales assistants in order to increase T/O, while squeezing any fat out of the supply chain.
• Get out of the mall: enclosed shopping centres are a relatively new phenomenon in the history of retailing. Take a leaf out of the books of the fashion discounters, furniture stores and big-box retailers (which can’t afford high rentals) and try and co-locate with them - “high street” and value centre space can be quite affordable. And effective too, if one can be part of a "node" and has strong marketing/pulling power to draw consumers.

The easy option is to bemoan Landlords and their apparently unreasonable rental demands, but I hate leaving my destiny in someone else’s hands, so my instinct would be to develop Plan B and Plan C options for my portfolio, so that my property strategy isn't overwhelmingly reliant on mall-based stores.

Publisher: eProp
Source: alchemy advisors

Most Popular

Impact of fuel price increase on commercial property

Jun 02, 2022
John Loos
It is well-known that the cumulative fuel price increase has added significantly to…

Fluxmans signs long lease with Growthpoint Properties for Illovo Corner offices

Jun 02, 2022
Illovo Corner
South African law firm Fluxmans has signed a long lease with Growthpoint Properties (JSE:…

Rebosis Property Fund bids farewell to Dr Anna Mokgokong, the founding independent non-executive director and chairperson

Jun 02, 2022
Rebosis Property Fund, a JSE listed real estate investment trust (REIT) with a…

Rebosis reports improved operational performance for six months to end February 2022; focus remains on portfolio optimisation

Jun 01, 2022
Otis Tshabalala Rebosis Property Fund
Rebosis Property Fund, a JSE listed real estate investment trust (REIT) with a…

Please publish modules in offcanvas position.