Occupancy costs out of kilter with trading densities

Posted On Thursday, 11 August 2011 02:00 Published by
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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

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