Retailers and Landlords. Can’t Live With Each Other, Can’t Live Without

At this point, it’s common knowledge that diminishing mall traffic is leading retailers to close stores and/or renegotiate leases with landlords.  There are also some store openings going on as retailers, hopefully, find locations and configurations better suited to the fast changing brick and mortar and e-commerce world.

But relationships between retailers and landlords are not quite as cut and dried as, “Give me a lower rent or I’ll leave.”

Here’s what Zumiez says in their most recent 10-Q about their leases.  Note that this is not different from what other retailers say- I just had Zumiez’s documents in front of me most recently.

“A majority of our leases provide for ongoing co-tenancy requirements or early cancellation clauses that would further lower rental rates, or permit lease terminations, or both, in the event that co-tenants cease to operate for specific periods or if certain sales levels are not met in specific periods.  Most of the store leases require payment of a specified minimum rent and a contingent rent based on a percentage of the store’s net sales in excess of a specified threshold…”

You can see there is some complexity and flexibility built into these leases that puts the two parties well and truly in bed with each other.  There’s a lot more going on here than renegotiating when the lease is about to expire.

Meanwhile, the accounting and consulting firm Moss Adams did an online seminar last week on the 2017 Retail Industry Outlook where they highlighted some of this shared interest.  You can still watch it here.

They had about 400 people listening and only had time to take three questions.  Uh, more time to answer questions next time please guys?  I think I’d submitted three questions before they’d even started talking and ended up with five in total.  One got answered.

The question was, “To what extent will retailers’ renegotiations with landlords makes brick and mortar they might otherwise have closed viable?  Can it be done in a way that leaves the mall viable for the landlord financially?”

Historically, Frank Kaufman the partner in charge of the retail practice said, landlords and retailers had pushed as hard as they could in these negotiations.  I’d characterize it as a zero-sum game.  And the large retailers could always make the ultimate push, where they filed a bankruptcy and were able to accept or reject the leases they wanted- a powerful tool for negotiating with a landlord.

Landlords, continued Frank, are now more proactive in trying to solve the problem and the retailers recognize it.  A retailer that wants its landlord to look favorably on it must bring entertainment to the mall.  If you offer a compelling reason for people to come to the mall (rock climbing was the example he used), the landlord is going to give you a great deal while he kicks out those who don’t offer some form of entertainment.  It’s not just about what you bring to your store, but what you bring to the stores around you.  If you spend more time at the mall, you spend more money.

What I find particularly intriguing is the community of interests that could form around a mall given Frank’s scenario.  There’s a shared dependence emerging that, if it was always present, wasn’t as urgent or obvious as it’s become.  It isn’t just between the landlord and retailer, but among the retailers in each mall.

I perceive/suspect/hope it will provide a positive environment and attitude where creative new ideas might be more likely to be identified and implemented.

In the turnaround work I’ve done, I’ve found tremendous resistance to change until the company is bludgeoned into doing something different.  What Frank is describing sounds more cooperative and positive, and perhaps not so resistant to some new ideas.  Hope so.

I can imagine the fly in the ointment being the cost of providing all this fun stuff for consumers to do and see.  Who, for example pays for that climbing wall and does the retailer pay for the space it takes up?  How does any income from it get shared?  Perhaps there will be a shared charge for all retailers based on their revenues or square feet?

I guess despite this new-found spirit of cooperation, there might be some tough negotiations that go down.  But still, in the words of Ben Franklin referring to the signers of the Declaration of Independence, “If we do not hang together then surely we will hang separately.”  Or maybe it was Thomas Paine.