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The Credit Crunch and Financial Market Meltdown Ė Retailers, Shopping Centres and the Sweet, Sweet Smell of Cheap Lamb

Trevor Bamford
A Health Food Retailer Perspective

Issue 77: November 2008
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Well as if things weren’t bad enough already with heightened interest rates and unprecedented fuel costs hitting the average household budget over the course of the last 12 months.
Now the practices of unscrupulous and, without doubt,  criminal US “free-marketers” operating a quasi“mafia-style” operation of greed  have brought this global economic circumstance and its impact on Consumers and the Retailers that service them, to a new and incredibly dangerous crossroad.
For Retail Pharmacies and Health Food Stores out there (certainly as far as the complementary healthcare angle is concerned) times have become increasingly tough indeed. By all accounts Health Food Stores have seen a drop in complementary medicines as a percentage of the whole with the food category on the rise arguably driven by the rise in consumer sentiment that “food is the new medicine”.

And for Pharmacies, most recently in the news, pressures biting as Consumers / Patients are holding back on the acquisition of prescribed medicines putting their own lives at risk and the sales out of the Retail Pharmacy Dispensary in decline. Interestingly, late last year a reputed national Retail trade publication reported that the only sales growth that was occurring in the national Retail sector was at the expense of profit.
From what I have seen I would bet that this has been the case across the bulk of this last year for most Small and Medium (SME) Retailers.
Indeed it is at times like these when Retailers are faced with the challenge to either cut margin or find a path to add-value and specialize.
For those operating in the Shopping Centre environment this decision poses a whole new and complex combination of commercial viability problems.
I know that this trend in Retail only just iterates what has been occurring over previous years a fact I relayed in my last month’s I2P article where Retailers are racing to “position” as either “mass-discount” or “premium-niche” to maintain “relevance” but these recent times of intense economic uncertainty surely hammer home this fact very powerfully.

This issue of profit loss for Retailers is serious. A recent example I can give of this is of an established fruiterer now deli operator in Brisbane.
This Retailer was incredulous as to how “powerful” an advertising campaign was that he had run in which he decided to sell legs of lamb ……. at cost. He was overwhelmed by the response - hundreds of lamb legs racing out the door albeit in less than full, wired shopping trolleys.
It was like every day was to become Australia Day and lamb was to become everything on the plate of his lamb hungry customers.
People just loved this lamb deal – the sweet sweet smell of this cheap lamb deal really did catch on fire.
But In no manner how short of ridiculous it was, what was even more ridiculous was that at the end of this same month this Retailer, who operates in a Shopping Centre, was awarded category Retailer of the Month by Management for “exceptional sales growth”.
How miraculous that the sweet cheap lamb deal did that…. NOT but hey let’s not speak of the significance of margin loss that this retailer sustained in order to perform so well.
Shopping Centre managements and their marketing teams love “the Sale” – the more Retailers that do it the better and the cheaper the Sale the the Retailer puts on the sweeter the Centre finds it.
This story makes me think of the joke of a Retailer of a specific nationality who under times of economic pressure did “the Sell” so well that he was awarded and lauded month after month by his Centre Management for miraculous sales performance.
He became so taken aback with the newfound love being shown for him and his business’s performance by his Centre Management that he started to think his impending Lease negotiations would be a breeze.
But then as swift as he sold his goods (maybe they were legs of lamb) he disappeared, gone, a hole in the Shopping Centres mall- no profit.
Growing up in my family Health Food Stores as I did I always remember my old man joking “tongue-in-cheek” with his customers who probably also “tongue-in-cheek” might ask for a 50% discount “sure we are not here to make money just lots of friends”.
But seriously folks, the dangerous commercial reality this represents for the Retailer especially for those operating within a Shopping Centre environment should not be underestimated.   
And this recent turn of events makes this issue even more serious.

Consumers are nervous, Retailers are nervous and from what I have seen Shopping Centre owners are also nervous ….. but only insofar as they seem to be having to pay their “people” more money to commence a review of the Lease obligations that at Law rest upon the shoulders of their tenants.
Shopping Centres, as a response to this economic challenge, appear to be moving to ensure that ALL tenants, at this time, know exactly how much their Base Rent and Promotions Fund payments are and when specifically they are due to be paid.
Indeed folks, for the Retailer there ain’t no sweet smell of cheap lamb coming of out of the board rooms of Shopping Centre owners in terms of Lease and Promotions Fund costs with this here economic challenge. 
I am aware of a number of Retailers trading in Shopping Centres to whom “gentle” letters of reminder have started to find their way.
As if things weren’t  tough enough already with interest rates, fuel costs, the credit crisis and financial market meltdown …… now there is the Law of the Lease and the Landlord behind these Laws struggling to maintain their own financial viability under the weight of a drop in asset values arguably inflated from years of hyper-inflated rental values and therefore property asset values to begin with. 
The issue of the quantum of Rental values being paid by Retailers in recent times to Shopping Centres is the subject of hot debate in an online forum I track that is part of a national Retail trade publication.
I have even heard of one Shopping Centre that has been found to be requesting GST inclusive sales figures from their tenants possibly as a means to “borrow” monies from the ATO in order to raise the financial performance measures of the Centre and hence the evaluation of asset’s worth – because after all this important sales information is used to illuminate a Shopping Centres Moving Annual Turnover (MAT) value which in turn is used to illuminate the performance of Shopping Centre as a whole and hence its evaluation as an asset for the owner (i.e. loans, lending and finance capacity).
The fact that these figures are also ultimately used to determine rental values that prospective Shopping Centre tenants should be expected to pay is the key to the significance of this issue. So for any Retailer it would be significant if GST inclusive sales figures were being used to inform this competitive commercial process.
Although this arguably would not be likely to occur in publicly listed property trusts the possibility that it could occur in smaller privately operated property trusts operating Shopping Centres is arguably high.
Makes you wonder if such things are matters for ASIC and the Corporations law or even the ATO really, doesn’t it?

So in such economically challenging times I think the Retailer, seeing what is the emerging posture of the Shopping Centre as they “walk highly leveraged way up on the financial tight rope” (indeed on the back of the rental values paid by tenants that in part have been used to inflate asset values which in turn have inflated rental values (and around and around) – think Centro) should be asking the following questions:

What about Lease costs? Why is it that there is no national- or state-based mechanism to deliver a review of what is a fair market rent for the Retailer at times of intense economic pressure - pressure that threatens SME retailers, the so called powerhouse of the Australian economy and majority employer of Australians – and to deliver equitable relief such that the SME Retail sector’s very viability and capability of performing in harmony within the “community asset” known as the Shopping Centre is protected.
In contrast to the 100% Bank Deposits Guarantee which has been fuelling the fires of federal parliament debate this week what about a 30% (or higher) Commercial Lease Rent Payment Guarantee for SME Retailers that presently are not only under the macro- and micro-economic pressure but also from the Law of the Lease?

What about Marketing and Promotions Funds? And what of the Promotions Funds that Shopping Centre’s extract under the Law of the Lease from Retailers. 
Why is it that these funds just flow from Retailer to Shopping Centre without any legal onus falling on the Shopping Centre to deliver change and innovation in the marketing service (that indeed the Retailer is acquiring or outsourcing) provided?
Why is it that that there is no Lease-based accountability mechanism applied to these Promotion Funds so that Retailers can identify how these Promotions Funds are indeed performing and whether commercially reasonable rates of return (or auditable ROI) from these funds are being delivered by the Shopping Centre? 
Surely the time has arrived for Retailers to demand this provision if they are expected to fork out from their revenue base to fund so called “cooperative” Shopping Centre marketing programs? 
Surely in times of both macro-economic pressure and for the sanity of micro-economic efficiency it should be demanded by Retailers and expected by legislators that these Promotions (I would argue as “Slush”) Funds become transparent and accountable at Law not only for the ongoing delivery of innovation in marketing service but that these funds actually be proven to deliver a commercially reasonable and auditable ROI for Retailers or the Retailers have the right to NOT pay into these funds as a matter of commercial principal.
As a case in point I can give an example of one Retailer who argues that he can take $1 of revenue from his business invest it in his own targeted low cost marketing and advertising strategy and generate for his business an additional $30+ in gross profit. 
His take on the “slush” fund issue is why, with the modern need for all business to account for any and every dollar of revenue in terms of its value, should he as a retailer have to pay 5% of his gross rent to a Shopping Centre who staff their Marketing Departments with cheap talent and whose “no-brainer” job it is to oversee the recycling of annualised campaigns created in the 90’s where the “Sale” (which typically relies on the Retailers funding in part the fund to selectively “burn” margin) is the promotion when accountability and performance is not provided in relation to this Promotions Fund by the Shopping Centre in return?
His take is that, in times of economic pressure and in the absence of accountability, if he could redirect his 5% contribution mandated under the Law of the Lease to the Promotions Fund back into his business he could make that dollar return better and faster and in such a manner that he would naturally be capable of performing as a better cooperative asset for the Shopping Centre as a whole. It is a good argument and it should be taken up by Retailers and their professional organizations nationally as a serious issue worth pursuing.

Why is it that Retailers, under macro- and micro- economic pressures have to put up with lack of ANY accountability (apart from the token $800 per year audit of a few paper receipts by a junior book-keeper in a large Accounting firm provided with a big fat disclaimer of liability – which by the way, at least in Queensland, complies with the Lease Law) for the performance of a Shopping Centre Promotions Funds?
As I say, these “slush” funds extracted from hard working Retailers already under pressure and increasingly so are nothing short of a loosely managed, shady profit centre used to do nothing else but build the brand value of the Shopping Centre period and NOT that of the tenants whose revenues in part made the Promotions Fund liquid.

The way I see it, it is at times like these I’d be thinking that the Shopping Centres could do a lot worse than work out ways to keep their Retailers as an important part of their asset’s performance both dynamic and fluid and in harmony, to chuck out the legal posturing and perhaps throw a few sweet legs of lamb at cost the way of their important Retail colleagues? 

C’mon guys for the love of the country…….. right!



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