The current standoff between shopping centre tenants and landlords is the most recent conflict in a complex and dynamic relationship that retailers, landlords and state governments have been grappling with for more than 40 years.
Boom and bust: Retailers’ demand for high customer traffic underpinned high rentals, but the pandemic has evaporated it, says Dr Matthew Bailey.
The underlying power dynamics between shopping centre retailers and their landlords have never really been resolved. Mutually dependent on one another, they have always fought over the spoils of shopping centre profits.
COVID-19 has intensified this contest. Relationships that were already highly competitive are breaking down.
Like other chains, Mosaic retail group – owner of Noni B, Katies, Rivers, Rockmans and others – has been negotiating hard on rent, but is now projecting the closure of up to 500 stores in shopping centres across the country. This is as much a warning to landlords as it is a rationalisation of the company’s badly hit store networks. Other groups like Solomon Lew’s Premier Investments are also fighting back.
Mutually dependent on one another, they have always fought over the spoils of shopping centre profits.
Tenants have been complaining about their conditions since the late 1970s. Shopping centres in Australia were only a couple of decades old, but their convenience, range of stores, supermarket and department store anchors, air-conditioning and car parking had proved compelling.
Shopping centres drew crowds of customers and out-competed many traditional shopping high-streets. They became social as well as commercial hubs. And they were protected by planning legislation that sensibly constrained sprawling development, but in the process prevented the construction of competing centres nearby.
This all produced highly sought after and valuable retail space.
The rise and rise of rents
The financial model of the shopping centre involved improving and expanding this space to attract shoppers. Access to this customer traffic was sold to retailers who leased shops. It proved exceptionally profitable.
On the brink: Dr Matthew Bailey (pictured) says relationships that were already highly competitive are breaking down.
As more and more specialty retailers signed leases, complaints began to emerge about exploitation and steep rent hikes. By the early 1980s, it had become a political issue.
The situation was complex. There were numerous examples of poor practice in an industry that had not yet truly professionalised. Rents climbed consistently and often dramatically. But many inexperienced retailers also didn’t read their leases, which were all signed voluntarily.
National chains generally accepted that access to customers came at a price and used shopping centres to expand rapidly. Occupancy costs, though, became an issue for them as well.
Intense lobbying led to successive government inquiries around the country, which found sufficient evidence to recommend industry self-regulation and then retail tenancy legislation. This introduced protections, rubbed out dodgy practices and improved the quality of information provided to tenants.
No winners in this fight
But the fundamental power dynamics remained in play. Landlords still had the most convenient and attractive locations for stores. They had control over entire retail environments, and even held the sales data of tenants who signed leases with them. Their bargaining position in leasing negotiations was invariably very strong.
A Productivity Commission Inquiry in 2008 noted that: “Well-managed shopping centres can unify a large and divergent group of tenants and help centre trade. In return, tenants in centres generally pay higher rents and outgoing expenses than similar tenants in a shopping strip and forego some independence in operating their business.”
It’s the most vulnerable who will suffer the greatest hardship: the smallest tenants, with the least bargaining power, in the most precarious financial situations.
Tenants and landlords have always argued over their respective share of this successful formula.
When the economy slumped in the past, retailers pointed out that landlords maintained their income even though the value of customer traffic delivered to stores had dropped. Now everyone is losing money.
Shopping centre customer traffic, by definition, is crowds of people in close and social physical proximity. Retailers’ demand for this traffic underpinned high rentals. The pandemic has evaporated it. Mosaic’s projection of store closures emphasises this point.
The stoush over the share of shopping centre profits and costs continues. No one will come out of this a winner. The fight to minimise losses will be bitter.
And unfortunately, it’s the most vulnerable who will suffer the greatest hardship: the smallest tenants, with the least bargaining power, in the most precarious financial situations. This is the pattern of COVID-19 in modern economies.
Dr Matthew Bailey is a retail historian based at Macquarie University and the author of Managing the Marketplace: Reinventing Shopping Centres in Post-War Australia (Routledge, 2020)
A version of this article has been co-published on The Conversation.
