RETAILERS have to be ready to walk away from their shops in the face
of escalating demands from landlords, according to business chiefs.

And today more than ever, this tactic is paying off.

Competition for retail space is at its lowest level for years, with
vacant lots in shopping centres often taken up with “temporary” stores
to give the appearance of full capacity, while shopping strips on the
street are today littered with “for lease” signs as stores have gone

bust.

But with so few new businesses looking to take up these empty stores,
and bank finance for businesses so scarce, retailers have more

leverage today than they realise.

Gerry Gerrard, General Manager (Property) at the Baker's Delight
franchise, recently did just this.
“We told the landlord in question that we would close six stores and
leave them empty because it was no longer going to be profitable to
stay in place with the rent increases we had coming down the track”

he said.

“Ultimately, in five of our six sites we got rent reductions of 20-30 per cent.”
“The landlords will always pretend to empathise but they don't care.
The only language they understand is action, and in today's market
there is nothing they hate more than an empty premises.”
Gerrard slammed landlords' “unsustainable” approach to lease
negotiations, where the standard increase has become CPI plus 2% but

can be much higher.

“Very often you get landlords hitting you with an initial demand for a
70 per cent increase. That is not unheard of, however absurd it
sounds. That is why you need to start rent negotiations at least 18
months out from your lease expiry so you have time to prepare and find

other premises.”

“You have to plan early: work out what your walk away price is based
on your current turnover and forecast rent increases. You will be able
to work that out quite easily. But the difficult thing is sticking to
it. If the landlord offers you something close, within, say, 5 per
cent or so, it may be worth staying. But if it's any less than that,
and you're already struggling, it's a tough decision but you must be
prepared to walk. Not only will it be better for your finances in the
longer term, it is the only way you are likely to get a rent

reduction.”

Gerrard warns, however, that bluffing does not work.
“Very often the landlord will wait until the 11th hour before coming
back with a reasonable offer and that can be difficult. So you have to
have made preparations to leave and be ready to act on your words.”
Clearly, such drastic action is not going to be an option for
everybody, especially small one or two store retailers who are rooted

to their location.

But Russell Zimmerman of the Australian Retailers Association, joined

Gerrard in advising businesses to be tough.

“If your business is marginal today, and you're facing rent increases
of 5% a year or more, then it is going to be very difficult to
increase sales by that much. You may already be in debt and think you
have to keep on going to try and pay your way out of it. But the
reality is that you will probably only get deeper in debt and end up

in a worse situation down the track.

It is better to walk away, keep your debts down and move on to a more tenable position, whether that
be to a new location or even a different job, than see your debts mount

and your business run into the ground over a longer period.”

“But longer term, we have to have government intervention to prevent
these unsustainable rent agreements that are just running
retailers into the ground. You cannot have rents increasing faster

than turnover – that is just a fact of life.”

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