While the decision of the national cabinet over a week ago on a mandatory code for retail tenancies of small to medium enterprises is welcome, it gets nowhere near addressing the urgent and dire financial challenges facing many small business retailers.
Having talked with many retailers in a range of channels since the adoption of the code, the biggest challenges are being faced by those in larger centres. Whereas many, not all but many, high street and independent landlords are agreeing deals that are usually considerably better than forecast in the code, shopping centre landlords are slow to negotiate and demonstrating no willingness to go beyond the code.
The code allows for a rent reduction based on the quantum of reduction in revenue. In one business I know of with base rent at $16,000 a month, turnover is down 50%. The code suggests a rent reduction of 50% on the basis of the revenue decline, with half of the reduction being waiver and half being a deferral.
The retailer in our example could expect a waiver of $4,000 a month and a deferral, to be paid later, of $4,000 a month. That is if their landlord is fair in their approach.
The decline hit the retailer from early March. The landlord says the code will not apply until April.
Prior to COVID-19, the business had annual revenue of $1,130,000. It’s average GP% then was 35%. Out of the $395,500 GP it paid $192,000 in rent, $143,000 in wages and $42,000 in overheads, leaving $18,000 in profit – in broad terms.
Revenue is now down 50% and is likely to fall further. In addition to the decline in revenue has been a shift in what shoppers purchase. The average GP% has fallen to 29%.
Here is what an average month looks like. This example does not allow for retail peaks and troughs, like winter. Revenue: $47,500. GP: $13,775. Rent: $8,000. Wages: $5,000 with hours significantly cut. Overheads: $2,800 with all possible cuts made. The business is in the hole for $2,025 a month. However, in the rent number in this example, I have not factored that half of the reduction, $4,000 is deferred, not waived. This makes the hole worse.
The owners are at maximum borrowings. They have no fixed assets against which to borrow.
The question the owners have is – do we continue to trade and lose $2,025 a month plus the $4,000 a month deferral and in six months and be at least $36,150 worse off? … knowing that realistically, the loss will be closer to $80,000 based on the current trajectory.
Talking to the owners their position is the government regulations on social distancing are what have stopped people shopping. They created the situation where our business is now no longer viable. While we support what they have done, they have left us with a financial obligation that we are considering not accepting. We think going into administration now is the best option for us, to not extend our personal exposure.
This scenario is not uncommon. It demonstrates the inadequacy of the SME retail tenancy code of conduct.
We accept it is a complex issue to address. We think that state and federal governments need to immediately agree to themselves fund 100% of occupancy costs, rent, outgoings, marketing, for 3 months from April, with a goal of a better plan being developed prior to the end of June.
That move would keep landlords and retail businesses afloat. The downstream benefit would be cash in the economy, people in jobs, fewer businesses collapsing and, I suspect, lives saved.
Note: this example is not one of our retail businesses and is not a newsXpress business.