The rent game

Is turnover the best way of determining rents in shopping malls? As e-commerce encroaches upon traditional stores’ revenues, it’s not only the tenant who has to face new challenges. Will new technology for footfall measurement aid landlords in making the market more transparent?

By Beata Socha

Determining rents in shopping malls is not an easy task. It’s basically a game with imperfect information. The landlord wants to charge as much as possible, but sometimes so much as to drive his tenants out of business. The tenant wants to pay as little as possible, obviously, and will therefore use any and all arguments to lower it.

“Rents for retail space are made up of two parts: base rent, the minimum rent guaranteed, and the revenue-based rent – on average 8-10 percent of the tenant’s turnover,” explained Anna Wysocka, head of Retail Agency, Poland, JLL. The base rent is paid regardless of sales figures. “As far as the revenue-based rent is concerned, the owner collects turnover data from tenants at specific intervals (each quarter or each year) and if the revenue-dependent rent negotiated beforehand exceeds the guaranteed rates, the tenant pays the difference,” she added.

Naturally, turnover rent is not applicable in the case of some businesses, like currency exchanges and banks. The basis for their rent calculation is the margin, not the turnover.

Top earners and strugglers

So how much do landlords get in turnover rent exactly? The average annual turnover per sqm stands at €2,010 across Poland, a recent CBRE report stated. However, some retailers make far more than that. Jewelry stores make on average of over €5,000 per sqm in annual turnover. Even with the highest rent rates among retailers (on average over €45 per sqm per month in shopping centers across Poland), they still have it relatively easy. Their total real estate costs (rent plus service charges) account for a mere 13 percent of their revenue.

The situation is quite reverse in accessories and gifts stores. Even though they make some €2,500 in annual revenue per sqm, which is still above average, they pay some of the highest rent rates – €41 per sqm per month. All in all, their rent together with service charges makes up a whopping 22 percent of their total turnover. And that does not include personnel costs. That’s something to think about the next time you wait in line or cannot find a shop assistant in an accessories and gifts store.

The sum of rent and service charges as a percentage of turnover, dubbed, tellingly, “effort rate,” is what investors look at when considering whether or not to acquire a shopping center, according to Beata Kokeli, senior director at CBRE’s Retail Department. “This way the investor can see how well each tenant is doing and whether to expect the tenant to ask for lower rent because he cannot handle his current financial burden compared to his turnover. Or maybe his turnover is high and there is room to raise the current rent,” she explained.

Imperfect information

All well and good. But that requires close to perfect transparency. Meanwhile, according to CBRE, not all tenants report turnover contractually. But that’s a matter of agreement between the tenant and landlord.

There is another source of bias, a problem far more difficult to remedy – and a growing one at that. The thing is that some sales transactions are not classified as store turnover. That is the case when a store moves a sizable portion of its trade online. “Clients often go to a brick-and-mortar store to see the product with their own eyes and then order online. Thus stores are turning into showrooms,” said Lucyna Śliż, associate director at the Retail Agency at DTZ.

The same goes for placing click-and-collect points at regular stores. “Customers pay online for purchases and then collect the goods in a regular store. These purchases are not registered at the store location and thus are not included in the store’s turnover,” explained Anna Hofman, senior negotiator in the Retail Department at Cushman & Wakefield. “Some fashion, footwear and electronics retailers are recording a drop in revenue in their traditional stores caused by increased online sales. In some cases, they look to decrease the space of their stores, which turn into showrooms and click-and-collect points,” she added.

An added bonus

One could argue that placing click-and-collect points inside the stores is a neat way of gaming the rent system. They seem to be the perfect way of driving footfall, which has its own advantages such as impulse buying, all the while keeping rents reasonably low. Statistics show that one in four customers who come to a store to collect a product paid for online, make additional purchases while in the store.

Moreover, if a client collects a product they had bought online from a traditional store, he is also more likely to return it in the same manner, rather than send it via courier. Thus the retailer saves on the costly process of reverse logistics. “Some 90-plus percent of returns are made in-store. You take something back that doesn’t fit and then you purchase something else,” Peter Todd, partner at Resolution Property, said at a CEEQA@Mapic event last November (see full CEEQA report in this issue).

No wonder then, that a third of all retailers surveyed by CBRE stated that they are trying to link traditional sales with e-commerce – it is having your cake and eating it too.

A zero-sum game

What about the landlord? Where is he in all this? Is the prevalence of e-commerce hurting his income? “The increase in online sales figures resulting in lower turnover in brick-and-mortar stores is a real threat to the revenues of shopping center owners,” Hofman warned. Currently, he has no way of checking how much the store made online as he only has access to turnover figures encompassing the purchases made inside the store. That excludes the whole showrooming effect and the click-and-collect concept.

“The problem arose a couple of years ago. Until then, this was an insignificant fraction of the retailer’s revenue,” said Kokeli. Now it’s a different story. E-commerce is growing at a double-digit pace each year. Right now, a quarter of all retailers derive 10-15 percent of their income from e-commerce, while for nearly 10 percent of vendors the share of online revenue is above 30 percent CBRE data showed.

If the turnover figures are obscured in this way, how can the landlord determine how much to charge for each unit in a mall? “One of the main challenges awaiting the market will be how to estimate the value of a location, where instead of making actual purchases clients only come to collect products bought online,” admitted Hofman.

Some have even posited replacing turnover rents with footfall rents, stressing the shortcomings of the turnover-based rents in the digital age. They argue that footfall, dwell time and conversion rate play an increasingly important role in determining the attractiveness of a location.

“Right now retailers and mall owners are not aligned in terms of business interests as landlords don’t benefit from online sales of the shops. This should be addressed,” said Mariusz Kozłowski, director of International Retail at GTC during the CEEQA@Mapic conference. It is in fact Kozłowski who is credited with coining the term “footfall rent.”

A complete picture

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One of the limitations of footfall data has thus far been its incomplete and not entirely reliable nature. A pollster asking a random sample at the mall’s exit which stores they visited, how long they stayed there and how much money they spent is far from ideal as far as data quality is concerned. That is changing very fast, though. An increasing number of malls are being equipped with footfall tracking systems which monitor customers from the mall’s entrance.

“The system is based on a network of wi-fi sensors placed around the building. These devices are completely non-invasive and do not require clients to do anything. The sensors capture cell phone signals of people walking around the mall,” explained Paweł Henke, CEO of Cherry, a provider of sensor-based footfall tracking technology. The system is

a real cornucopia of data: it remembers the paths clients’ choose, the time they linger at a store window and how often they return. “Additionally, you can check which stores attract the same group of clients and how events organized at the shopping center or promotional campaigns increase the mall’s footfall,” Henke added.

Footfall or turnover?

Market analysts, as well as mall owners, are aware of the potential of the new monitoring systems. “They allow for an analysis of client habits and determine the popularity of entrances and passageways. They can also be helpful when negotiating rent rates for the best leasing space locations, as well as help with layout planning and indicate which areas are more ‘challenging’ – places for popular and well recognized brands,” Śliż explained.

Whether footfall rents will eventually replace turnover rents remains unclear. Retailers will likely have a thing or two to say about it. “Footfall data for a shopping center may of course influence the rent policy. One should, however, analyze not only clients’ routes within the center, but also how these correspond to changes in the revenues of the most frequently visited parts of the scheme,” said Wysocka.

One thing is certain: sooner or later the landlords will have to respond to the growing share of e-commerce in retailers’ sales strategy. “Even if the share of e-commerce does not translate into higher rates, it may impact e.g. the area occupied by the tenant. It may also influence the overall offer of the shopping center – the owner may expand the part that cannot be traded online, like the restaurants and cafes,” Wysocka explained.