Prior to (and likely to be post) Covid-19, there was an increasing concern in the retail sector around the rise of turnover rent deals. Retailers viewing turnover deals as a mechanism for the parties to share risk and rewards. But are they actually shared equally?
If turnover deals are going to become the norm, collaboration between landlords and tenants is essential to establish how the relationship works for both parties.
Below we summarise some of the more conflicting points during turnover lease negotiations, and an occupier/landlord’s perspective to these disputes:
- Definition of turnover in the omnichannel era.
Traditionally retailers used to distinguish online sales from physical store sales, with turnover being "cash in the till" for the store. With the rise of online shopping, Landlords believe that omnichannel retail is posing a challenge to that definition.
Currently stores are being used for multiple purposes in addition to buying goods such as: browsing products, trying clothing on, testing products, brand awareness, online returns, click and collect etc. So, if physical stores have all these uses for a retailer, why are in store sale transactions only taken into account when calculating turnover rent? CACI report The online Halo Effect shows that online sales more than double within a store catchment, and that 90% of all UK retail spend is influenced by a store. Hence, retailers in general and particularly those on turnover deals should recognise and place a value on the importance of physical stores.
Although retailers agree in principle to the online influence, they also see physical retail as an expensive route to market especially for click & collect. Pure-play occupiers looking to grow into omnichannel retailing are especially sensitive to this landlord request to encapsulate all turnover through the tills as they are able to direct all click & collect revenue to alternative methods of collection such as Amazon lockers etc. The other argument is that click & collect customers have to pay a surcharge to collect their goods in shopping centres via the car park charge. It is therefore cheaper for customers to collect or return goods from out of town stores than in shopping centre locations.
- Value the significance of creating relevant retail environments.
As a consequence of the changes in customer behaviour landlords are required to create a more experiential and interesting retail environment to attract consumer’s attention, time and money. That comes at a higher cost to the landlord at a time of significantly declining returns by way of rent. A lower return in investment and a higher uncertainty will affect a landlord’s ability to provide the relevant shopping environment. That could lead to a lack of appropriate and attractive retail destinations and a negative effect on a tenant’s physical and online sales - benefiting neither landlord nor the tenant.
The occupier’s perspective to this point is that Covid-19 is fast forwarding the clock on retailers to adapt their business models to cope with increasing online demand. The reliance on a physical environment is still relevant but diminishing in terms of store numbers to cover the same catchment. Physical retail is becoming more about “last mile delivery” to customers than in the pre Covid-19 model.
Both parties need to be more open to negotiate all available information: tenant’s financials, footfall, future planned investment in retail environment, service charge impacts of Covid-19 to make informed decisions together.
As tenants seek greater flexibility and the option to vacate if a unit is not trading well, similarly landlords should have the ability to terminate the lease if the tenant is not performing to expectations.
It seems that turnover deals will have a greater role in the future of retail, however to actually become a beneficial tool for both parties a consensus about some of the most controversial points is needed to make sure landlords and tenants have a fair share of risk and rewards.