There seems to be a particular strain of masochism in retailing, a strange desire by small traders to lease a shop in a Westfield centre.
The pain of that desire should be well known by now but it was underlined again in Westfield's directors' report on Australian operations:
“At 30 June 2011 the occupancy rates continue to be in excess of 99.5% and average speciality store rent per square metre increased by 4.3% over the same time last year.”
That's nice for Westfield. Underlying comparable net operating income growth for the mall men was 4.6 per cent, which was nice too. But the kicker for the tenants was in this sentence:
“On a comparable basis, total retail sales increased by 0.6% with specialty store sales increasing 1.6%.”
The Lowys were happy to spin that into a story about speciality shops eating the department stores' lunch, which is partly true, as indicated by the ABS retail sales numbers.
But with a moment's thought, the real story is the unsustainable squeeze Westfield and similar landlords are putting on their tenants and the ongoing denial of the restructuring that is required in the retail sector.
According to Westfield's Peter Lowy, specialty shops locked into Westfield leases are “doing well”. “Well” is clearly a relative term.
Consider the lot of a typical Stuff Shop in a Westfield shopping centre on the basis of the above figures. Your sales rose just 1.6% per cent last year, but your rent, your highest fixed cost, jumped by 4.3 per cent. Only perverse pride could be taken in the fact that you pay some of the highest retail rent in the world.
Your wages bill, assuming you can afford to hire staff, also rose, not to mention the price of electricity.
Depending on what particular stuff your Stuff Shop flogs, there's a very good chance that while your costs were rising, the price of what you sell was falling. The stronger Australian dollar made it cheaper to stock your shop, but thanks to the internet and international travel, your customers know that. Your chances of squeezing a higher profit margin from that cheaper stock are not good. You might be able to get away with it for a while, but the real competition in the retail space and those better informed consumers with the internet in their pocket won't let you for long.
So, if your margin remains stable, you actually have to move more stuff to just maintain the same dollar income, let alone achieve the dizzying growth rate of 1.6 per cent. Moving more stuff involves more costs – more warehouse space, more handling, more staff. Retailing wasn't meant to be easy. And then you remember that you're locked into rent increases.
Yes, it must require a certain masochism.
It's not like that for all purveyors of stuff. The shops at the top of the tree still have some pricing power, the stores that exist to sell expensive stuff expensively, or that manage to get the offer right, that can still bring some novelty or excitement or glamour to the business, do better than average, but by simple definition, it's not like that for most.
The massive challenges facing the tired format of our two over-reported department stores are well documented. The ability of landlords to sustain rent increases well above sales growth is much harder to understand.
The Lowys' defence to charges of rapacious behaviour has always been to point to their extremely low vacancy rate – if they charge too much rent, how come there's always someone else willing to take the place of a shopkeeper who couldn't afford it?
It's a good question. As Mark McInnnes at Premier shapes up to the nation's retail landlords, closing the stores where the rent is too high and promising to open more where the rent is viable, it's a question that will be asked more often.
For now, I can only suspect the answer is something to do with masochism.
Michael Pascoe is a BusinessDay contributing editor.
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