After Borders, a new chapter in retail

Veteran retail property and business professional Duncan Johnston argues that the wholesale closure of book and fashion stores this year should send a blunt message to retail landlords: Don’t be greedy.

As both a landlord and a tenant, Johnston has a unique perspective on the fallout for retail property from the collapses of the giant REDGroup and Colorado chains.

In his role as an accountant and property entrepreneur, Johnston and his associates personally manage 15 to 20 retail and commercial properties for self-managed super funds, including his family’s fund.

And as executive chairman of Collins Booksellers as well as the joint owner of five Collins franchises, Johnston negotiates hard with retail landlords get the best deal for his fellow franchisees.

Retail property specialists say that although new tenants should rapidly fill the spaces left by the REDGroup (owner of the Borders and Angus & Robertson book chains) and Colorado Group, shopping centres will pay a high price.

The shopping centres will inevitably lose revenue with the changeover of tenants as well as facing the costs of breaking up huge of areas occupied by Borders into much smaller shops.

And there is a strong possibility that some departing tenants will still owe at least some money – particularly because centres typically demand fewer financial securities from their anchor tenants.

But probably the biggest cost for the shopping centres is the loss of Borders as a major drawcard to bring shoppers into the centres, providing a flow of potential customers for small retailers.

“Borders had become an important linchpin in the leisure and entertainment centre of these shopping centres,” says retail specialist Simon Rumbold, national director of property economics with property forecaster and researcher Urbis.

“Borders became a very popular place for people to hang out, browse and spend time,” he adds. “[The loss of] Borders certainly creates holes in some of the larger shopping centres.”

Property Observer asked several retail specialists about the impact from the mass store closures, the lessons for landlords and tenants, how landlords vet tenants and about the true state of retail property.

Are such wholesale stores closures a rare event?

While smaller retailers go out of business with some regularity, Rumbold says the departure of large retailers is relatively unusual.

“No landlord wants to lose larger tenancies, particularly iconic ones like Borders which attract people into their centres for purposes other than buying just clothes or food.”

A Westfield spokesperson says the task of replacing departing tenants is part of the group’s normal business practices. 

 How quickly will the vacated stores be filled?

Landlords will feel the closure of the REDGroup stores much more sharply than the demise of the Colorado chain. It comes down to size of the areas – as well as the ability to draw shoppers into the centres.

A typical shopping centre has between 50 and 300 shops so the closure of one, two or three average-sized shops is “not a big deal” for landlords, Rumbold says.

“Colorado stores [and most Angus & Robertson stores] were typically 100 to 150 square metres, which are relatively small shops,” he says. “And the better shopping centres would have waiting lists of tenants looking for those spaces.” 

What are the lessons for landlords from the mass shop closures?

“Don’t kill the golden goose,” says Johnston of Collins Booksellers. “Shopping centres should be investors in caravan parks; they put a lot of people into them.

In his other role as a manager/landlord of commercial and retail properties for self-managed super funds, Johnston says an approach is taken not to squeeze as much rent as possible from tenants.

“We are about making sure have a long-term tenant who is successful and is there for the long term,” he adds.

Before accepting a tenant for one of the properties he manages, Johnston vets prospective tenants with extreme care. “We go through their business model, making sure it is going to be successful.”

Johnston says Collins won’t rent from a major shopping centre unless the occupancy costs for its stores can be kept to 12% or less of the turnover.

And he is strongly opposed to the practice of many large shopping centres of having turnover clauses in their leases, stipulating that tenants pay a share of their profits in extra rent after turnover reaches a certain level. “Turnover clauses are common with shopping centres,” he says. “The clauses are in almost every bloody lease.”

Rumbold comments that although most shopping centres have turnover provisions in their leases, very few retailers actually paid turnover rent.

But what about the ex-Border stores?

Rumbold says the much large floor spaces occupied by each Border store – typically about 1,500 square metres – creates much more of a problem for their former landlords.

“It is obviously harder to fill those large spaces than the small ones,” he says.

A spokesperson for Westfield says all of the vacated Borders stores in its centres have been leased to new tenants. (The majority of Borders stores were in Westfield centres.)

Duncan Johnston of Collins understands that Westfield has divided some former Borders shops into two or three small retail spaces in order to attract tenants.

Does bookselling in general face financial problems?

Both Rumbold and Johnston are emphatic that bookselling, including from bricks-and-mortar outlets, is not in trouble.

"There has been a lot of comment around about why Borders and Angus & Robertson went bust,” says Rumbold. “I agree with most of the comment about private equity taking over retail businesses that they don’t really know how to run properly and with too much debt. And Borders was very slow to adapt in the US and in Australia to the online challenge.”

 But he points out that the giant US book chain Barnes & Noble has had a 7%  increase in its in-store sales over the past year, and its sales last Christmas were the biggest in 10 years.

 "The idea that the REDGroup failure is due to the disappearing book market is completely misconstrued and incorrect,” Rumbold adds. “That is not to say that booksellers or book sales have not been hard hit by on-line; they have.”

 "People will buy books online and in bookshops, and the two will happily co-exist for along time to come.”