Myer store closure shows retailers playing hardball in rent negotiations

Retailers are no long bluffing when making threats about shutting down stores to escape unrealistic rents, one industry expert has warned, after department store giant Myer announced it would shut down one of its two ACT stores.

The announcement also comes just a few weeks after Myer chief executive Bernie Brookes said the business was having trouble negotiating over retail rents.

The department store confirmed last week that it would not renew its lease at the Tuggeranong store, saying it has continued to review the merits of its existing store portfolio. It also noted that the store represented less than 1% of total group sales and that customers are opting to visit alternative Myer stores.

However, David Gordon, partner in charge of the national retail advisory practice at WHK Group, says there may be other factors at play – namely, that retailers aren’t bluffing anymore.

“Every retail lease negotiation has an element of bluffing there, but retailers don’t have much room to move right now. When they say a spade is a spade, they actually mean it right now.”

Brookes made comments several weeks ago suggesting the company was having trouble dealing with a landlord, and that it was able to win a discount on rents by suggesting the company could close its store.

While it isn’t clear whether that particular argument had any effect on the latest decision to close this store, Gordon nevertheless says it’s emblematic of a shift in how retailers are approaching these negotiations.

“Retailers just don’t have the flexibility to play this type of game anymore, because the top line is coming down. They don’t have the ability to mess around and accept an outcome that will hurt their profit.”

“They’re not bluffing when they say if they take these outcomes proposed by the landlord they’ll lose money.”

Gordon says larger retailers’ preparedness to shut stores may continue over the next year as consumer confidence remains soft and rents stay high.

“It’s clear that Myer just isn’t getting the correct sales-to-rents ratio. There are just too many costs involved here for the store to turn a profit.”

“It’s quite difficult, especially at this time of year, to reduce service staff or cut costs. There will be times during the year when you can do that but certainly not now.”

However, Gordon says there’s not a lot that can be done when it comes to cutting rents.

“Everyone understands that rents are too expensive, but there’s not much that can be done. Landlords have obligations to their banks and their covenants would require overall rent per square metre of a certain price.”

“There are alternatives, but ultimately it comes down to negotiation and as we see here retailers are willing to just up and leave.”

Myer also said it would be opening up a store in the ACT, although it won’t be opened until sometime during the 2014 financial year.