Wednesday, February 9, 2011

Shutting up shop - The Irish Times - Mon, Feb 07, 2011


TROUBLE ON THE HIGH STREET: Retailers are under threat from all sides – consumers with less to spend; landlords and their punitive upward-only rents and out-of-town superstores looking to hoover up any available business. It’s tougher than ever for our shopkeepers

THESE ARE very tough times for Ireland’s shopkeepers. Just how tough, was illustrated by a report published last month which said that 400 shops would have to close for good during what was the worst January in living memory.

In the days after the report came out, some of what was contained within came to pass as high profile stores like Zhivago Records in Galway and Waterstone’s Bookshop in Dublin announced they were in serious trouble.

If there was one thing Irish shops did not need to kick-start 2011 was a weak January, coming as it did on the back of a nightmare before Christmas.

Pre-Christmas trade in Ireland was badly damaged by heavy snow at the start of the month and in the week before December 25th. The harshest budget in the history of the State and the gloom caused by the IMF bailout did not whet people’s appetite for a seasonal splurge either.

While weak consumer sentiment and bad weather hit retailers hard, what is causing many independent shop-owners more grief is the existence of upward-only rent agreements – leases which, effectively make it illegal for shop keepers to try to renegotiate their rents downwards, no matter how bad business gets or how low the value of the property they are renting falls to.

Imagine how hard it must be to own a shop on a busy street and watch your rent increase by as much as 500 per cent in 10 years because of upward only rent reviews, only to wake up one morning to find a shop selling almost exactly the same products has opened next door and is paying just 10 per cent of the rent you are, and charging prices you can never hope to match.

Such scenarios are playing themselves out across the State.

The report which said that 400 shops would close this month was published by Retail Excellence Ireland (REI). It represents more than 8,500 shops and has pleaded with any new government to take immediate steps to save the retail sector.

Its chief executive David Fitzsimons recently told Pricewatch that the outgoing Government had focused on the collapse of the banking sector at the expense of the rest of the country.

“The domestic economy is being left behind,” he says. “The retail sector accounts for 50 per cent of GDP and the reality is that the Government can not expect the economy to recover unless the retail sector recovers. I know we can’t improve consumer sentiment overnight, but a new government can address certain issues which may help the sector.”

Speaking as the REI report was launched, Stephen Mackerel, chief executive of the Carphone Warehouse and a member of the organisation, accused the outgoing Government of cronyism in failing to take on developers who were demanding inflated rents. He said that if retailers were in a position to renegotiate their rents downwards, prices for consumers could fall by between 6 and 8 per cent almost immediately.

Mackerel described January as the worst in the shop’s history. “Footfall was down at least 20 per cent on last year and last year was in itself a real shocker.” He said that of his 77 stores, landlords have only entered “into any sort of meaningful sort of negotiations” in seven of them. “The rest have just given us the two fingers”.

Mackerel says that if upward-only rent reviews were scrapped, the retail sector could provide 30,000 news jobs and drop their prices by between 6 and 8 per cent. He says, quite reasonably, that the most effective way to stimulate demand among would-be shoppers is to entice them through the doors with lower prices. While an incoming administration may look towards changing the rules, the outgoing one certainly did not.

One of the final acts of the last Oireachtas was the publication of a report into Ireland’s retail sector. At its launch, Willie Penrose, the chairman of the committee, said that although it had spent three years investigating the sector, it never got around to discussing the issue of high retail rents despite admitting it was one of the biggest threats facing Irish retailers and could cost tens of thousands of jobs.

Penrose accepted that the issue of upward-only rent reviews was a serious problem but claimed the committee had not discussed the issue formally because “we did not anticipate that the report would have to come out so quickly.”

Keeping rents high and forcing businesses to close does not, however, make sense for landlords, surely?

Yes and no. While no landlord wants to see a tenant vacate a premises because they have gone out of business, nor do they want to see the value of their investment decimated because the rental income falls off a cliff.

Industry sources say that some developers are massaging the figures. If they can convince Nama that they are getting €10,000 in rent for a property, but are actually only able to get a tenth of that, then theoretically that property is worth 10 times more than it otherwise might be. The problem is however, that first the retailer goes out of business, then the developer goes bust and finally the taxpayer picks up the bill. No-one wins.

While rent is one issue that threatens to kill Ireland’s indigenous retail sector, another shadow looms almost as large on the horizon in the form of massive supermarkets springing up on the outskirts of our towns.

On many levels such developments are to be welcomed as prices will fall – at least in the short term.

The downside ultimately will be a diminution of choice and the possible destruction of our town centres. In the US, Walmart has laid waste to many town centres. The same thing is happening in the UK with Tesco, Sainsbury’s and the Walmart-owned Asda opening huge supermarkets selling everything from flat-breads to flat-screen TVs and fresh fruit to washing machines and driving business away from towns out into the suburbs.

Things in Ireland are moving that way. The Tesco Extra stores sell toys, hardware, electronics, prescription drugs, clothes, groceries, alcohol, books and a whole lot more. While the prices are competitive, the service in such stores can be found wanting.

Last week, Pricewatch wandered the aisles of one such shop for quite some time looking for a staff member who could shed any light at all on the dizzying array of TVs on the shelves. There was no-one to be found.

According to Fitzsimons, there is “going to be a big shift in retailing and a big shift in power, with more and more of the money going to huge supermarkets on the outskirts of our towns and this could kill town centres completely.

“Our industry is going the way of the US where 70 per cent of the market is controlled by just three players. The big name multinationals can come in and demand their own terms and conditions when setting up and this can leave the smaller guys screwed.”

As smaller shops trade is swallowed up by hypermarkets, choice will be diminished as will customer service. Even now shops are being forced to make hard calls and many can’t afford to employ the extra staff to give customers that extra bit of service. “There are some electrical retailers who could afford to employ maybe 15 per cent more staff to offer advice and give them the edge over online retailers but can’t because high rents offer them no flexibility. So consumers are taking the hit twice in the form of worse customer service and higher prices,” says Mackerel.

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