Turnover rents in the age of multi-channel retail | Deloitte UK has been saved
Limited functionality available
Historically, there has been a resistance to a more widespread adoption of turnover rents in the UK, given the increased business and commercial risk associated with the terms. Tying rent to a tenant’s trading performance has the advantage of better aligning the interests of landlord and tenant to mutual benefit. Principally, this appears to be taking the form of a very rapid shift away from fixed rents to a turnover model.
However, online retail has been one of the biggest hurdles to the development of turnover rents. E-commerce has clouded the role and profitability of individual stores. It remains very challenging for retailers to quantify accurately the interplay between physical and online channels, particularly with ‘click & collect’.
How can landlords value the role of physical stores— as product and experience showrooms, bases for ‘click & collect’ services and convenient product return processes—where many of the sales are executed online?
As landlords seek to maximise turnover rent, they may demand that online sales, ‘click & collect’ and return services be factored into the calculation. Retailers will likely seek to retain online sales revenues, though this needs to be balanced with the business need to maintain their brand presence in key physical locations. In many cases, landlords will need to accept that the margins achieved online and through ‘click & collect’ sales are much lower than through in-store sales, making a one-size-fits-all turnover percentage impractical.
Transparency of multi-channel sales is limited, a problem that will only increase in line with the proportion of online sales.
Online sales frequently require a physical location for purchases to be collected from. The right strategy is not always clear for a retailer if a shop loses money but supports the online channel. While such challenges are not insurmountable, the fact remains that it is complicated to arrive at clear answers. The online channel has sown confusion and encouraged many retailers to retain stores that were otherwise unprofitable and which, with the benefit of hindsight, should have been perhaps closed many years ago.
The shift towards online shopping exacerbated by COVID-19, means that many High Street retailers will face a challenging recovery. Faced with reduced income, increasing vacancy costs and legislation preventing them from taking enforcement action, retail landlords are struggling too. In recognising their shared interests, the traditional landlord and tenant relationship needs to evolve to better align the interests and risks of both parties, albeit with considerable pain being felt by all as it develops.
Bo is a research professional with 10 years’ experience, specialising in the UK real estate. Previously heading up UK industrial research at Colliers International, providing thought leadership on occupational and investment trends to Colliers existing and potential clients. Bo has also extensively researched regional office markets in the UK, producing all Colliers Manchester, Leeds and Birmingham quarterly office reports.