What mall owners need to do in times of Covid

Published: May 22, 2020 6:00:22 AM

In the post-Covid-19 landscape, landlords should anticipate renegotiation of long-standing contracts

The ongoing Covid-19 pandemic has accelerated the shift from brick-and-mortar to e-commerce.The ongoing Covid-19 pandemic has accelerated the shift from brick-and-mortar to e-commerce.

By Saurabh Runwal

The ongoing Covid-19 pandemic has accelerated the shift from brick-and-mortar to e-commerce. E-commerce giants have invested heavily in wider product categories, quicker delivery times and increased rural penetration to increase their share of the pie. In 2017, e-commerce accounted for 3% of total retail sales in India; based on current trends, this ratio will more than double to 7%.

This has further accelerated amidst the ongoing Covid-19 crisis as even traditionally offline segments, including personal care, consumer durables, etc, are showing a higher propensity to adapt to e-commerce models. Brick-and-mortar retail landlords must focus on short-term survival while re-evaluating their long-term strategy.

The most immediate impact of Covid-19 is a decline in mall footfall. Tenants can forego their rental obligations altogether, since occupying the property during the lockdown is prohibited by law, making it nearly impossible for malls owners to clock any revenue collection except for grocery stores, which account for 1-5% for total rental income. In addition to zero revenue collections, retail landlords have received negligible or no respite in the form of interest waivers from banks and will struggle to make full instalments even with quarterly deferments.

As mall owners in India re-strategise for the coming months, they must steel themselves for three critical challenges: Rise in short-term vacancy rates, rental renegotiations, and changes to consumer behaviour.

Rise in short-term vacancy rates: Premium malls in Tier-1 cities have enjoyed extremely low vacancy (~5%) by the end of 2019, with new brands eager to cater to the growing affluent middle-class consumer. However, large-scale lay-offs and pay-cuts will drive consumer austerity in the short term—adversely impacting discretionary spending—translating to a direct hit to retailers’ top-line, and thus, their ability to pay rent. H&M, a global giant in fast fashion with ~5k stores worldwide, is using the crisis to accelerate its shift online; it has informed landlords it may stop paying rent or terminate leases and has slashed additional investment.

To dampen the hit from higher vacancies, retail landlords must follow a three-pronged approach: identification, reconfiguration, and replacement.

Identification: This will enable landlords to identify at-risk tenants: those with high-leverage, working in sectors with the highest online propensity and low annualised (12 months trailing) historical sales and at-risk properties (those in low-income neighbourhoods and high infection rates).

Reconfiguration: The key to reconfiguration is to set up an operating mechanism for the rapid turnaround of vacant shells, including expedited move-out of existing tenants, liquidation of leftover inventory, resizing of store spaces, flexible set-up for moving in new tenants (including the opportunity to tweak lease agreements for lower deposits and longer periods of free rent).

Replacement: Mall owners will no doubt struggle in the short-term with attracting new tenants—as most retailers will look to defer new lease agreements. It may be beneficial to look beyond the large chains that have traditionally occupied space in malls. Innovative solutions, such as partnering with mid-to-large scale direct-to-consumer (DTC) brands that are looking to open their first physical stores, can work. Several digitally native brands in the US have already begun expanding their offline-footprint.

For example, Allbirds, an online sustainable shoe company, is looking to double its store count from 20 to 40 in 2020. Similarly, Pepperfry, India’s leading online furniture store, has expanded to a store count of 65 nationwide, drawing in nearly ~40% of total revenue from its offline channels.

Rental renegotiations by retailers: In the post-Covid-19 landscape, landlords should anticipate organised renegotiation of long-standing contracts. For example, in Hong Kong, ~50 brands participated in an unprecedented strike, shutting down 200 stores across prime malls for a day to demand their landlords lower rent. Major property developers Henderson Land and Sun Kung Hai Properties have already agreed to slash base rates for ~2 months. Additionally, in an attempt to hedge against low sales volumes, several retailers are attempting to shift towards turnover sharing agreement.

As mall owners prepare for the forthcoming negotiations, it will be imperative to support retailers in the short term. A viable option would be deferred rental collection (with a 6-12 months deferment period, depending on when normalcy resumes). Additionally, it will be important to negotiate customised payment plans based on the type of stores and overall store exposure.

Re-invigorating consumer confidence: The magnitude of impact on consumer behaviour will primarily be driven by the length of the lockdown period and the pervasiveness of the spread. CapitaLand, the Singaporean property developer, has opened all of its four malls in Wuhan as of April 2. Consumer behaviour in Wuhan has already shown encouraging signs of a return to normalcy. In India, it is still too early to predict what shape the recovery curve will adopt, but undeniably, mall owners need to prepare strategies to attract consumers post the crisis.

As shoppers return to malls, the establishment of infection prevention infrastructure for both employees and customers will become hygiene. In Wuhan, mall workers are regulating the overall traffic inside malls to prevent large gatherings. Additionally, owners have supplied their staff with masks and other protective equipment. There are also ongoing awareness efforts with employees urging customers to use strategically placed hand sanitisers and frequently wash their hands. As Indian mall owners look to implement similar changes, another top of mind question will be the cost implications.

The only way to make it feasible will be to split the burden of added cost with retailers—as an addition to existing common area maintenance fees. Above all, malls should utilise their digital platforms to actively communicate such infrastructure upgrades, well in advance to ensure steady footfalls once the shutters are lifted.
In the coming months, several variables will determine the magnitude of impact on organised physical retail.

Consultant with R City (Runwal Group). Views are personal

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