Primark, a real success story for the high street, has announced it is seeking rent reductions of up to 30 per cent on leases coming up for renewal.
While less prosperous competitors have been using Company Voluntary Arrangements (CVAs) to encourage landlords into accepting lower rents to retain a tenant, Primark is taking a different approach.
With over 370 stores worldwide, including the world’s biggest Primark in Birmingham with five floors of retail entertainment, the high street giant is using its strength to secure favourable deals.
Securing anchor tenants in shopping centres or filling flagship high street locations has become tougher in recent years as household names reduce their portfolio or exit the market.
Primark is an attractive tenant for landlords. An apparently strong covenant with its roots firmly in bricks and mortar with no online shopping offering, Primark is effectively saying – ‘give us reduced rents too, or we will go elsewhere’.
Is this a new approach?
High street pressures always make good headlines as consumers can relate to the brands but is this Primark approach really anything new?
All well run businesses, large and small, should be constantly reviewing their cost base and seeking opportunities to obtain a better deal. This may not always be a cheaper deal, but may include improved service terms, greater flexibility or more rapid response times.
Approaching the end of any contract is therefore a natural time to revisit those previous agreements and seek to renegotiate, especially if the business has other options and is in a strong trading position. In fact, Primark has already used this tactic to reduce rents on lease renewals in 2018.
Is it fair?
Why wouldn’t it be fair? Markets are constantly changing, and landlords are often able to take advantage of downturns where longer term leases, signed in periods of comparable prosperity, tie in tenants to rents above the prevailing market rate.
However, landlords must be open to discussion with tenants experiencing difficulty if they wish to retain them. CVAs are partly the consequence of a lack of such flexibility and compromise, until there is no other option.
A growing trend
The prevalence of CVAs and the approach taken by Primark all point to a sharp change in the operating model and the need for landlords to discuss different options. Whether that’s less focus on covenants and more focus on driving footfall or introducing turnover rents, rent renewals could look very different in the future.
However there is a knock-on effect, and where property owners have debt, their own loan covenants or a share price to maintain, diluting profitability may not be an option. This is why open dialogue between retailers and landlords is key to delivering a sustainable future for the high street.
The success of Primark demonstrates that there is still life in the high street with space for bricks and mortar retailers, but the offering needs to change to transform the high street. Bringing together retail, leisure and hospitality to make a place where people want to be is part of the puzzle but greater support regarding business rates and town centre car parking will also help to boost our high streets, benefitting consumers, retailers and landlords.