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Redefining Irish retail

11 October 2010

Delegates at this year’s annual conference of the Irish Property and Facility Management Association in Dublin were told that property developers and retailers must end the point scoring, and start talking about ‘partnership’

The Irish property and facilities sector is facing a continuing crisis, both on the client and supplier side. The ‘Celtic Tiger’, as Ireland’s booming economy was called, has been tamed as everyone reduces margins and boosts efficiencies to stay in business.
Too often, those actions are not enough, said conference chairman Charlie Costello in his opening address to the 135 delegates at the premier Irish games stadium Croke Park. Business failures are all too common.

The crisis is particularly deep in the retail sector, which was the focus of this year’s IPFMA conference. Retail sales have dropped by up to 40 per cent and banks have slashed overdraft facilities.

Costello’s remarks went hand in hand with the day’s headlines that the Irish government is facing a massive bill to bail out several banks, all too reminiscent of Britain’s financial crisis. The bailout could make the make the crisis worse if, as is likely, the Irish government starts reining in public sector spending.

But Costello remained upbeat, noting the cloud may have a silver lining. “There are many companies that are ill, but remedies do exist, and they are definable,” said Costello, who is also chairman of Active Facilities and Property Management.

New market conditions require a real partnership, he explained. “Vacant retail space is not in the interest of either retailer, property owner or developer in the newly defined property market.”
Attaining that partnership and how to ensure it works for all parties was the central theme of the conference. And it will only work if both parties listen to the customer in the shop, said keynote speaker Feargal Quinn, a independent senator.

“There are successes in even the toughest of times, but listen to the customer and respond to their changing needs,” said the former An Post chairman. “Comments like, ‘we’ve always done it this way’ will no longer work. The object is to get the customer back in the shop again. Developers and owners of shopping centres should encourage their retail renters to try harder, because it will mean success for all.”

Developers should have someone in charge of retail clients who himself or herself has had some shop-floor experience, Quinn said. Even then, the person should “get out from behind their desk” and spend time walking their clients’ shop floors to understand shoppers’ needs.
In fact, whether we know it or not – or like it or not – landlord and retail client are a partnership, even it they haven’t acted like it in the past, said Peter Stapleton, managing director of Lisney, a commercial and residential real estate agency.

Understanding this should lead all parties into innovative thinking and avoid “needless point-scoring”, he said. But there needs to be more information sharing between owner and retail operator.

Even more sharing across the sector in general, and Stapleton urged the setting up of a national property register, something that the Ministry of Justice has said is a good idea in principle.
The register would include details of floor areas, rent-free periods, all parties to a lease, rates and costs at each rent review and – controversially, he acknowledged – what sort of allowances and capital contributions for fit-outs the owner gave to the tenant.

But, “we are overcome with the government’s silence on setting one up”, Stapleton said, referring to the government’s intransigence on the issue. To this extent, he wants IPFMA to take the lead for it and not leave it to a disparate collection of pressure groups.

A good web site, too, is needed as a focal point for showing interested parties what advice, contacts and general information is available regarding the Irish commercial property market.
“The landlords really have to roll up their sleeves and get stuck in there with this,” Stapleton said. “The value of the rental property begins with the value of the retailer renting it, and not with how ‘smart’ the property itself may be.”

That value of the retailer suffered greatly in 2008 with the economic downturn, and the retail pharmacy sector was hit hard, said Cormac Tobin, managing director of retail chain Unicare Pharmacy.

Unicare, with 2,400 stores in eight countries, including 72 in Ireland, went from profitable to unprofitable, said Tobin who was a store manager at the age of 23. 
But people were shopping differently, too.

“We decided on a no-blame culture and it was no longer going to be ‘what we did in the past, we’ll do in the future’,” he said. The changes in retail were driven home to him when he ventured into a music store that showcased rows of CDs for sale. He was with his 15-year-old daughter who said the place was ”like a museum”.

Unicare did a major review of what they were selling, and got out of non-pharmacy goods such as clothes and jewellery. They asked themselves why they were in business and decided it was to offer customers help with their medical issues.

Within this context, Unicare approached the property market and looked for partners who understood the three-sided relationship of property owner, retail client and retail customer. But there is no room within that relationship for a property owner who does deals with one retailer and then another deal with another retailer that undermines the first.

He suggested it was counterproductive to offer a competitor of Unicare a space in the same centre and, as a example, give them a greater rent-free period.

It’s the age of the ‘grounded consumer’, said Ciaran Flanagan, managing director of marketing and design agency IDEA. Most developers and owners of shopping centres now acknowledge that the retail shopper is looking for social interaction as much as, if not more than, to purchase an item.

Shopping centres now have to entertain shoppers, meaning “there’s no business like shop business”, said Flanagan. “A little bit of showbiz in designing a shopping centre always helps.”
The overall effect is that shopping centres are now particularly public places. Large numbers of fast food restaurants with plenty of sit-down areas keep people occupied. Some have play areas for children.

People are looking for small indulgences, for having that moment of a little joy in the shopping experience. Flanagan said it is no wonder that surveys have shown that 35 per cent of a shopping centre is now devoted to entertainment for retail customers, from cinemas to climbing walls.

An example of how important entertainment is can be found in the large number of families walking around with small children. Parents will leave a shopping centre if their children become bored or kick up a fuss. Entertainment can keep the little ones occupied, and also keep parents in a centre.

As part of an increasing understanding of a partnership between retail client and property owner, turnover leases are becoming more popular, said Ian Middleton, managing director of Sheffield-based chartered surveyors and property consultants Smith Young.

“They won’t solve all your problems, but they may allow both parties some flexibility,” said Middleton, who is also a former regional real estate manager for the Burton Group in the UK.
A pure turnover lease will see the property owner take a set percentage of the retail client’s sales, such as 10 per cent, explained Middleton. There is no base rent, so both parties sink or swim together. “It means an alignment of the landlord and tenant goals,” he said. “It also establishes a kind of equality between them in the partnership.”

Turnover leases means both parties are also focused on how to get more customers into the retailer’s shops. But Middleton acknowledged that sharing risk includes an element of uncertainty over income levels for the developer as well as the client.

To make a turnover lease successful, the retailer has to feel comfortable sharing their sales data, which could mean a lot more than simple turnover. If the two partners are to critically analyse how better to boost the retailer’s sales, then the books must be open to allow brainstorming and innovative thinking.

Information on client profiles, times of sales, walk-through figures and more should be on the table. This will mean the retailer trusts the developer with this sensitive information, which is no mean feat.