Why turnover rents work

The closure of UK airspace when the volcanic ash cloud hit was bad news for a lot of retailers, but particularly those like WH Smith for which airport sales represent a significant element of their business. Last week the company revealed that third-quarter sales in its travel business were down 4%, half of which was directly attributable to the ash cloud crisis.

In most situations losing a week’s trade due to a factor completely out of the control of your business would be disastrous. But while Smith’s would certainly have rather done without the hassle, at least the system of turnover-based rents which is the norm in airports means the retailer’s rent bill will be reduced to reflect the disruption.

The system of turnover rents works well in places like airports and stations because it aligns the interests of the retailer and the landlord. The airport operator needs to keep traffic up in order to maintain the income from its tenants, and its decisions on which retailers to let space to are influenced by which are performing and which aren’t doing so well. The short-term nature of the deals means that retailers are under pressure to deliver sales too, to avoid losing out on their prime pitches in the terminals.

It’s a system which airport-specialist retailers like Smiths seem to like, but could it be applied more widely? To a degree, it already is. Deals based on turnover rents are being increasingly being agreed in shopping centres and retail parks, giving landlords more of an incentive to ensure their centres are attractive shopping destinations which keep shoppers coming back.

But there are difficulties. Retailers are reluctant to reveal turnover data to their landlords, while the ‘easy-in, easy-out’ model of short term licenses which works well in airports and stations only works because the of the exceptionally high traffic of passengers - it would be more difficult to achieve in more traditional centres where retailers wouldn’t be able to justify the fitout costs over such a short time frame.

Finding ways of tying rents into store performance does make sense though. If landlords and retailers can agree on a way of confidentially sharing information, it should form the basis of more and more leases.