Retailers need flexible friends

Most businesses have a relationship with their fixed overheads similar to the relationship that a ship has with the rocks beneath it.

For most of the time they are not an issue but when the tide starts to go out it becomes pretty important. Many industries are fortunate in having a relatively low level of fixed overheads in relation to their income, and sail in deep waters.

The retail industry, though, tends to run with a high fixed cost base and so is very susceptible to the ebb and flow of consumer sentiment.

The main reason for this high level of fixed overheads is that most retail businesses have few long-term assets but carry significant fixed costs in the form of rent.

This is why retail is the first sector to suffer when the consumer feels nervous and the sector most prone to failure in times of recession. Many accountants will say that there is no such thing as a fixed overhead and to some extent this is true.

At Blacks, our warehouse has always been too large for us. We have successfully defrayed this cost by renting out the space to other companies that need the flexibility we can provide. However, the problem with the store rental element of the fixed overhead is that it really is fixed. Very fixed.

That is not the fault of the landlords. When times are good they can sell their space on long-term, upward-only rents and the banks will back them. They would be mad not to take advantage of this.

The problem comes when times are hard and the rocks start to breach the water. When that happens everyone suffers. The landlords with voids, the banks that supported them, the retailers that go bust and the employees who work for them.

It’s a very destructive cycle and it causes a lot of grief to thousands of people. For the retail sector to
flourish in good times and to survive in bad it really is necessary for the fixed overheads to become a little
more variable.

Landlords have done much to help the situation in this recession. The move from quarterly to monthly rents and the transition from 20-year to 10-year leases has introduced some vital flexibility.

However, I think we need more if we are to avoid the destructive impact on tenants and landlords alike when the bad times hit. Perhaps the most sensible remedy is to take the existing rent review process and make it more regular and bidirectional.

If every two years it was possible to move rents both up and down depending on a range of factors, including the footfall of the venue and the current state of the economy, then there would be fewer retail failures and voids in the bad times and more rental income for landlords in the good times.

Making the fixed overhead of rent a little bit variable would save the UK economy and workers a lot of pain and unnecessary upheaval. And for retailers it would help to keep the rocks below the waterline.