Old Mutual's smoke and mirrors game

Posted On Wednesday, 17 March 2004 02:00 Published by
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OLD MUTUAL, which is also one of the largest owners of shopping centres in the country, is busy with a smoke and mirrors game with its tenants which will lead to most of them being none the wiser.

OLD MUTUAL, which is also one of the largest owners of shopping centres in the country, is busy with a smoke and mirrors game with its tenants which will lead to most of them being none the wiser. This, of course, may well be the whole intention of its game plan in the first place.

Cut to the bone, it’s about the nitty-gritty matter of rentals.

For some time now Old Mutual, together with other major landlords, have been under increasing pressure by its smaller ‘mom ‘n’ pop’ tenants to re-look the rental mix in major shopping centres. Smaller retailers pay base rentals of as much as R500 per square metre, while major retailers right next door to them pay as little as R20. So goes the argument of the SA Council of Retailers, which is fighting the cause of smaller retailers.

“The crux of the issue is the monopolised concentration of shopping mall ownership, with only six to ten shopping centre owners in South Africa,” according to SA Council of Retailers chairman Marcel Joubert. Submissions on behalf of smaller retailers are now being made to the Competition Commission. With this as background Old Mutual is trying hard to placate smaller independents with the promise of ‘striving for more equitable deals for all parties’.

More recently Ian Watt, managing director of Old Mutual Properties, has even taken up the cudgel for the smaller retailers very publicly by, amongst others, grinding away at anchor tenants. The concept of supermarkets passing on costs of fixtures and finishes, which the landlord is expected to finance with no increase in rentals is not sustainable, he regularly proclaims. “The pretext that the supermarket draws the feet and should be subsidised by the rentals paid by the smaller tenants needs to change,” according to Watt.

Is the man shooting himself in the foot by taking on the very groups that bring in Old Mutual’s bread and butter, so to speak? The truth is much simpler. Old Mutual, it seems, is playing up to an audience with the hopeful end result that there will be no change in the rental picture at all.

What does Woolworths, a favourite anchor tenant in most big centres, make of this? “We are fully aware that shopping centres need anchor tenants of varying kinds and there is always a delicate balance around who pays what rental and who brings what to the party. We always enjoy the cut and thrust of these negotiations and, in general, feel the landlord and tenant tend to get the balance correct at the end of the day,” is Woolworths’ CEO Simon Susman’s wry comment. Watt goes even further in his denunciation of big supermarkets; their rentals are no higher in real terms than they were 30 years ago, fewer than 20% of visits in centres end up in supermarkets, they avoid paying a proportionate share of rates, taxes and operational costs and their occupation costs are half of what they are in European markets, according to Watt.

These are only some of Watt’s gripes which will no doubt mollify the smaller independents and, hopefully for Old Mutual, redeem itself in the eyes of the ‘moms ‘n’ pops’.

Diversional tactics are not new to Old Mutual, nor does it have a monopoly on it. But how much substance is there in Watt’s thunder?

For the sake of balance Cape Business News approached some of the major anchors like Pick ‘n Pay and Shoprite/Checkers for a reality check on Watt. This helped clear the smoke a bit and it looks increasingly as if Old Mutual’s Watt is making the supermarkets a convenient scapegoat for the landlord’s problems with smaller retailers.

On the matter of supermarkets attracting less than 20% of visits to centres, Shoprite’s group marketing director Brian Weyers responds that it may be true, but not relevant to the broader picture. “The fact is that the proportional spend in supermarket versus other tenants should be brought into account,” he says.

Izak Joubert, property director at Pick ‘n Pay concurs; “We would not be surprised if at any specific point in time only 20% of the customers in a shopping centre visit the supermarket on that trip. One cannot however extrapolate this to mean that only 20% of a centre’s customer base supports the supermarket.”

“Landlords are not forced to put supermarkets in shopping centres. They do so because that is what their market research indicates customers want. They also do it because in most cases a centre would not proceed if a supermarket is not secured. If a developer wants to build a centre without a supermarket, they are certainly free to do so,” says Joubert.

Watt’s argument that supermarkets are avoiding paying proportionate share of rates and taxes and that their rental is only half of what they are in Europe is also flawed.

Shoprite’s Brian Weyers says this argument does not take into account the lower profit margins that South African supermarkets realise, compared to those of their European and American counterparts in food retailing.

Says Pick ‘n Pay’s Izak Joubert, “We pay a proportionate share of rates in every single regional centre in which we operate. There are about four stores in neighbourhood centres where on lease renewals we have absorbed the rate payable at that point in time into our gross rental. This does not mean that we are not paying rates, it simply means that our rental moves away from gross plus rates to gross inclusive of rates. This clearly leaves us paying the same rental in year one, but it then pegs the increases in rates.

“This is now the landlord’s risk and doing this may move in their favour, as when rates increase by less than our escalation rate or against them when they increase by more than our escalation rate. Because rates are pro rated this cannot be passed onto the line shops if this kind of rent structure moves against the landlord,” Joubert says.


Publisher: Cape Business News
Source: Cape Business News

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