Primark is pushing for rent cuts in a bid to bring its costs in line with high street rivals that have used insolvency proceedings to slash payments to landlords.
The fast-fashion chain is understood to be in discussions with landlords over lower rents on properties where lease contracts are coming up for renewal.
The move comes after competitors such as Monsoon and Topshop owner Arcadia pushed for lower rents as part of insolvency programmes known as company voluntary arrangements (CVAs). The arrangements have become increasingly popular among bricks and mortar retailers who have struggled with high costs and the rise of online shopping.
What’s the problem?
Physical retailers have been hit by a combination of changing habits, unseasonably warm weather, rising costs and broader economic problems. 2018 saw the disappearance of Toys R Us, Maplin and Poundworld as a result.
In terms of habits, shoppers are switching to buying online. The likes of Amazon have an unfair advantage because they have a lower business rate bill, which holds down costs and enables online retailers to woo shoppers with low prices. Business rates are taxes, based on the value of commercial property, that are imposed on traditional retailers with physical stores.
At the same time, there is a move away from buying ‘stuff’ as more people live in smaller homes and rent rather than buy. Those pressures have come just as rising labour and product costs, partly fuelled by Brexit, have coincided with economic and political uncertainty that has dampened consumer confidence.
What help do retailers need?
Retailers with a high street presence want the government to change business rates. They also want more political certainty as the potential for a no deal Brexit means some are not only incurring additional costs for stockpiling goods but are unsure about the impact of tariffs after October 2019. Retailers also want more investment in town centres to help them adapt to changing trends, as well as a cut to high parking charges which they say put off shoppers.
What is the government doing?
In the October 2018 budget the government announced some relief on business rates for independent shopkeepers. It has also set up a £675m ‘future high streets’ fund under which local councils can bid for up to £25m towards regeneration projects such as refurbishing local historic buildings and improving transport links. The fund will also pay for the creation of a high street taskforce to provide expertise and hands-on support to local areas.
What is the outlook in 2019?
Some retailers could go under. Weakened by a difficult Christmas – which accounts for the entire annual profits of many retailers, and with further Brexit wobbles to come – retailers are facing a tough 2019. Another rise in the national minimum wage in April and the falling value of the pound against the dollar, which is used to buy goods in the Far East, have also added to costs and hit profits.
Primark is looking for rent reductions of up to 30%, according to the Sunday Times, which first reported the story. Next, one of the healthier high street retailers along with Primark, said earlier this year that it cut rents by 29% for 28 leases renewed over 2018.
A spokesman for Primark said: “As leases come to an end, we seek new agreements that reflect the prevailing market rental rate for the property and its circumstances. In the current market, those rates are often lower than past rates.”
The spokesman added: “Like any responsible retailer, we have a duty to our shareholders to maintain a competitive cost base, and we seek to maintain good relationships with our landlords.”
It is not yet clear how many of the company’s 189 stores might secure cost cuts, but Primark is thought to be offering some concessions in exchange. They include signing on to longer leases or investing in refurbishments that it believes will increase the property’s value.
Primark, which is owned by Associated British Foods, defied the high street exodus recently to open its biggest ever store in Birmingham, offering cafes, a beauty salon and a barbers over five floors.
Rivals, however, are shutting stores at a rapid rate, with 75,000 retail jobs lost since last year. Tough high street conditions have forced the owner of footwear chain Office to become the latest retailer to consider a CVA. Its South African parent company, Truworths, has appointed turnaround advisors Alvarez & Marsal to explore its options.
Last month, landlords for Sir Philip Green’s group, which has 570 stores, approved a restructuring plan that kept the company from falling into administration, saving 17,000 jobs. The agreement involved at least 23 store closures and rent cuts for nearly 200 stores.
On Friday, Sports Direct owner Mike Ashley said the retail industry was in “dire straits”. He added that CVAs were being used as “carte blanche” to penalise creditors and landlords, while leaving healthy retailers at a disadvantage. “The more successful retailers [are] subsidising the rotten ones,” he said.
