Microsoft’s Chairman views the Internet as the “town square for the global village of tomorrow”. It’s safe to say this is a truism, but if this town square has a catchment of millions and a spend potential worth billions, shouldn’t it follow similar rules to our traditional retail locations? Basically, how long can the high street in this “town square” remain under-rented?
We all know that, in the UK at least, turnover rents have caused a sea change in the way leases are structured. But the snag has always been accurately forecasting retailers’ turnover across the lease period. The transfer of more sales to online adds a whole new layer of complication.
For a start, most retailers currently allow for goods purchased online to be returned in-store. This can be to any physical store and the value of the returned item is often deducted from the outlet’s turnover. This mis-communication between channels has damaging consequences for the smaller branch of a well-known high street retailer where returns are common. It also damages the landlords who signed them on a turnover-linked lease. The retailers are being hit where it hurts (their margins) which in turn short-changes the landlord if their tenant’s books show under performance. So shouldn’t there be provision on turnover leases to disregard the return of web based product?
If this isn’t possible, shouldn’t landlords start demanding retailers’ online sales contribute to their physical store turnover? Yes, it would be difficult to implement, but there’s another key argument from the landlords side at least: with more and more sales transferring online, some retailers will prefer to reduce the number of retail outlets and accept that many of those which remain will function more as showrooms than selling outlets. And where does the turnover come from in a showroom?
So, should the online high street in the new town square be allowed to grow and grow by it’s own rules, or should the success support it’s predecessor namely our traditional high street? The landlords have had to take up much of the slack from risk-sharing over the last few years, perhaps in time the retailers might consider sharing more of the risk as they benefit from the growth of their online branch.