Entrepreneurs and SME’s need to be aware of Landlords.

Pension Funds, Insurance Companies, Banks and wealthy families, build shopping centres and in the process change the retail buying patterns and social shopping trends in society. What would-be entrepreneurs must understand and learn to negotiate, is the trap, which Leases in South Africa, can become.  Undoubtedly, these Landlord Barons are collectively responsible for breaking up the Independent Retail trade and encouraging the large National and Multi-National chain stores to proliferate and form monopolies.

They are anti-small business. That is not to say that these centres do not make money from small independent operators. They do. They hedge the smallness of businesses by charging them more than they would charge larger ones on leases per square metre and stipulate to generally impossible increases and exit clauses they would never dream of enforcing against those larger ones. At the same time they give huge discounts to large chain stores who in-turn become their anchor tenants attracting large numbers of “feet” into these developments. This is the nature of the retail world. Nothing can be done about it and generally, despite not always being valued by developers, pension funds, banks and insurance companies, these small retailers survive, in-spite of their landlords and sometimes despite affirmative steps landlords take to play small retailers off against each other.

Property Owners in South Africa have the South African Property Owners Association (SAPOA) acting for them collectively. The full weight of the funding supplied to SAPOA in membership enables affordability to be able to contract the services of exceptionally expensive lawyers. SAPOA has been masterful at ensuring that there is a wealth of legislative protection and heavily funded legal precedent against small and independent tenants, protecting their members thoroughly and weighing the pendulum of justice against independent retailers. Ask any small tenant and they will tell you that in South Africa, the law only favors the Property Owner and does absolutely nothing to protect small and independent traders.

While it is in all likelihood not intentional, the consequence is that Property Owners have been masterful, (and this is possibly a matter for the Competition Commission to investigate), at collectively ensuring amongst themselves, that they retain every reputable and successful law firm in the country, making it impossible for a disaffected new or small tenant to find or be able to afford a competent and experienced lawyer who is willing to go up against the big bullies of the property world.

What is it that is done to disempower Small Independent Retailers?

Firstly, to be in retail one has no choice other than to set up business in these shopping centres. The very existence of these centres has destroyed high street shopping in South Africa. Bad local government planning, and talk of well-greased palms of Local Councilors and Council officials has resulted in a virtual monopoly being created. Economies-of-scale make it unviable to set up anywhere except in these shopping centres. Add to that the traditional game played with Parliamentary Members, where they  have ensured that legislation is protective and nurturing of the often biased interests of large property owners. It is impossible to find any Member of Parliament brave enough to suggest legislative amendments favoring small tenants in this country. They have been systematically and completely co-opted by Property Owners collectively. There is a general belief that they are owned by the property industry.

Small and independent retailers pay, on average 3 and sometimes as much as 5 times as much, for the space which they occupy in shopping centres as opposed to chain stores and national brands. This is despite the fact that they do a fraction, often as little as 10% of the turnover done by the larger operators.

Landlords have no appetite for risk. They believe steadfastly that they have no obligation to share the risk of decreased turnover, economic slumps or indeed to protect their tenant clients by properly balancing the nature and types of retailers in their centres and managing competition in everyone’s best interest. To this end it is hard to find any landlord that will reject an application for a lease based on the reality that that particular industry might be over represented in their centre.

Landlords have adopted a national take-it or leave-it approach in their negotiations with small players. Historically landlords came from a base of charging a “percentage of turnover”. The ideal for the tenant was below 10% and the average agreed on was in the region of 12%. Landlords were prepared to share the risk of success and failure. This has unfortunately changed. (Another area, which possibly merits Competition Board investigation for collusion).

One of the principle reasons for the change is that landlords no longer manage their own properties. They outsource this work to Managing Agents. These are the real killers of small retail in South Africa. They manage a number of centres instead of one. Policies are of a one-size fits all uniform type. They are accountants, actuaries and lawyers. They also have law firms on-call. Performance contracts signed with their clients leave no room for negotiation, compassion or humanity, despite public advertising and marketing to the contrary.

Today these landlords have mitigated their risk collectively, never entering into a “percentage of turnover” agreement in a lease with small and independent tenants. Collectively they charge per square metre irrespective of turnover. This is not a conspiracy theory. It is fact. The result is that small independent retailers pay, after two to three years of operation, an average of 17% of turnover as rent, before all of the other charges landlords exact such as marketing etc. Certainly excluding lights and electricity. For a start-up business in the first two years of operation, those lease charges average out at 30% of turnover. Chain stores on the other hand work closely with Managing Agents to ensure that landlords make huge concessions up front allowing them time to “stock and establish”. Seldom are similar meaningful concessions made for small and independent stores.

Making decisions about where to set up business, you will want to see numbers of passing “feet”, shoppers. What you need to be aware of is that there are countless cases of researchers colluding with retailers to fudge footfall figures. Landlords would buss children in for promotions and entertainment in parking lots, parading those children through the centres to boost their footfall figures. Entertainment venues such as Casino’s or Exhibition Centres would be built attached to shopping centres and would falsely reflect the traffic to the entertainment venue as footfall through the shopping centre. All designed to induce small retailers into believing that setting up business in the shopping centre would increase turnover prospects.

What is to be done? Collectively, Small and Independent Retailers constitute a hefty and meaningful group in Retail. What these players need is courage. Courage to understand firstly, that they are not alone. Courage to collectively take on the monoliths which have been created that they are forced to lease from. These monoliths often have been created ironically enough from money paid by Small Business and their customers to Banks, Insurance Companies and Pension Funds.

By building an Association as strong as the South African Property Owners Association, with potentially many more actual members than SAPOA has, Small and Independent Retailers have a chance of breaking these monopolies which have been created. Legislation needs to be changed and the imbalance against Small Independent Retailers needs to be adjusted. We need laws protecting tenants who struggle daily to build successful businesses, from being mercilessly pursued by greedy landlords and worse by Managing Agents until they are declared bankrupt and their children’s futures formulaically stripped from them to feed the ever growing bellies of these landlords and their servants.

This can only be done if Politicians are honest or forced by their constituencies to become and to remain honest. An Association designed to counter-balance the power of SAPOA is necessary to ensure that there is continual vigilance and to apply the critical checks and balances to protect the interests of the weak and vulnerable. We cannot expect Government to do this. Government depends on large corporation for financial support. The South African Government does not champion the interests of small business. Despite paying sme’s lip-service, serving the people is not profitable for Government nor the individual politicians who constitute Government.