What is to become of the small retailer?

The Small Retailer

It's no surprise that the whole world is in financial terminal but, writes Brandon Conway, what on earth does the sub prime mortgage fall out have to do with small retailers?

Young Chuck moved to Texas and bought a donkey from a farmer for $100.00. The farmer agreed to deliver the donkey the next day. The next day he drove up and said: "Sorry son, but I have some bad news, the donkey died."

Chuck replied: "Well, then just give me my money back."

The farmer said: "Can't do that. I went and spent it already."

Chuck said: "Okay then, just bring me the dead donkey."

The farmer asked: "What ya gonna do with him?"

Chuck said: "I'm going to raffle him off."

The farmer said: "You can't raffle off a dead donkey."

Chuck said: "Sure I can, watch me. I just won't tell anybody he's dead."

A month later the farmer met up with Chuck and asked: "What happened with that dead donkey?"

Chuck said: "I raffled him off. I sold 500 tickets at $2 apiece and made a profit of $898"

The farmer said: 'Didn't anyone complain?'

Chuck said: "Just the guy who won. So I gave him back his two dollars."

Chuck now works for the bank.

If you wiped out the past eight months and someone asked what a sub prime mortgage was, just like me chances are you wouldn't have a clue.

However, with the benefit of hindsight we all should have known. Here we have a situation where real estate companies in the US, sold mainly residential properties without the usual collateral.

They have been aided by financial institutions that have bundled up these mortgages and on sold them to investment banks and funds worldwide with a price tag as you would any commodity. The result is that the properties are being forfeited and the value of the bundles sold are being adjusted down to who knows what?

What should have been normal business practice has turned out to be a fraud of such gigantic proportions that the whole world economy is in turmoil. The numbers are unprecedented and because it is so mind boggling, it has acquired its own respectability. Company directors are still receiving bonuses for monies lost. . .can you get a hold on that?

The man in the street is looking at situations where our banks are declaring quarterly profits in the billions on the back of onerous fees and charges paid by us while holding the country to ransom by refusing to trade freely because they regard unsecured clients as untrustworthy. "In G-d we trust. Everybody else pays cash." The consequence is that small traders struggle to obtain finance to carry on day-to-day business.

Where does that leave the small retail trader trying to make ends meet in a shopping mall? Well, let us try and draw a parallel to what has happened in the mortgage market.

There, properties were sold at inflated prices to buyers who could not afford to buy. Small retailers are reaching a situation where they have businesses that hold leases in shopping malls where rentals have risen to heights that they cannot afford to pay and either continue with great difficulty or are forced to close.

When I entered retailing 19 years ago, occupancy costs were between four per cent and seven per cent of sales. If you were achieving sales of $10,000 per square metre, the mall manager would give you a certificate of merit to hang in your shop.

Leases for preferred traders were at least five years with further option rentals negotiable with minor increases depending on your performance. Your presence in the centre was respected and you were given the protection of limited exclusivity. You seemed to have a closer relationship with the mall owners and they took an interest in the success of their tenants.

Sadly, things have changed. In our modern corporate world with all the trappings of merchant bankers, trusts, stock markets, and the like, we dance to a different tune. Developers sell to trusts who sell shares to funds who in turn demand a return for their shareholders. They value the shopping mall based on the rents achievable over a period of time. Now we have a situation where occupancy costs are 20 per cent to 25 per cent of sales despite the fact that sales have remained fairly static.

Here is my analogy: an accountant will tell you that you cannot sustain a business trading under competitive profit margins with occupancy costs at these high levels. We have a situation where a large number of retailers cannot afford to pay the rents based on the current state of sales achieved.

I wonder if the shareholders who own the trusts that own the shopping malls are aware of this situation? What is the remedy? Get new tenants? Keep the rental high for another five years and hope that things improve? So what if another tenant loses his shirt, his house and whatever else he has to lose.

If there is a lesson to be learned for mall owners from the sub prime mortgage debacle, it should be this: Leave something on the table for your tenants. When greed rules the market, everyone suffers. Who knows, you may also finish up with a concrete skeleton and a truckload of worthless paper.