Landlords under pressure as retailers deduct online returns from revenue

4 May 2018 (Last Updated May 4th, 2018 16:28)

Mall owners, who currently suffer from the growing e-commerce trend and the pressure of finding new ways to attract shoppers, are now dealing with retailers deducting returns for items bought online from their sales figures.

Landlords under pressure as retailers deduct online returns from revenue
Landlords have to invest in transforming shopping centres to attract customers. Credit: JTA

Mall owners, who currently suffer from the growing e-commerce trend and the pressure of finding new ways to attract shoppers, are now dealing with retailers deducting returns for items bought online from their sales figures.

The CEO of Simon Property Group, the largest US mall owner, David Simon says a ‘significant number’ of tenants are underreporting sales and the company is trying to negotiate with them to find a solution.

For the struggling retail landlords, sales per square foot are a crucial metric, which is used by investors to measure their financial health.  While the landlords lose out on money, a low figure can also damage their reputation on the stock market.

Simon says that the issue arises from rents, which are based on how much a retailer sells in its physical store.

It is common for a tenant to pay a base amount, followed by a cut of sales to the landlord, however on occasions a retailer has no base rent and is obligated to pay only a share of the sales made at the property.

Simon said: “We are getting dinged by internet returns.”

“Every retailer is different, and there is not a standard response yet. It needs to be addressed in future leases.”

He refused to put a number on the problem, but said it was ‘material’ and that they ‘have audit rights, and in our normal procedure we saw some anomalies about sales’.

This adds tension to a list of troubles that retail property owners face as internet shopping takes over brick-and-mortar revenues.

Landlords have to invest in transforming shopping centres and add attractions that customers can’t find online, such as restaurants and gyms.

Strategic Resource Group managing director Burt Flickinger says the makeover of shopping centres can involve adding small, local merchants and relatively unknown retailers to the mix as larger chains cut back on space.

He said that big and well-known companies, especially the publicly traded ones, are more likely to conform to established guidelines when reporting sales figures.

Flickinger said: “As the big chain tenants close, they’re replaced more often with newer, more entrepreneurial independent owner-operators, who can be more casual in terms of responsibly reporting.”

According to estimates in an investment-banking client presentation by RBC Capital Markets, online sales will represent 24% of total retail sales by 2027. The growing online operation will result in returns piling up and becoming an even bigger issue to landlords.

The rate of returns for online purchases is estimated to be four times the rate for physical-store sales, according to David Sobie, CEO of Happy Returns, which operates in malls and other shopping venues, says, taking online returns for retailers with a small number of physical stores.

While returns seem bad for the store and the landlord, according to Sobie ‘returns from internet purchases as a source of foot traffic are valuable’, as opposed to in the shop returning unwanted purchases where customers are ‘going to browse, and maybe get something to eat’.

Retail and real estate consultant Raider Hill Advisors CEO Daniel Hurwitz said: “The mall business has become obsessed with sales per square foot as an absolute measure of success. The reporting of sales has become less pure because there are so many moving parts with online returns. As an industry, it would be prudent to come up with a way to deal with this.”