Many retailers such as Accent Group, Myer, David Jones and Super Retail Group even have in-store kiosks where customers can order goods online when they cannot find the right size or shade in stores.
But retailers are reluctant to share their online spoils, saying most online orders are fulfilled from warehouses and online sales are less profitable than bricks and mortar sales.
Landlords’ push for a share of digital sales came to light at the height of the pandemic, when online sales peaked at 20 per cent of retail spending and reached 75 per cent of sales at retailers such as Accent Group. But it had been bubbling away under the surface since the very early days of e-commerce.
It’s a rich claim from landlords to be claiming those sales when they haven’t been made from a physical store.
— Paul Zahra, Australian Retailers Association
Vicinity Centres chief executive Grant Kelley hit the headlines when he told The Australian Financial Review Retail Summit in June that rental agreements should include a base rent plus a variable component based on a proportion of a tenant’s online sales.
“I think we need to no longer regard [retail] space as a physical construct but as a virtual construct,” Mr Kelley said, claiming that two-thirds of online fulfilment actually happens through click-and-collect within stores in shopping centres.
Not a ‘simple’ formula
His argument was rejected by Australian Retailers Association chief executive Paul Zahra and Rob Scott, chief executive of Wesfarmers, which owns Bunnings, Target, Kmart, Officeworks and online retailer Catch.
“Often online sales are less profitable for retailers than in-store sales. So I don’t think it’s as simple as simply adding online sales to the calculation of rents,” Mr Scott said.
Mr Zahra said the push for a share of digital sales had picked up pace – led by major shopping centre landlords such as Westfield owner Scentre Group and Vicinity Centres – as online sales growth remained high even as stores reopened in recent months.
“What we’ve seen is that in any new leases an [online sales] clause is being presented to most retailers,” Mr Zahra told The Australian Financial Review.
“A lot has been thrown at retailers and this year  has been a particularly unusual year because of the pandemic and most retailers have had to rethink their whole business model as a result of this quantum shift in digital trading.
“So it’s a rich claim from landlords to be claiming those sales when they haven’t been made from a physical store.
“They have been at it for some time, it’s now being taken seriously by landlords because they’re losing foot traffic.
“Their argument is that someone comes and visits a store, they go showrooming and then buy online and [the landlord] should claim part of that sale.
“I’d say the opposite happens – for every one of those examples someone researches on their desktop and then goes into stores,” he said. “How they can claim the revenue without the cost – will they invest in online platforms?”
A ‘burning issue’
Mr Zahra said larger retailers had the property and legal resources to fight landlords’ claims for a share of digital sales, but the ARA was worried about small and medium-sized retailers that lacked the power and resources to resist.
“It will be an SME [small and medium -sized enterprises] issue as opposed to the majors – no major retailer I know would agree to that,” he said.
“Given the way the whole market is moving, my advice to all retailers is reduce your physical footprint and invest heavily in digital.
“But you can’t invest in digital if you’re paying rent on sales you don’t make in stores.
“It’s a burning issue that’s going to get traction.”
The debate is raging not only in Australia.
In Britain, where online spending accounted for about 20 per cent of retail spending even before the pandemic, dozens of large retail landlords are considering new rent calculation models that would factor in e-commerce sales, including delivery and click-and-collect.
For example, British property giant Hammerson announced plans in August to allow tenants to move to more flexible, turnover-based leases if they paid an “omnichannel top-up element” based on store performance and omnichannel metrics, including the click-and-collect performance of a store or footfall from showrooming.
“The lease structure in the UK in particular has not been fit for purpose for some time,” said Hammerson’s UK and Ireland managing director Mark Bourgeois.
“Retailers are loud and clear in telling us that change is required, and a lot of deals that we’ve been doing over the past year or so have incorporated elements of what we’ve [now] announced.”
Hammerson is testing the approach before rolling it out across its entire portfolio. The landlord expects all leases to be converted by 2023.
Macquarie Bank analysts estimate that online retail penetration will reach 20 per cent by 2025 – reducing demand for bricks and mortar retail space – while retailers such as Accent Group and Kogan.com predict that 22 to 30 per cent of all retail spending will have shifted online, in line with trends in Britain, the US and China.
If British retailers agree to sign leases with “omnichannel top-ups”, Australian landlords facing declining footfall, declining store-based sales and less demand for space will inevitably increase pressure on local retailers to follow suit.