Retail, hospitality hit by rents, slow spending

The rate of business failures in hospitality and retail during the past year should be ringing alarm bells for decision makers.

A walk down Hay Street in the city, or through the precincts of Subiaco, Leederville or Highgate shows the tangible impact of the challenging business environment many retail and hospitality businesses in Perth have endured.

Business News has compiled a list of nearly 50 closures and insolvencies in the central city and surrounds in the past two years.

(click here to see a PDF version of the full special report, including map and three lists)

Landlords unwilling to adjust rents, and tighter purse strings among consumers, have been flagged as two of the biggest causes, in what numerous industry insiders described as the perfect storm.

“The city is done, mate,” a director of one major hospitality chain told Business News.

“There’s no reason for anybody to go there.

“(And at shopping centres) major landlords don’t care who they bankrupt.”

Across Western Australia, there were 76 retail insolvencies in the 2019 financial year, significantly up from 31 in 2014, according to the Australian Securities and Investment Commission.

In accommodation and food, there were 85 appointments, rising from 54.

That’s despite a general improvement in numbers across the economy as a whole, with 857 insolvencies in the state in the 12 months to June 2019, down 8 per cent on the previous year and 14.4 per cent on 2016.

There have been some high-profile scalps, including The Trustee on St Georges Terrace and Rosendorff Diamond Jewellers on Hay Street.

Java Juice is the latest example, having entered administration in mid-August.

Also included on the map are larger national chains that have hit the wall, such as Ed Harry.

Meanwhile, other operators have scaled back.

Franchise Fusion owner Troy Pickard. Photo: Gabriel Oliveira

Franchise Fusion owner Troy Pickard told Business News the company had grown from 11 stores in the Bucking Bull and Primal Pantry franchises to 17 in an 18-month period, but then closed five shops in the past 10 months.

The business then sold the master franchising rights for Bucking Bull in WA, leaving Primal Pantry at Brookfield Place as the only operating asset, for now.

Mr Pickard, who has been in the industry for 20 years, said it had been a stressful period.

“It doesn’t leave an owner when you walk out of the store, it stays with you all day every day,” he said.

“It’s fair to say the food and beverage sector in particular is (amid) the perfect storm at the moment.”

Major contributing factors were a soft economy, landlords unwilling to lower rents, and wages unchanged since the boom.

“You’ve got a challenge with landlords and shopping centres being greedy, and I say that with the greatest respect … it’s driving businesses to fail,” Mr Pickard said.

They were unwilling to accept the challenging economic climate, he said, leading to tenants exiting and shops becoming vacant.

“The premises is then vacant for an extended period of time, and there are examples where those tenancies are rented out at half, even a quarter of the value a previous tenant was expected to pay,” Mr Pickard said.

“Landlords are not prepared to accept the changing economic climate and [are] failing to embrace the need to reset rent levels to pre-boom periods of 10 years ago.”

One reason Mr Pickard said Fusion had retained the Brookfield Place Primal Pantry was that the landlord had been willing to work collaboratively with the business.

Numerous sources suggest landlords were often unwilling to reduce rents because it could lead to building devaluations, with some preferring to use rent rebates so as not to affect the headline value of assets.

Confidence, spending down

HLB Mann Judd Insolvency WA principal Kim Wallman said his team, which was focused on small businesses, was having more meetings than usual.

“In the retail sector it’s just turnover,” he said.

Consumers were not confident, he said, and businesses simply did not have enough revenue coming in.

Mr Wallman said many landlords were reluctant to share pain with tenants by reducing rents, a common opinion expressed by many industry sources speaking to Business News.

Data from the Australian Bureau of Statistics shows retail spending has been stagnant for some time. 

Retail sales in WA were $34.1 billion in the 2019 financial year, up just 0.2 per cent (unadjusted for inflation) compared with the 2017 financial year.

For clothing retailers, sales dropped 5.9 per cent over that period to be just more than $1.1 billion in 2019.

Cafe, restaurant and takeaway sales improved, growing 4.5 per cent from 2017 levels to be $5.6 billion in the year to June.

But that belies a longer-term trend.

Sales across food outlets were higher in the 2013 financial year than the most recent period.

Beaumonde on the Point director Neil Irvine told Business News the cafe and restaurant industry in Perth was in very bad shape.

“The industry is tough, Perth needs another million people to make it worthwhile for a lot of restaurants,” Mr Irvine said.

“We’ve got … too many things in Perth for the amount of population we’ve got.”

The economy was soft, he said, and too many businesses were engaging in discount wars. Customers also had strong expectations on price.

“I can only see more people going under unless people’s attitude to restaurants change,” said Mr Irvine, who is both a landlord and tenant at the On the Point precinct.

“We’ve all had to discount rents, I’m not the only landlord in Perth who’s had to do that.” 

But he said councils had been unwilling to reduce rates as rents had come down.

The Honda Shop managing director Eddie Peters. Photo: Attila Csaszar

The Honda Shop managing director Eddie Peters said pressure was also being felt outside the city.

“Go through Subiaco and look at the empty shops, go to Burswood … come to Midland, there are 30 empty shops just on one stretch along Great Eastern Highway,” he said.

“The businesses that (were) in there, they’re small retail, family businesses that just can’t compete.”

Mr Peters said there was also a high vacancy rate in regional areas such as Bunbury.

Bricks and clicks

Co-founder of Cottesloe fashion boutique The Black Wall, David Long, said his business had expanded to a second store in Fremantle, but retreated after less than two years.

“We had our shop right in the heart of Fremantle, right on Market Street, and businesses that had been there almost 30 years, neighbours of ours, all shut down within the past 12 months,” Mr Long said.

“Some tried to sell their businesses but no-one would buy in.

“Franchises … established businesses from over east have given it a go into Fremantle but all of them have gone.”

He said a big part of the squeeze on businesses was that commercial rents had not come down as much as residential rents.

On the other side, customers had less disposable income.

An example of this was the fly-in, fly-out workers who previously shopped at the store.

During the boom years, the shop might get one or two of those customers a week, buying $1,000 of items.

“That customer almost doesn’t exist any more,” Mr Long said.

Yet there was some cause for optimism, he said, with online sales creating new opportunities and driving a significant chunk of business.

The Honda Shop’s Mr Peters is less enthusiastic about online retailing.

Mr Peters was a highly vocal advocate of levying a GST on all online purchases, with the federal government dropping the threshold from $1,000 to zero last year.

He has also campaigned for action against overseas retailers he claims are fraudulently producing invoices to avoid customs handling charges and reduce GST liability.

Even in cyberspace, however, WA consumers are being thrifty.

According to data collected by the National Australia Bank, WA retail sales fell nearly 4 per cent in April compared with the previous month.

Year-on-year growth in WA was about 1.5 per cent, about half the rate of Queensland and Tasmania.

Small Business Lounge founder Brooke Arnott. Photo: Gabriel Oliveira

Small Business Lounge founder Brooke Arnott said there were indications customers were moving back towards in-store experiences because they wanted better customer service.

“We’ve got clients that have grown globally and they are mainly retail-based in stores,” said Ms Arnott.

But she said there were many factors making competition from online retail tough.

“When you have a space for someone to come into, there’s a lot of extra costs to take into consideration (compared with) running an online store,” Ms Arnott said.

“Rent, electricity, staff to manage those stores.

“The customer is still paying the same price as if you bought it online.”

Taking action

Business Foundations chief executive Phil Kemp said business models, and a lack of expert help, were overarching problems.

“The issue business are facing, mum and dad business, (is) that technology is changing the way business is conducted within the business and between businesses,” Mr Kemp told Business News.

“The way business was done in the past is not the way business will be done in the future.”

He cited the example of JB Hi-Fi, which recently reported an increased profit, as one business which had navigated a tough environment by investing in a new business model.

Examples of how technology was changing, and could benefit business, were tools for project management or scheduling workers, new channels to market, and social media marketing.

But a big problem was that many business owners struggled to get the assistance they needed on these fronts.

Business Foundations, which ranks fifth on the BNiQ list of SME organisations and programs, was recently focused on supporting technology adoption in regional areas with indigenous enterprises, he said.

Technological literacy, particularly around digital marketing, is also a priority for Business Station, according to chief executive Colin Jorgensen.

It operates three incubators across Perth and ranks eighth on the SME programs list.

Mr Jorgensen said examples included forums on issues including website development, software, online trading, and digital marketing and strategy.

“(We want to) get people digital savvy,” he said.

The driver was not just online sales, but building brand awareness, Mr Jorgensen said.

Consultancy B-Directory owner Elsa Rene-Mitchell is working on similar training initiatives in digital marketing, including for AgriStart, 21st on the BNiQ list of SME organisations and programs.

“You need to be willing to do everything, to up your social media game, make sure your website and online presence are doing really well,” Ms Elsa Rene-Mitchell said.

“Good isn’t good enough any more; you have to be exceptional.

“We’re living in the era where it’s cool to own a business, I think we’re in a small business boom personally, so its highly competitive.”

Mr Jorgensen agreed that it was increasingly easy for people to open small businesses, although they would be entering a tough economic environment.

“It’s easier now to set up a business than it was 10 years ago,” Mr Jorgensen said.

There was more support and information available than ever, he said.