The Great COVID Rental Tug-Of-War

With the onset of the COVID-19 and the multiple lockdowns that followed, every business has been impacted in ways they have never been before pushing business leaders to navigate a very uncertain trajectory, making tough calls in the months, years to come.

While we go through making difficult choices and communicate with different stakeholders, one point that we should all recognise is the fact that the world has changed, the economy has reset, there is a new normal setting in.

we should all recognise is the fact that the world has changed, the economy has reset, there is a new normal setting in

Until we have either gotten over the pandemic or learned to live with it, we have to change strategy to get to survival and sustenance mode and device means of sailing through this period being cash neutral at best, while we continue to build stronger relationships and true partnerships with all stakeholders in the business and work on win-win solutions that will help cranking the economic wheel back again. For this, you should have accepted the new economic normal failing which you are bound to go through a lot of stress and pass that stress on the people you interact with.

you should have accepted the new economic normal failing which you are bound to go through a lot of stress

Of the many issues we are currently dealing with, one issue that will have far reaching consequences on the the retail industry which contributes to 10% of the GDP and employs 46 million people and accounts to 40% of consumption, is the current stalemate between the retail community and the malls / landlords on the issue of footing the rental bills for the lockdown period and as we unlock, agreeing on the viable rentals in the new subdued economy.

For small, bootstrapped retailers like us, with zero cash reserves, this stalemate if not resolved, and quickly, will be fatal. The close to three months of lockdown has left us in a cash-hole with us now staring at a very uncertain economic outlook and being expected to pay all bills in full while being restricted to zero cashflows during lockdown, there seems to be no light at the end of the tunnel, yet!

One of the most common lines that I have heard from property owners during these conversations is "We have EMI's to be paid". While I do understand that aspect, one of the points that is not understood well is that EMI's are not all costs.

EMI is not all cost. It has a principle portion which goes towards acquisition of a capital asset and an interest portion that can be attributed to cost of acquisition of the asset.

Most tenants don't seem to understand the difference.

Mall Metrics:

In solving any problem I believe it always helps to look at the problem from the other sides perspective.

In an effort gain an understanding of the mall financial model and where the pain points might be and create visibility, I put together this simplified financial statement making some validated assumptions with finance partners that have done mall finances. (refer the image Simplified Mall P & L)

I do believe that these numbers will be off by 10%-15% be it the rental revenue, other costs or the investment itself. I am happy to be corrected on these numbers and get input on what they need to be substituted with. However, based on the assumptions made and the base numbers used in this model, there is a surplus of 10.5 CR on a 18 CR revenue. Another point to keep in mind is the total monthly expense is at 0.75% of the total investment in the project.

Small Retail Economics

For context setting, it is important to understand that smaller retailers have not yet got the economies of scale and operate on much smaller margins which does not leave much in their bottom line. Working capital is a monthly cycle that has to rotate and the moment rotation stops, everything stops. There is generally no reserve to fund stoppages. There is not much marketing we can do and if we do manage, its mostly jugaad.

Now to go over in the current context of what the retailer side of the equation looks like, I have taken an example of a 2000 sqft format store and its simplified P & L. For the sake of a like for like comparison, I have used the same average rental & CAM cost and ignored expenses like marketing as not much is going into those buckets during lockdown.

Depending on the context of the business these numbers too will vary between 15%-20% but we are fairly in range. Now let's look at what these numbers have to say. With ZERO revenues during the lock down and all costs continuing, at massive 6%-7% of the overall investment gets wiped out every month. A three month lock down would mean around 20% of overall investment which also accounts to 50% of the investment in the interiors gets wiped out!!

With ZERO revenues during the lock down and all costs continuing, at massive 6%-7% of the overall investment gets wiped out every month.

No one seems to be asking the question of who is bearing this cost? The impact of the demand for full rentals and the stress of negotiating through unreasonable expectations in these unprecedented times has not allowed small retailers surface these other costs that are expected to be quietly borne by them when the fact of the matter is that the malls being shut has completely stripped the retailers of their ability to conduct any business to pay any of these bills. And as small retailers we have no contribution or control on this aspect. No one has!

Government Support

The government has announced a number of measures to support the industry, but so far what had trickled down and really made an impact on the businesses like ours have not anywhere closely significant to help tide over this crisis. The 3 that I am aware of are listed below:

1. Moratorium on EMI's: This has come as a welcome relief in terms of the immediate cash burden on many organisations. With the cash crunch most of us have opted for this. However our interests are accumulating over the months and our revenues are either frozen or dwindling. Eventually we will be expected to pay off these multifold increase in costs at significantly subdued revenues (50% or lesser in many cases).
2. 20% additional working capital collateral free: This option have also come as a relief in inducing liquidity into the system. We haven't seen this yet with Banks dragging their feet in making this available and we have gone past couple payrolls already! Assuming this will come through eventually, as explained in the Small Retail Economics, this entire capital and more will get wiped off paying off the exorbitant bills of the 3 months lockdown itself with zero revenue. Eventually we would had dug a bigger hole for ourselves with money that does not belong to us and then continue to stare at an uncertain economic outlook!
3. 2% relief in contribution to PF: For companies with more than 100 employees, this benefit on the employer front, while welcome (anything is welcome in form of relief as of now) does not make any mentionable dent in any finances for the magnitude of losses business are going through.

A game of bluff

Knowing people on the retail side and on the landlord side, and being privy to many such conversations, a pattern that I have noticed is that it is a game of bluff. Both parties in most cases do not want to lose each other. The landlords are aware that loosing a tenant with the current economic outlook would mean they lose 3-6 months of rental in the course of finding a new tenant, and they may not actually get the same rentals as they have signed up currently. Rent-free fit-out periods, agent commissions and sheer time to find a new tenant. But they do want to take a chance in pushing their tenant as far as they can, because they know that the tenant has invested a significant amount of money and time in building the business and "may" not let go. On the other hand the tenant is conscious that they will have to be prepared to lose a significant amount of money invested in the store and goodwill they have built for the location, but they might just bleed themselves out of business if they continue to latch on to unviable costs with the uncertain outlook.

Currently, most small retailers have significant bleeding parts, however unfortunately, for many of them have not done their numbers yet, so haven't realised!

If they do continue to latch on to the current costs, for many it will be just a matter of time for when they naturally bleed out of business in the months to come. Nevertheless, in the game of bluff its has become a matter of who picks the cards first!

Financial & emotional stress

The game of bluff is really not helping. There is a huge financial stress on all sides and currently from a small retailers perspective I can say that with every passing day and the outlook of the market, that stress is only building up and we might be grossly underestimating the financial strain small retailers are going through. With the set constraints the only survival strategy in the current uncertain outlook is to let go of any bleeding parts so you survive, albeit in a smaller way. The financial strain on the businesses is also leading to significant emotional strain which eventually I worry will lead into decisions being made driven more by emotion and anger than financial prudence.

Build a relationship, work towards a win-win

For most retailers and landlords, the relationships span multiple years, or even over decades in some cases. We have thrived on each other and will continue to need each other in the future. At a time like this, we need to all come together and create win-win solutions and quickly. The sooner we destress the situation, the sooner the focus can move on how to the more productive aspect of reviving the businesses and start cranking the economic wheel. There are many choices to be made, one key one being:

Do you want to win a legal contract and lose a relationship? Do you want the golden egg or kill the goose that gave the golden egg?!

The government while has come up with sops, I do think they need to relook at what has really made it to the ground and what difference has it made to real businesses. By inducing liquidity there is a runway that is being created, but without footing the bills and the economy not showing any positive signs, we are deferring the eventual problem. In some cases the deferring maybe lead to survival, but in many cases it will still mean death, at a later date! We need to come up with policies that not just defer bills, but foot the bills!

As I sign-off, I do foresee that like many others, Koskii will be impacted from this pandemic. There will be setbacks, we may go back a few years, we may lose a few stores! But Koskii will rise, not because we were shrewd business men, not because we had the best legal team, not because we had the best business plan, not because we had the best business idea, but also because we have done all we can with very limited resources and held together 200 families as much as we could when they needed it the most, because we have prayers of so many that have seen us deal with this crisis, because in our heart we know we have done the right thing! Always!