Landlord-tenant divide

Source : Straits Times – 15 Jul 2009

IN THE natural order of things in the retail world, a landlord protects his tenants, and this traditionally has meant not cannibalising their business.

That one big mall owner would have information on its tenants’ takings – via a central cash register system – and set up competing businesses through a subsidiary, makes news, and more so when such a move raises a stink among the tenants.

I am referring to the controversy of Far East Organization’s subsidiary Kitchen Language (KL) and its opening of five eateries – three Tully’s coffee joints and two sandwich shop Quiznos – in its malls including Orchard Central over the last eight months.

Far East said it brought the brands into Singapore so consumers can have wider choice. It also gave the assurance that Far East does not reveal tenants’ takings to KL.

I had interviewed one upset Far East tenant, sandwich chain Subway, and reported on the alleged conflict of interest in The Sunday Times on June 7.

The other major mall operators contacted – CapitaLand Retail, Asia Malls, Lend Lease and Frasers Centrepoint – said they are not in competing businesses with their tenants.

This led to a second article on June 20 reporting on how at least four retailers – Subway, O’Briens Irish Sandwich Bars, Starbucks Coffee and Bakerzin – are now proposing new protection clauses in their tenancy agreements.

Lawyers and real estate consultants interviewed are divided on whether Far East’s behaviour is anti-competitive. I’m no legal expert so I would not want to comment on the legality of what Far East did. But the episode does raise questions about what makes good business practice.

The tenants’ concerns appear justified. Landlords have access to sales figures of all tenants in their malls. The information is used for calculating rent, which is made up of a fixed basic rate and a variable tied to merchants’ gross turnover.

Over the last five years, advances in technology have given landlords timely, accurate and granular sales information. A central point-of-sale (POS) system that connects to the tills of all the tenants in a mall gives sales feeds to mall owners daily, down to the amount and time of each transaction.

Some real estate consultants have dismissed the value of such data. But tenants are making a Bronx cheer. Justifiably so, it appears.

For instance, with daily sales feeds, landlords can gauge how lucrative tenants’ businesses are before deciding to plunge into any retail business.

The landlord can also glean consumer spending habits from week to week or month to month by studying tenants’ sales – without having to pay a cent for market research. That is all sweat off their backs, the tenants argue.

Some real estate consultants, though, counter that landlords can just as easily monitor shopper traffic by having someone stand outside a retailer’s store, quashing tenants’ protests of intrusive snooping.

The issue of tenants’ free choice – of getting into a mall or not – is also moot: Having their tills tied to the landlord’s central POS is mandatory under most tenancy agreements.

Besides, there is the promise of symbiosis from the shared information. For instance, when a mall operator organises a midnight sale, it wants to know immediately how many shoppers and retailers benefited. Such insights will allow the mall operator to better cluster tenants by business type and plan promotions to boost shopper traffic and sales.

Given all this, I’d think it’s not too much to ask of a landlord not to compete with its tenants. After all, a mall’s success is also determined by how well shops do. Yes, consumers might get more choice if landlords were to bring in new brands, but is it worth it if the result is unhappy tenants?

As Singapore Retailers Association’s executive director Lau Chuen Wei said: ‘Let landlords carry on with their core business of building good relationships with tenants for their mutual success and let tenants carry on with their own businesses.’