As if the rise of e-commerce on its own was not enough to singlehandedly cripple brick-and-mortar retail, retail property owners are getting hit with collateral damage. Online returns being made in-store, which are then subtracted from a store's sales, are turning out to cost property owners "material" amounts of money. Many retail property owners are paid rent that is correlated to the amount of sales consummated on their property, but the convenience of being able to buy online and return in store has put significant pressure on these figures and - in turn - property owners' earnings. Bloomberg reported this morning:
Mall owners, already squeezed by e-commerce and spending billions on property makeovers to draw shoppers, have a new headache: retailers deducting returns for items bought online from their sales figures.
David Simon, chief executive officer of Simon Property Group Inc., says a “significant number” of tenants are underreporting sales and that the company, the largest U.S. mall owner, is negotiating with them to find a solution.
For America’s beleaguered retail landlords, sales per square foot is a crucial metric, used by investors to gauge their financial health. In addition to the dollars lost themselves, a low number can damage a mall’s reputation on Wall Street.
The issue Simon is flagging arises from rents that are based on how much a retailer sells in its physical store. It’s common for a tenant to pay a base amount and then give the landlord a cut of sales that exceed a set threshold. Occasionally a retailer has no base rent and is obligated to pay only a percentage of sales rung up at the property.
“We are getting dinged by internet returns,” Simon said on a conference call with analysts Friday. “Every retailer is different, and there is not a standard response yet. It needs to be addressed in future leases.” He declined to quantify the problem but said it was “material,” telling the analysts that “we have audit rights, and in our normal procedure we saw some anomalies about sales.”