After losing nearly half of her customers in the coronavirus lockdown in March last year, small business owner Shirley Sun was starting to think her only option would be to shut down for good.
Her Chatswood-based fitness studio, Leap Health and Wellbeing, had never been quieter, hurt further by its reliance on inner-city office workers. “I was potentially looking at putting my business into administration. It was really difficult and challenging,” she says.
Thankfully, after eight months of wrangling with her landlord, Sun has finally renegotiated the terms of her lease and gained rent relief, meaning her business will live on.
For sweet shop owner Greg Smith there was no pre-Easter sugar rush when COVID struck. Left with $40,000 of chocolate confectionery and no customers, his profit margins quickly soured after sales plummeted 80 per cent.
“Suddenly no one wanted to come to the shopping centre. It was pretty brutal,” says Smith, who owns the Lollyology store in Westfield’s Knox City mall in Melbourne’s east.
He managed to hold on by launching a website in three days flat, selling the bulk of pre-ordered stock at cost, delivering orders himself and negotiating with Westfield to reduce his rent, a process that took six months.
Now, while things are picking up, Smith says he still worries about what will happen when government support like JobKeeper disappears. “I do worry about the second half of the year,” he says.
However, not all small business owners will be as fortunate. Insolvency and legal experts are bracing for a wave of collapses in the new year as government stimulus falls away, insolvent trading protections end and consumers shift their spending online.
Directly in the firing line is Australia’s $400 billion small business sector, along with some of the country’s largest shopping centres which rely on those businesses to drive foot traffic.
I was potentially looking at putting my business into administration. It was really difficult and challenging.Fitness studio owner Shirley Sun
Grey clouds are hovering despite recent company results and sales data suggesting the retail sector is experiencing a sunny patch following months of souped-up spending by stimulus-flush shoppers.
In November, retail sales rose a huge 13.3 per cent as Victorians emerged from lockdown and Black Friday sales surged. Major retailers, such as Solomon Lew’s Premier Investments, have revelled in the unexpected boon, reporting huge jumps in profits and sales – especially online.
But the buoyancy may mask some trouble ahead.
Smaller operators – such as gyms, travel agents and fashion boutiques – could be set to struggle in the coming months as stimulus measures wear off. Their decline could severely weaken some of the country’s largest shopping centres and their multibillion-dollar owners.
A study of Australia’s 31 largest shopping centres by independent property research collective PAR Group shows small businesses make up 37 per cent of stores in those malls.
Smaller fashion brands such as Autograph, Alice McCall and Zimmermann account for another 18 per cent, while large retail chains, such as Vodafone and Flight Centre, make up just 17 per cent of retailers.
Authors Rob Ellis, Damian Stone and Anthony DeFrancesco warn this reliance on small businesses could pose an issue for landlords if retail conditions began to decline.
“This has ramifications for shopping centre owners, as they face the risk of store closures by small businesses which have insufficient financial reserves to trade profitably in a post-COVID-19 retail environment,” they say.
And while many businesses, big and small, are sitting pretty after their biggest trading period of the year, as 2021 drags on the risk of insolvency grows.
The first quarter of the calendar year is often a boom time for collapses, says KordaMentha partner Scott Langdon, a trend he attributes to retailers needing to furiously restock and set their product strategy for the year ahead following the Christmas rush, along with a more “emotive” element.
“Retailers have just gone through their best sales and profit period for the year and are faced with another nine or ten months before they get back to it,” he says. “They feel like there’s a long slog ahead.”
Langdon expects this trend to be no different in 2021, albeit slightly delayed, predicting an increase in insolvencies and administrations when much of the government’s stimulus and other COVID-19 relief slowly wears off.
“In 2021 we’ll see a polarising of the retail market, and we will see an increase in insolvencies or administrations,” Langdon says. “The strong will get stronger, and those who have archaic or undeveloped business plans will struggle, and struggle fast in this ever-changing retail environment.”
Figures from corporate regulator the Australian Securities and Investments Commission, released recently, augur trouble ahead. There were 120 insolvencies for the final two weeks of December, as much as triple the amount reported for the same two weeks in 2019.
Temporary safe harbour provisions relieving company directors of their duty to prevent insolvent trading have also worn off, increasing pressure on businesses that may have relied on them to weather a COVID downturn.
‘Strong will get stronger’
Olivia Hitchens, principal at specialist retail law firm Hitch Advisory, agrees with Langdon’s prognosis. She says there is a “huge delineation” between retailers with a good online offering and those without.
“Small businesses with a good online presence have done well. Those without an online presence who rely on shopping centre traffic have done badly,” she says. “If you don’t have an online presence, are not unique and are relying on foot traffic, you will do it tough.
“I know people who kept their doors open by using JobKeeper payments for themselves and their staff. But COVID is accelerating closures that were likely to have happened to some businesses anyway, she says.
Hitchens says insolvencies will be playing “catch up” as they have been delayed by the presence of JobKeeper and the government’s safe harbour provisions.
In a recent note to investors, Citi analysts Adrian Dark, Suraj Nebhani, Akshat Agrawal point out there is now an oversupply of retail space in shopping malls.
Vacancy rates are elevated and likely to rise further, along with a decline in tenant quality and increase in temporary tenancies. More store closures are expected as chains rationalise their portfolios.
It’s like that classic Warren Buffett quote: ‘Only when the tide goes out do you discover who’s been swimming naked’.”James Stewart, KPMG’s head of restructuring
Larger retailers will end up taking a greater share of shopping centre space as small businesses close, accelerating a generally negative trend for malls.
“We expect the market to be in tenants’ favour, with falling rents and/or rising incentives, for some time,” the Citi analysts said.
Another key indicator of distress are disputes lodged by commercial landlords and tenants under the government’s commercial tenancy relief scheme.
Victorian Small Business Commissioner Judy O’Connell says, since March last year, the commission has received more than 14,400 COVID related enquiries.
Some 3296 small business owners and landlords have lodged applications to resolve rent disputes and, of those, 890 were resolved with early advice and another 864 settled in mediation, she says.
About 2367 requests for mediation have been filed in NSW, of which 90 per cent are resolved without going to court, the state’s Small Business Commissioner Chris Lamont says.
“We encourage eligible landlords who come to new arrangements with their impacted tenants to apply for the available land tax relief over the coming months,” he says.
However, despite the potential trials facing the country’s small businesses, not all in the sector are pessimistic about their health. James Stewart, KPMG’s head of restructuring, is far more sanguine about their prospects.
“We’ll see some [insolvencies] because it’s inevitable, but I would be surprised if we got a big rush. It’ll be a far softer landing than people think,” he says. “It’s more likely to be a gradual unfolding of some businesses that were vulnerable anyway, and as the stimulus runs off that just exposes it.”
“It’s like that classic Warren Buffett quote: ‘Only when the tide goes out do you discover who’s been swimming naked’.”
Source: Thanks smh.com