Negotiating with Landlords during Lockdown: Advice for Salons
Small retail businesses such as salons have been hit hard by the lockdown. With many businesses explaining that landlords have not been open to negotiation, Hairnews attended a webinar held by Pavlo Phitidis of www.aurik.com
This was an extremely interesting and valuable session for smaller retailers, many of whom have experienced difficulties so far in negotiating with landlords. Here is the take home message from this seminar.
Although this lockdown has been like a punch in the face for retailers, you need to get up and continue fighting! Rental costs represent a severe and onerous fixed overhead, and small retailers need to lead negotiations in order to fight another day and to regain the ground that you have severely lost during lockdown.
We are likely to be severely impacted for the next six months by which time we will have a better idea of the new “normality”. A vaccine, which will return things to “normal”, will most likely only be available mid 2021 at the earliest. The end of lockdown will not bring business as usual, but rather a slow start to the economy.
Lockdown will ultimately depend on the capacity of hospitals, and additional lockdowns may occur periodically if hospital capacity is reached.
The webinar divided the lockdown timeline into three parts:
1.During the current lockdown
2.The month after lockdown (at this stage this is May) where things will slowly start up again.
3.The six months after lockdown (at this stage, May to October) where business will be up and running again in a limited way and vastly different from how we know it.
It is worth remembering that the coronavirus is similar to a state of war. We are not in an environment where contracts can be enforceable and rather in an environment where what should be done is what is morally right.
No contract ever envisaged what we are going through, whether there is an Act of God clause or not. Contracts are based on the principle of fairness and it is this principle that we must try to achieve when negotiating with landlords.
No thinking person will allow debit orders to run, when they need the money to feed themselves, their families, and their wider community. People will remove the money in order to survive. We are now in a state where survival comes first.
We are now in the Red Zone!
Red Zone means:
• Act immediately to save your business.
• Get any money in that you can.
• Stop all costs that do not directly support your revenue generation.
• Try your best to keep your staff afloat as you need them, and so does the economy.
In the Red Zone, you need to set up negotiations.
At month end, debits will run and overheads will land! You need to make sure that nothing leaves your bank account between now, and the time you have successfully negotiated.
• Stop or cut costs
• Gather your people
• Share your plight widely so that people understand the situation small retailers are in.
• Communicate with landlords!
You need to make sure that the landlords understand your reality. With the increase in rates and taxes and electricity costs, inflation, the weakening rand, and regular power outages, businesses have been compromised for months and there has been no opportunity for most businesses to build a buffer large enough to cope with the current circumstances of lockdown.
Your clients’ reality has also changed and this will affect their behaviour going forward which will in turn impact your ability to rebuild and the speed at which you can rebuild. You have to come up with a different business model which may well be more expensive, and incur additional costs you did not have previously to keep clients safe.
Negotiate with Empathy
Landlords are also facing challenges, and their ability to negotiate may depend on their own ability to negotiate with their funders and investors. Also, they have operating costs. Pest control, cleaning, security and other services still need to run. Showing empathy builds trust and creates a win win.
Keep Your Staff
If you possibly can, avoid retrenchments. Staff know that they are all in this together, and most staff will rather take a pay cut or shorter hours, than have one person retrenched. Plus, you will need your staff to restart your business when things open up again in our new reality. This may include reduced density of clients, protective clothing, etc.
You must communicate strongly with your landlord that you have no buffer and you are in a serious plight, however at the same time you understand their plight.
Have Plans in Place from April to October
What will you do when you open again? How are you going to run your business and make changes? You need to demonstrate that you have created a place of safety for clients. If you can do this it will set your business apart, but it will mean increased expenses.
For the next six months you will be navigating this new landscape. Thereafter you can go forward with more confidence and build on what you see is working. After six months it will be your time to invest in growth. If you have a business model that is well adapted and you can operate it and demonstrate consistent performance, there will be superb locations available and leases on offer at rates you will not have seen for a long time!
Project that your turnover in the next six months will probably be 30 to 50 percent of a normal month. Prepare for the worst case scenario and plan for the best, it will be a rough run. This is why you need to variabalise all possible costs aggressively!
You have to plan to negotiate a six month deal with landlords because this is how long it will take for things to settle. What works in May might not work in June.
If you have no success in negotiations and you feel the counter offer is not realistic you will have no choice but to step back.
The Negotiation Process
You need to approach the situation with empathy and earn your rights before you negotiate, by being totally transparent about your situation. Apply for all forms of Covid-related relief and apply for bank relief measures. You need to prove that you have exhausted all other avenues and you are approaching your landlord because you literally have no other choice.
During April and May: You should ask for “rental forgiveness” for two months. April and May should see no rent payable. You need this time to recover and you need what money you have, to keep your team who will power your business. Losing trained staff is a huge setback! To make up for it, offer an extension of your rental contract by two months at its end.
However during this time you should offer to pay all the operational costs as your landlord needs cleaning, security etc for the centre to survive.
This deal will give you breathing space and you can use the rental money to reshape your business and support your staff.
From June to October: You should ask for rental to be flexible and to be calculated as a percentage of sales. Remember your landlord is a partner in your success. Negotiating a percentage of your turnover will give them an insight into your success or your plight. During this time you should pay the operational costs as before.
Remember to emphasise that your landlord needs you there! How many tenants can a centre lose before the vibrancy and appeal of the centre collapses? Your salon creates joy and variety among the big chain stores. At present it is unlikely that a new tenant will step in to fill a space if an existing shop closes.
1. You need to use your heart and head. It is an emotional time, let your feelings help you connect. Understand this person is also battling, locked down, home schooling. Talk about them, talk about you. A purely rational argument is not as effective.
2. Prepare and be honest. Show your books and your numbers. Be very honest about your totals.
3. Be persistent. Most will say no at first, but do not take no for an answer. Continue engaging with them, once lockdown is over meet at their offices, contact them on their cellphones! In the webinar Pavlo Phitidis said that as a last resort, you should temporarily stop paying rent and instead place what you can in an attorney’s trust account.
4. Landlords may act tough and pull out contracts. You must persist and be open. Show them you have your plan in place, and how you have reached it.
5. Be objective driven. If an alternative offer does not work for you then consider closing.
6. At the end of 6 months you will have a better idea of your landscape, and then renegotiation can happen based on the new reality.
The Bigger Picture
If instalments fail due to funds that have been used to feed people, this is not fair. It is also not fair that any retailer prevented from trading should have to face costs that are not linked to generating turnover. It is not fair that a landlord should make concessions if they don’t also get them.
In the best case scenario, government should implement a complete freeze on all instalments for the next two months, or else there is a high likelihood the most important people (small business owners who have invested everything into their business) may be forced into a state of impoverishment.
There will be a round table webinar discussion with retailers as well as landlords, with Bruce Whitfield, on Thursday 16 April at 10 am to discuss the situation from all sides, and what measures can be requested from government.
Please attend this if you can! The more retail businesses who get involved, the more power any actions and appeals will have. You will find the sign up button HERE.
Watch the full webinar HERE