Brands and Landlords Are Suing Each Other - and There Is No Right Answer To Who Is Right
Hello and welcome to the eleventh issue of moderated, a newsletter created to dive into insights and phenomenons in the Fashion Industry. It also has a curation and summary of the most talked last week’s events of the industry, offering further readings for more details.
if you are here for the first time, welcome! I hope I can somehow help you to keep up with the fast-paced Fashion Industry. If you haven’t subscribed yet to receive a weekly issue by e-mail, you can just by clicking below.
In this week’s moderated, I will talk about the conflict between landlords and brands that surged with the Covid-19 outbreak and the solutions players are finding to deal with it.
But before we jump into the main article, check the last week’s recap of the Fashion Industry.
Last Week’s Recap
Gap Announces Collaboration With Kanye West’s Yeezy line.
Last week, Gap announced it had signed a 10 years contract with Kanye West for a collaboration with the singer’s line Yeezy. The struggling Gap saw its shares increase nearly 40% after the news about the partnership was released. The collaboration Gap Yeezy will arrive at stores in 2021 and will offer “modern, elevated basics for men, women and kids at accessible price points”, according to the statement released by both partners. The partnership also brought up some controversy related to a previous collaboration on the make between Gap and the New York designer Telfar, to who Gap allegedly stopped answering and did not pay for the work already done.
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Large Job Losses To Be Expected at Nike, Macy’s, and Swarovski
Nike Inc., the group that owns Nike, Converse, and Jordan, warned last Friday that it is planning layoffs to focus on a more digital approach. The announcement came after the group released a quarterly net loss of US$790 million – its first in the last two years. In this scenario, the Chief executive John Donahoe stated the group aims for 50% of its business to be from digital sales, which got to 30% last year. "Our vision is to create a clear and connected digital marketplace ... So we're accelerating our approach," he said.
Macy’s also announced it would cut jobs. The struggling retailer will be laying off 3,900 corporate and management employees to relieve the financial problems it is facing. Macy’s is expecting to save US$365 million in fiscal 2020 and US$630 million on an annual basis with the layoffs decision. The strategy comes aligned with the decision of Macy’s to become a smaller company after the financial hit from the Covid-19 outbreak.
Swarovski is another brand that revealed it will cut off 600 jobs worldwide, including 200 from the Tyrol region, where it’s based. The Austrian company also attributed the move to the drop in demand due to the pandemic.
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Etsy Stock Keeps Rising
Etsy is an e-commerce platform that sells vintage and artisanal products. With the lockdown situation, the website sales rose. Therefore, so did their shares, which have tripled since March and are trading at a record price. In March, the company’s shares went down due to the concern about the economic slowdown, but then people started to use the website to buy masks and other products and the scenario turned around. Last Tuesday, the shares jumped 5.1% to a record US$101.22.
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Black Fashion Industry Leaders Unite to Create a New Coalition In Favour of Diversity
More than 400 black editors, models, stylists, and executives united to create an organisation that aims to address the systemic racism and discrimination in the fashion and beauty industries. The group was co-founded by Lindsay Peoples Wagner and Sandrine Charles aims to take advantage of the discussion going on right now and walk away from “cancel culture” and towards an “accountability culture”. The coalition is planning to work side by side with organisations in the industry to create a “Quality Index Score” from companies’ information, which was modeled based on the Human Rights Campaign’s Corporate Equality Index and other similar surveys. This Quality Index Score will be made public yearly in a report shared by the organisation from 21 June 2021 and on.
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Paris and Milan Fashion Weeks Will be Happening in September - Physically
According to the Fédération de la Haute Couture et de la Mode and the Camera Nazionale della Moda Italiana, Paris and Milan Fashion Weeks will be held physically in September, as usual. The Paris Fashion Week will be from September 28 to October 6 and will have digital content to complement the physical experience. The Milan Fashion Week will be from 22 to 28 of September.
Brands and Landlords Are Suing Each Other - and There Is No Right Answer To Who Is Right
Here in Paris, commerce is once again open. Stores reopened and people returned to the streets. However, in Paris, retailers depend a lot on tourists, so stores are not yet even close to being as crowded as they use to be before the pandemic. Therefore, stores are not making the sales they use to, but the rent price of their space, be that near Opera Garnier or at Champs-Élysées, remains the same. The math does not close there. But in Paris, stores are at least open and France will be open for tourism from some countries very soon. The same cannot be said about many regions in the United States, Brazil, India, and many other countries.
This scenario is creating a very complicated situation between brands and landlords, in which it is very hard to point who is right and who is wrong. On one side, landlords are filling lawsuits brands that are not paying their rents for the last months, since the pandemic impacted them. On the other side, brands are suing landlords because their rent is not supposedly worth the same as before the pandemic. Confusing right? Let’s try to understand what is happening, some of the solutions found around the world, and how this can define the survival of some companies – from both sides.
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They Are All Suing Each Other
Last week, Valentino filed a lawsuit against Savitt Partners, the landlord of its Fifth Avenue store, in order to leave the lease with them that runs until 2029. In the lawsuit, the luxury company stated: “Even in a post-pandemic New York City (should such a day arrive), the social and economic landscapes have been radically altered”. They also said that their ability to drive sales at this store has been “drastically, if not irreparably, hindered”. Not very far from the Valentino store, another brand is currently suing its landlord – Victoria’s Secret. The lingerie brand is currently paying almost 1 million per month in rent to keep its flagship store in Herald Square, New York. Victoria’s Secret, under its parent company L Brands, filed a lawsuit against its landlord SL Green Realty with a similar speech to Valentino: the retail landscape is forever “forever shattered.”
But landlords are also not happy with the situation and they also have their bills to pay. The Simon Property Group, for example, recently sued Gap Inc. for owning them US$66 million in rent and other charges. Gap was also sued by two other landlords.
In the UK, lawsuits have not surged yet because the government banned commercial landlords from taking any legal action against tenants not paying rent until the end of September. But it does not mean the situation is not complicated too. In the UK, commercial rent collection happens four times a year. At the first one, which was in March, just after the lockdown was imposed, landlords across the UK managed to collect only half of what they suppose to receive. Brands such as Primark and JD Sports stopped paying rent since the pandemic imposed lockdown measures. The next rent collection day is close and property analysts are predicting landlords will collect even less than in March, with some of them receiving less than 20% of what they are owed.
In Brazil, the situation is more similar to the one in the United States, especially because commerce is still either closed or open for a shorter time. The largest retailers, such as C&A, Lojas Renner, and Marisa communicated some of their landlords in March that they would not be paying full rent. In São Paulo and Rio de Janeiro, some malls, which are extremely popular in the country, offered a 50% discount on rent for the time stores will be closed, while others are not charging at all for the days when retailers won’t be open. Other malls are holding a different negotiation with each tenant. The difficult situation is already resulting in some legal action from companies and landlords.
In India, the situation is also getting to the level of legal action. The majority of mall owners are not open for negotiations and retailers are getting worried about how they will meet rent payments. Even with commerce recently reopening in the country, footfall is way lower than normal, making tenants preoccupied with the near-term sales and the conditions of rent that are in place right now.
The problem in all these scenarios is that both parts hold some truth to their statement. Indeed, for retailers, paying full rent when no revenue is being generated does not make sense. However, for landlords, just not receiving rent because of a lockdown out of their control can ruin some real state companies, especially the small businesses. In the end, landlords either compromise to discounts, because a little payment is better than no payment at all, or take legal action. Landlords often like to point out that retailers should have prepared for a moment like this. But shouldn’t both parts share this responsibility? Some solutions are being considered and even applied by some players in an attempt to ease the tension between landlords and retailers.
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How to Solve this Issue?
Neiman and Marcus, Hudson Yards and many mall tenants use a revenue-sharing model of rent, in which the payment is related to the revenues made by the store, instead of a fixed monthly lease. This model makes the impact of lockdown measures the responsibility and problem of both parties. In the future, the model also makes successful sales months a celebration for both.
Another approach, which is way more radical than the previous one, consists of landlords buying struggling tenants' stakes to keep their business running. Brookfield Properties, for example, announced in May a US$5 billion fund to buy partial ownership of weak retailers. The group already used this approach to buy Forever 21 out of bankruptcy with its rival Simon Property Group. The two are considering doing the same to help J.C. Penney, a retailer that recently announced bankruptcy and that is an important tenant for both real state companies. Deborah Weinswig, founder and chief executive of Coresight Research, strongly believes in this approach from real state investment funds, as she stated:
“If more of these REITs (real estate investment trust) could say, ‘Hey, if you’re a retailer doing under $100 million in sales, we’ll give you free space, a payment platform and help you with e-commerce’ in exchange for some equity, it could really change the landscape of retail, big and small.”
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But Is This Really a Covid-19 Problem?
The thing is, even before the pandemic, brick-and-mortar was not performing well in some countries such as the United States. There were too many stores even before and the system was already collapsing. The lockdown just accelerated the process, and this is a landlord and tenant problem.
If the online shopping habits developed by consumers during lockdown become the norm, the retail situation will never return to "normal". Brands such as Nike and Zara are already planning store closures and job cuts to focus on e-commerce. Of course, stores won’t disappear as a whole, as the majority of consumers still prefer to buy brick-and-mortar, but every research points that they may decrease in number – and landlords should be prepared for that.
I personally love going to stores, way more than shopping online. However, I indeed don’t think we really need four Zaras or three Diors all 10 minutes walk from each other (yep, that’s the case in Paris). Landlords and tenants have a long-term problem to solve, a way more threatening problem than the temporary lockdown.
Thank you for reading this week’s moderated and next Tuesday I will be back with more. If you haven’t already, subscribe below to receive the moderated newsletter straight to your email, and if you really liked it, share this post with friends and family.
Bye-bye and see you next week!
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