Chemist Warehouse and Priceline are reportedly asking for “massive” rent reductions, as API warns that pharmacies could close and one industry expert says some stores are severely impacted by the pandemic
API chief executive Richard Vincent has reportedly told listeners at a conference call announcing the Priceline parent company’s half-year results that pharmacies could close if negotiations with landlords do not go in the company’s favour.
Mr Vincent said that, “We have engaged in discussions with our landlords and in most instances those discussions are proving fruitful, but where they are not fruitful, we are not afraid to permanently close stores or clinics,” Fairfax Media reports.
The half-year results showed that “self isolation has slowed sales” in April as a result of the COVID-19 pandemic.
Sales results varied between stores and depended on factors such as location and whether the store had a dispensary, the company said.
However in a statement about its half-year results, API said that “API will continue to monitor the financial performance of its Priceline network with the intention of keeping stores open and people employed where it is safe to do so. API has entered negotiations with landlords and in most instances those negotiations are proving fruitful.”
Earlier this week, the Australian Financial Review’s Larry Schlesinger had reported that Chemist Warehouse and Priceline had both “stunned their landlords by proposing massive rent reductions despite being one of the few retail groups to trade strongly during the pandemic”.
Mr Schlesinger spoke to Ray White leasing agent Anthony Harris who said that these groups were “taking the piss out of the system”.
He cited correspondence from Chemist Warehouse Leasing Services on April 8 (one day after the new Code of Conduct regarding commercial leases during and post-the pandemic was released) in which the discount giant asked, among other things, for rent to be halved during April, May and June.
The landlord of one Chemist Warehouse was quoted saying he “strongly” doubted that the store’s turnover had plummeted by 50%, and after the group was contacted for comment by the Financial Review, CEO Sam Gance reportedly apologised to this landlord “for sending them ‘the standard corona letter’” and said the April shortfall would be paid and future payments made in accordance with the lease.
Commercial rental expert Phil Chapman, director of retail leasing authority Lease1, told the AJP that “The mandated Code of Conduct’s overarching principle is to act in good faith, with transparency, and to come out as a small to medium enterprise as a large retailer is not”.
“It’s certainly not within the spirit of the Prime Minister’s call to arms.”
Chemist Warehouse and API both declined to comment on this matter.
Who’s hit hard?
However, Mr Chapman said that some pharmacies are indeed severely affected, and urged any pharmacy owner in distress to act now – and for all owners to recognise that the economic impact of COVID-19 will affect their business for a long time to come.
“We’re finding the community pharmacies who are located in the strips and the smaller outdoor shopping centres have proven the most resilient, and I believe that post COVID-19 and the recovery period, that that sector of community pharmacy should realise their added business value, and that should be reflected in better rental outcomes, due to the fact that they have proven themselves as wholly resilient and low-risk as a tenant,” Mr Chapman said.
“Then there’s the downside. Unfortunately, and as is usually the case, the pharmacies in the larger shopping centres have been highly exposed to the massive fallout of shops closing around them, and the distance and proximity to supermarkets in some regard.
“Footfall for some of those has dropped dramatically, even though they have remained open and answered the call the Government put out to them.
“Recent comments about the reset in rents out there in the Australian Financial Review, that rents could reset by as much as 30% in some shopping centres, should be reflected for pharmacy as well.”
Another piece in the Financial Review this week, by property editor Nick Lenaghan, quoted Jefferies analyst Sholto Maconochie who said that he expected rents to drop by between 20% and 30% over the next 12 to 24 months.
Hardest hit are pharmacies in CBD locations, Mr Chapman told the AJP, as “All the office workers are working from home and any food and beverage nearby is shut as well, there’s no tourists, no office workers, no lunchtime trade and no footfall milling around”.
“This is causing CBD-located pharmacies to be the worst affected.”
Mr Chapman said that a handful of pharmacies had closed recently with COVID-19 a likely factor.
The sector had already been impacted by factors such as the maturing of price disclosure as well as the lack of a signed Seventh Community Pharmacy Agreement.
A ‘whole new ball game’
Mr Chapman said that there has been a “very mixed response” from landlords to the economic situation caused by measures to contain the pandemic.
“Retail leases for pharmacy are a whole new ballgame, and there’s a new set of rules.
“We are disappointed to find many landlords seeking to gain, or take opportunity, through this crisis by seeking potential information on tenants’ businesses that have no correlation to the current health and economic crisis,” he said.
“They’re coming out, some of them, with a checklist saying, ‘We want two years’ profit and loss, what’s your capacity to raise capital from the market’ – all this sort of stuff. We’ve actually taken it up with the Shopping Centre Council.
“Some of the smaller landlords are getting on the same foot there – they’re seeking to stall and block legitimate and proportionate relief during the COVID-19 period.”
He said that any pharmacy which has a lease renewal in the next 24 months “should really be sitting down and strategising how they’re going to approach that before the end of this year”.
“A pharmacy in distress should act as early as possible, and have that communication with their landlord.
“Our initial advice, if you are seeking relief, is to be open and transparent. Remember you don’t need to provide levels of information outside of this period.
“Don’t lock in a deal too early, as we still have a long way to go, and remember that the parties are to show good faith and be proportionate in the outcomes that they seek.
“Be pragmatic about your staff, your own financial future and health.
“And start to plan what a recovery might look like. Certainly don’t fall into the trap that when the Government says, ‘Right, get back to work’ that it’ll be a shotgun start, because it won’t.
“There’s going to be a long tail on this. The financial pressure’s going to be felt over a long period.
“I think there’s also enough pharmacists out there who have been around long enough to understand that with the economy in the state it is, why we feel that post COVID-19 inflationary factors are going to play a big part. We hopefully won’t see the consumer price index go up to the heady heights of 8%. And of greatest concern there is annual rent reviews, times the CPI.
“If this happens, the new rules of leasing are going to have to come into play.”