Shopping centres favour larger tenants - which puts pressure on smaller retailers, writes Michael Williams

While South Africa's bigger malls have proved to be quite resilient, smaller and older shopping centres have been hard hit by the economic downturn of the past 18 months.

In Killarney Mall, Johannesburg, papered up windows and a few listless shoppers create an unhappy ambience in one of Johannesburg's first malls, which was opened in the '60s.

Ruth Kellow and Dawn Scofield have small businesses in Killarney Mall, and both are feeling the pinch. Ruth runs Kinderspiel, a toy shop, and Dawn runs Mr Pet, a pet shop. They say they believe the dice are heavily loaded against small-business owners.

Ruth says: "This mall wants smaller retailers, they try to attract them, but it is difficult because the rent is high. It can be anything from R200/m² to R300/m².

"It is important for big companies like Edgars to be in the mall, but they don't have to make a profit here, because if they make a loss it can be absorbed nationally. As an individual retailer you can't do that: you have to make a profit straight away."

It's not fair

Ruth says she feels the relationship between small and large retailers is heavily weighted in the latter's favour. When a large retailer decides to change its opening hours, it does so with little concern for the smaller businesses that feed off the foot traffic.

"As a small retailer, you depend too much on the big ones. Woolworths used to be open until seven in the evening, and now they close at six. This mall used to be busy until about 6:30pm, but now it is quiet by 5pm. My rent hasn't been reduced; I still have to make the same turnover."

Ruth is sceptical of the reasons malls have for giving large retailers special treatment, and says that different pricing for small retailers and anchor tenants should be "completely scrapped".

"I don't think these big shops are such a draw card," she says.

"They don't offer good service, they have too many staff, and they are understocked."

Dawn agrees, calling the rent "hellishly expensive". For other small businesses considering setting up shop in a mall, her initial advice is "don't do it" - but she then offers a cautious bit of advice: "If you go into a mall, try to do your research beforehand. Find out about its history and how often shops are opening and closing. And wait until you are sure (about) what the economy is going to do."

Taking on Goliath

Small businesses and franchises face intimidating odds when operating from shopping centres and malls where South Africa's retail giants reign supreme. And it doesn't help that smaller businesses are often charged more per square metre than their larger counterparts - a practice that has attracted the attention of the Competition Commission.

Stephen Walters, a property expert from Fernridge Consulting, says that mall developers are naturally eager to secure strong "anchor" tenants who will draw shoppers into the centres, and so offer discounted rates and other perks to seduce them into taking up space. The problem is that smaller tenants usually end up footing the bill.

"When a new shopping centre comes on stream, its owners calculate the total return they need to achieve to operate profitably. What is problematic is the allocation of rentals among tenants.

"Large national retailers, who take up the bulk of the space, are charged R50 or less per square metre a month. To make up the shortfall, developers then charge smaller tenants anything up to R570/m². Such a scenario does not promote small business, yet this sector has been identified as a major provider of jobs and contributor to wealth creation in the future."

Stephen says he believes this strategy is short sighted, as it is often the smaller tenants who make or break a mall.

"It is often your small, independent retailer who is bringing flavour to the centre and making the difference between success and failure, yet they are the people who are often mistreated with respect to rentals and all sorts of conditions."

Combine exorbitant rentals with the increases in rates and electricity in the last couple of years, and many small businesses in malls are struggling to stay afloat.

It's an issue that was discussed at a franchising think tank hosted by FNB last year, and in a subsequent document that outlined a possible way out of the mess.

Anita du Toit, the franchising expert at FNB, explains: "The solution that the franchise sector is hoping for is to engage with property developers to mitigate the situation. If large anchor tenants paid only R10 more per square metre, it would reduce the burden on smaller businesses by 30%.

"In the US, the International Franchise Association and the International Council of Shopping Centres announced a partnership to address the interests of their members in that country. We need similar initiatives in South Africa. Shopping centres also need smaller tenants, as consumers are seeking variety."

Malls aren't talking

It's a problem that malls seem reluctant to talk about, with centre management at Maponya Mall, Sandton City, the V&A Waterfront, Gateway Mall, Cavendish Square and Menlyn Park offering only one jumbled press statement in response to requests for information on the relationship between smaller tenants and malls.

However, Stephan le Roux of Growthpoint Properties - a property investment company with a significant retail portfolio - was happy to explain the reasoning behind the pricing structure: "It's a known fact that the rentals of the anchors are being subsidised by the smaller shops, the argument being that it is a relationship where the anchors will pull in feet and then the smaller retailers will trade off those feet. It's a quid pro quo: they're paying a higher rental to get the anchors to go into the shopping centres."

Stephan agrees that smaller tenants are essential to the health of malls and says that the malls in his portfolio offer significant support to smaller businesses. This support extends to training initiatives and seminars, as well as a programme that allows kiosks or other very small commercial spaces to operate at a nominal rental. Le Roux says that these "incubator" businesses are then groomed to become bona fide retail outlets.

The debate around rents has been drawing more attention, and for now, all eyes are on the Competition Commission and its investigations into large retailers.

But for Anita, a slap on the wrist by the commission will be less satisfactory than a more nuanced solution. "The centres still need smaller tenants to offer variety, specialisation and personal attention, something not typically found at larger retailers," she says.

"The hope is that developers and larger tenants alike will recognise the contribution made by small businesses and take measures towards achieving a more equitable scenario," Anita concludes.