Leading retailers waste little time in stopping rental payments
Listed sporting goods manufacturer Adidas incurred the wrath of Germany’s business establishment last week when it announced it would cease paying rents on its retail outlets as long as the coronavirus pandemic was preventing it opening its stores. The company seems to have been startled by the wave of negative reaction to its move, and has since backtracked on its decision, conceding that it erred in threatening its landlords with such a unilateral decision.
Leading the backlash against Adidas was Angela Merkel’s CDU/CSU’s legal policy spokesman Jan-Marco Luczak, who warned that it had not been the intention of newly-introduced protective measures to shield financially strong corporations from forgoing rent payments and welching on contracts. “Adidas’ decision is absolutely wrong”, he had said. Kai Warnecke, the head of Germany’s property owners federation, had warned that Adidas’ default on payments should not be allowed to set a precedent. “If so it would be the end of the real estate market”, he said.
Nonetheless, the number of leading retailers in German preparing to cease paying rents on their leases is growing rapidly. The latest to join high profile defectors such as Adidas, H&M and shoe seller Deichmann is Galeria Karstadt Kaufhof, Germany’s leading department store chain. The chain announced that it was stopping rent payments for all its department stores, sports outlets, travel agencies and logistics properties, notifying its landlords that as a result of its outlets’ closure, the company had ‘no other choice’ but to stop payments from April 1st. The company would do everything it could, it said in its letter, “to find a new economic basis for the sustainable operation of our stores”. The troubled Karstadt Kaufhof group is currently undergoing a massive restructuring of its operations in any event, so the pandemic comes as a double whammy for the group.
Karstadt Kaufhof is losing €80m in turnover a week while its stores remain closed. Weeks ago the company had already announced short-term working for large swaths of its store employees, and this week it imposed the same cuts on its headquarters staff. It had already applied for state assistance in helping it restructure, but reports suggest that the banks had been proving less than co-operative, and negotiations overly bureaucratic.
The retail group’s finance director Miguel Müllenbach confirmed that the company would not be paying its due rents from April through June, for starters, adding that it was also looking into trying to claw back at least half of the rent already paid for March. In addition, it would not be attempting to make any back-payment on rents legally due under existing contracts before end-June 2022, as envisaged in the new government provisions to protect companies temporarily.
Under the German emergency aid package, landlords may not terminate tenancies for non-payment of rent between April 1st and June 30th to prevent retail proprietors from losing their premises. For those getting into arrears, they will have until June 2022 to repay any outstanding debt.
Adidas did an about-turn this week after stirring up a cloud of negative publicity following their decision to halt rental payments. All the more so, as the DAX-listed group had earlier posted stellar figures for the full-year. It rescinded its decision to cancel rental payments, and simultaneously announced new measures to protect both the company and the jobs of its 60,000 employees.
All rental payments due for April had now been settled, the company said in a statement. CEO Kasper Rorsed conceded the company “had made a bad mistake and broken a lot of trust, which it will take a while to win back.” The closed stores all round the world were such that “even a healthy company like Adidas can’t hold out for very long under those circumstances”, he said.
Last year Adidas posted record profit figures of more than €2bn, with plentiful liquidity and a hugely strong brand image. The new measures include a 50% salary cut for board members, with a 30% cut for senior management. The share buyback programme has been completely stopped. A new agreement has been struck with the workers’ representatives for short-term working. A new drive has been initiated to use partners to start manufacturing facemasks and medical protective suits for the healthcare industry, helping to alleviate worldwide shortages in the pandemic.
Essen-based shoe chain Deichmann, with nearly 1,500 outlets across Germany, and Swedish clothing giant H&M with 460 German stores, are so far sticking with their decision to hold back on rental payments, saying to ARD television that they intend to defer rents “until the situation is clarified”. Electronic and white goods retailers MediaMarkt and Saturn have also said they are unilaterally suspending rent payments as a precaution.
REFIRE: The case of Adidas is being scrutinised in the retail real estate sector like no other case before. The backlash against the German sportswear group was so severe from politicians, the media, celebrities and even the public that the company is likely to be tainted with accusations of unfair play long after the benefit of saving a few months’rent has been factored in. Quite simply, while the company was acting within the law, it clearly contravened the spirit of the government’s economic relief package.
Whether other prominent retailers also flouting the regulations, such as Ceconomy (owners of MediaMarkt and Saturn), H&M and Deichmann, will be tarred with the same brush is doubtful. Adidas is a world-leading brand, a highly admired company, and associated with sports and honour. It’s viewed as hip, stylish and cool – a relatively rare combination for a German company. This has been a PR disaster for Adidas, but they’re only at the head of a long list of companies who are faced with a similar dilemma, and whose individual negotiations will be shaping the course of retail property investment over the coming years.