Problems of tenants in times of pandemic

A year ago – retail apocalypse on the horizon

A few months ago we shared our thoughts on the possibility of the phenomenon called overseas a retail apocalypse appearing on the Polish retail market. We asked then a question whether Polish retail chains are prepared for this type of problems, whereas owners of Polish shopping centres – for problems of their tenants. At that time we had no idea that the retail market will face other difficulties – consequences of the coronavirus pandemic.

As a reminder, the retail apocalypse is a phenomenon described in relation to the American market, connected with the increased number of bankruptcies of retail chains (e.g. Sears, Nine West, Toys “R” Us, Diesel) and massive limiting of retail activity by tenants of the shopping centres. Forbes estimated that in 2019 over 6 thousand stores were to close, while by the end of 2026, 75 thousand is to disappear. It is considered that the main cause for this phenomenon is the dynamic growth of e-commerce. In accordance with the report prepared by Cushman&Wakefield, Polish e-commerce market grows by 18% each year and is one of the fastest growing European markets.

Three months ago – tenants’ resistance?

While taking into account that each bankruptcy, even of a small tenant, causes on a landlord’s side fuss and concerns as regards the possibility to collect overdue rents, further leasing of the premises, legal uncertainty in respect of tenant’s movables left in the premises, we looked for a tool which would allow us to asses the contracting risk in current, difficult for commerce, times. Our goal was to find a functional and relatively inexpensive instrument the landlords could use e.g. when deciding whether concluding and agreement with a given tenant will be beneficial, during annual verification of tenants’ financial standings, negotiations of agreements (e.g. form and amount of the securities or less or more rigorous grounds for terminating an agreement).

We have found and decided to test the tool which would allow to asses the financial standing of retail operators, also these belonging to the international retail chains, and at the same time to estimate their chances to survive in difficult economic conditions. This tool is the so-called “Z-score”. It was developed for American listed companies by prof. Altman in ‘60s. As a result of the comparative research, prof. Altman selected the most useful indicators to asses the expected financial capacity, and at the same time the symptoms of the threat of bankruptcy, and on this basis he created a model of assessing profitability of companies.

The Altman model was created to evaluate American listed companies, therefore, it could not be easily applied to the conditions of the Polish commerce. We have contacted the author of the algorithm and established cooperation with his team which modified the methodology so that it could be applied to smaller European companies. The results of applying the Z-score to the Polish market seemed promising so we have ordered a report regarding one hundred popular tenants of the shopping centres in Poland – from food operators, clothing companies to HoReCa sector and drugstores.

The results were a big surprise for us – it turned out that many tenants (also the most popular ones) had bad or very bad scores. It was strange for us so we additionally consulted the professor Altman’s team in this regard. Explanation in some cases may be found in the capital structure (branches of international companies very often have worse results than mother companies). The results may be also affected by the strength of economy – score below 250 points, considered a reason for serious concerns in a country suffering economic stagnation, or with weakening economy – in Poland (so far considered an economy at growth stage), may not necessarily be a bad score. However, even while taking this into consideration, the results made us think:

  • approx. 60% of the researched tenants had a score below 250 points,
  • nearly 30% – below 150 points,
  • every tenth company had a score below 50 points.

The conclusion from analysing the above values is not optimistic – even if the tenants with such low scores operate in “fair economic weather”, it seems that in bad economic situation, many of them may sink.

Now – virus blow

When talking about adverse economic conditions, it is not possible not to refer to the current situation – the coronavirus epidemic and its unquestionably negative impact on the condition of the retail market. None of us may predict today how long the suspension of economic relations may last. Even while the going is good and assuming that at the beginning of May the governmental restrictions will be lifted, there are voices in the market saying that the commerce sector will be rebuilding its previous capability for at least a few years. Certainly some entrepreneurs, saving their businesses, will lay off their employees, which will cause social pauperization and therefore, result in the decrease of the purchasing power of the consumers and slowing down of the retail sector revival.

Additionally, it seems that former shopping habits will be changed. Part of the society will just be too scared to visit crowded shopping centres, also in the light of information that the epidemic may return to us in autumn. The crisis in the traditional commerce caused by the epidemic will probably strengthen even more the already strong e-commerce market, which in consequence may deepen the retail apocalypse phenomenon.

The government, despite the already existing institutions in Polish law which could be used between the entrepreneurs in this extraordinary circumstances, introduced new, not necessarily beneficial from the perspective of landlords, regulations. It seems that this type of decisions do not take into consideration neither the specificity of the sector nor key, less noticeable players in this market, such as funds and banks financing the operations of landlords.

For the next chapters of the apocalyptic history we are waiting uneasily (as most people connected with commerce in Poland).


The article was published in the Rzeczpospolita daily portal (in Polish): https://www.rp.pl/Firma/304179926-Koronawirus-problemy-najemcow-w-dobie-pandemii.html

The authors of the article are Magdalena Wierzbicka-Zagrajek and Sławomir Lisiecki.

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