[Interview] Andrzej Cieślik, Lavard: we cannot be at the mercy or disadvantage of shopping centre owners

The solution we opt for is to switch to at least partial rent from turnover. This will allow, in case of a possible next lockdown, to avoid such a situation as we are currently dealing with," says Andrzej Cieślik, Board Advisor to Polskie Sklepy Odzieżowe Sp. z o.o. in an interview with Retailnet.pl / SCF News editors. (d.Lavard).

How do you assess the situation in which the retail sector has found itself in connection with the coronavirus pandemic and the temporary lockdown of parts of the economy?

We are at a point in time when the whole industry has to verify how much their assets are worth in real terms. I mean, above all, shopping malls, whose value - in my opinion - is clearly overestimated. This leads to the fact that the amount of loans per square meter of area is too high. As a result, at a crisis moment like the present, there is a lack of reserves and a margin of error that would allow us to survive this crisis in a reasonably safe manner. This definitely does not facilitate negotiations between landlords and tenants. 

What can improve this situation? 

Negotiations will become simpler once managers show a real picture of the current trade to the owners of the retail facilities, and they communicate with the financing institutions of their projects. Currently, decisions on rent rebates are only short-term, ad hoc. Landlords have obtained credit holidays to repay their capital, and tenants have been exempted from paying part of their rent, but this will soon be over. This is not a target solution. 

Your company has therefore decided to take decisive action.

That's right. We have chosen the most difficult and probably the most expensive way to restructure the company. On September 10, the court approved the restructuring of our company in the course of the cure.

What gives you such a solution?

First of all, it gives us a completely different negotiating position with the gallery owners. The sanitation procedure makes it possible to withdraw from the current contracts, with the consent of the administrator and the judge commissioner, of course. However, I want to make it clear that we do not want to cause any problems to anyone or close down shops en masse. We want partnership talks on equal terms, and not to be at the mercy or disfavour of shopping centre owners. And this is how it sometimes looks like, especially if the decision-making centre is not in Poland.

How have negotiations with landlords been conducted so far?

In few cases we can talk about partnership conversations, although there have been solutions satisfactory for both parties, e.g. managers decided on a rent rebate in the amount corresponding to sales decreases. Unfortunately, in the case of the largest galleries in the largest Polish cities, this understanding was lacking. If our turnover was 80 percent lower than last year and the proposed rent rebate was 20 percent, this is an unacceptable situation for us. 

What are you going to do about it?

Currently, we have almost 70 showrooms all over Poland. So far, the priority, apart from conquering the market, has been to improve brand recognition, which operates, for example, at the cost of lack of profitability of several stores. This was at too high a cost and if the marketing budget was increased by these funds, spending them in another way would have a much better effect. That's why I predict that we can limit the size of our network by 20-30%. Of course, we do not plan to limit the size of our network only, when new locations appear at normal rates we will consider opening these locations.

You're talking about too high an image building cost. What exactly is it about?

Let me give you an example. In one of the stores in Warsaw we have a monthly loss of PLN 100 thousand. We kept it only because of our images. In my opinion, for PLN 1.2 million a year we are able to do much more for the image of our brand than one store even in the most prestigious location in Warsaw. For me, the decision in this situation is simple and obvious. 

The second issue is the marketing fees paid to the facility manager. Assuming the fees at the level of 5 PLN / 1 sq. m at 10 thousand sq. m of leased space, it gives 50 thousand PLN per month and 600 thousand PLN per year. This is a cost which, if we spent it ourselves, would actually create the value of our brand.

When will the final decisions be made, which locations will you continue to operate and which ones will you want to give up?

I think that by the end of the year we will know much more about how our network will look in the future. We want to get rid of the least profitable locations, of course, but a lot also depends on negotiations with individual gallery owners. The solution we are opting for is at least a partial shift to rent and turnover. This will allow, in case of a possible next lockdown, to avoid such a situation as we are currently dealing with. Let me repeat once again - we cannot be at the mercy or disfavour of shopping centre owners.  

Can online sales be a lifeline for the fashion industry?

This will be extremely difficult for our range. It is hard to imagine that all of a sudden Poles would start buying suits online in bulk. Nevertheless, the development of e-commerce is essential. We continue working on the project in this channel.

Interviewer: Łukasz Izakowski