Mitigating the impact of inflation on the retail industry

Mitigating the impact of inflation on the retail industry

Inflation in Belgium soared to an all-time high in September 2022, hitting an unprecedented 11,23%. Sky-high fuel and energy prices have a huge impact on the index numbers, confronting retail companies not only with increased energy costs, but with higher wage costs as well – in addition to the general increased cost for goods and services due to the current geopolitical situation.

Rent indexation: possible threat to retail market

On top of those rising costs, the rental prices for commercial retail are allowed to be indexed – which would represent a monthly rent increase of 10%. Needless to say, these combined cost increases might negatively affect our retailers, and the high streets they operate in.

Retail Point calls on property owners and commercial tenants to come to the negotiating table to discuss the planned rent indexations.

“By negotiating a burden sharing agreement between tenants and owners, we have a chance to address the biggest challenges the retail market faces in these extraordinary times”, Yves Walravens and Philippe Simons from Retail Point state. “Nobody benefits from instability in the market, including owners of retail properties.”

Good to know: what is the Belgian index system?

The Belgian system of indexation is a mechanism whereby salaries are linked to the evolution of the flattened health index. The monthly salary is more specifically increased by a percentage equal to the inflation rate of the previous calendar year. If the price of living increases, wages increase at an equal rate to preserve the purchasing power of the nation’s populace. The same goes for rental prices.

Increased costs: a tangible example

The increased cost of energy has a profound impact on the profitability of retail and food chains.

• The yearly heating cost of the collective areas in a well-known shopping mall has gone from €400,000 to €1,6 million.
• The gas and electricity bill for a single branch of a famous fast food chain has increased from €100,000 to €400,000 a year. Food cost has increased by 20%, while the wages are expected to rise with 10% from January 2023.

A 10% rent increase would impact businesses significantly. “A negotiated solution is the way forward”, says Philippe Simons from Retail Point. “By sharing the burden, property owners can provide the necessary breathing space retail companies need to absorb this exceptional situation.”

Sharing the burden: a concrete example

Retail Point advocates not including high energy costs in rent indexation, reflecting a more realistic trend. Normal inflation is around 2%. If we negotiate a fixed figure of 3%, anything above that could be split equally between tenant and owner.

• Index increases by 8%
• 3% indexation is considered fixed
• The remaining 5% is shared between owner and tenant
• Rental indexation would come down to 5,5%

Stability in the retail market benefits both tenants and owners

We are well aware that any negotiated solution will depend on the goodwill of property owners. “The situation is pressing. The solution lies in understanding and a certain degree of solidarity”, Yves Walravens concludes. “Uncertainty in the retail market will affect property owners as well. They too benefit from stability in the retail landscape.”

In need of independent advice on how to move forward with rent negotiations for your retail company? Philippe and Yves from Retail Point are happy to help. Feel free to reach out and discuss your situation with us, in all confidentiality, contact Retail Point