• Huey Lee, Author |

4 min read

Without a doubt, 2020 was a trying year for retailers.

Pandemic lockdowns, shopping restrictions, economic concerns and increased unemployment put a significant dent in brick-and-mortar activity, a trend set to continue into the new year. KPMG in Canada research indicates that Canadians plan to spend 34 per cent less on non-grocery items in the coming months due to financial stressors. The federal relief programs and holiday season may have offered some help, but the sector's troubles are far from over.

Those looking to 2021 for relief may not find it so easily. The first quarter of a new year in retail is traditionally slow under normal circumstances; this year's will be further hindered by the second wave of COVID-19 that is likely to keep much of the country in a restricted or locked down state. The forthcoming vaccinations offer hope, but it will be some time before Canadian consumers return to "normal" behaviours. In fact, our research further shows that only 31 per cent of Canadians believe they will go back to their old purchasing habits, indicating that COVID-19 has accelerated the migration to online shopping. Moreover, while government incentive programs have helped bridge retailers' cash flow requirements, they have not been enough for some businesses and won't be around forever.

From the ground up

The forecast may look weak, but now is no time to wait it out and hope for the best. To survive, retailers suffering a sustained reduction in demand must be the ones to begin conversations with their stakeholders (e.g., suppliers, landlords, lenders, etc.) to discuss challenges, explore options, and gauge their partners' willingness and ability to help. These conversations are never easy, but retailers must take control of their situation or risk having someone else do it for them.

And rest assured, there are paths to relief. Commercial landlords, for example, have a strong motivation to explore ways in which they can help their retailers survive until mass COVID-19 vaccination. After all, without retailers, there can be no cashflow. And depending on what kind of commercial property a landlord oversees (e.g., mall or strip mall), the loss of retail outlets could have a ripple effect across an entire asset. Other key stakeholders, such as lenders, may also be less motivated to take aggressive action given weak market conditions for tangible retail assets.

For landlords especially, the decision to support a tenant during this time of reduced consumer demand rests on several factors. These include the strength of the relationship, the tenant's long-term future, and the likelihood of finding a replacement tenant in the current environment. To that end, commercial landlords who have concerns about a tenant's solvency are encouraged to take proactive steps, including:

  • Sustaining dialogue with their tenants to understand their current financial position and ability to continue to pay rent.
  • Considering ways to share risk and reward, such as percentage rent agreements based on store performance or requesting outside security (e.g., guarantees or letters of credit) in a rent deferral agreement. In these cases, any such agreement should be documented properly in writing to reduce the chance of future dispute.
  • Reviewing tenant leases to be clear on which corporate entity is the tenant and whether there are any personal or corporate guarantors of the lease, as those guarantors may not be protected in an insolvency process.
  • Watching out for the early signs of insolvency (e.g., inability to pay rent) and providing careful consideration and sound advice in the early stages to help avoid significant problems.

There is also a need for landlords to gauge the sensitivity of their own financial position to the insolvency of several of their tenants. A financial advisor can assist by preparing a robust forecast that can easily be stress tested.

In the longer-term, landlords should consider the resiliency of their portfolios against major disruption events and whether to pursue diversification. They should also consider possible changes to rental agreements to protect their position against future events of this nature, as well as co-tenancy and/or anchor provisions.

Regaining control

While the tumultuous 2020 calendar year is now behind us, we're still a long way from normal. Many businesses will survive; some will not—and landlords and tenants should be optimistic and clear-eyed about what comes next. The upside is they are not in this alone. At KPMG, our goal is to help retailers step back from the brink and build liquidity bridges that will keep their doors open both now and into the future.

Relief is in sight. Make sure you know how to reach it.

In my next post, I'll explore similar implications and strategies as they pertain to the restaurant sector. Please stay tuned.

In the meantime, feel free to connect directly with me or one of the following people in your local area:

Toronto
Anamika Gadia
agadia@kpmg.ca
Partner, Restructuring Lead

Toronto
Katherine Forbes
katherineforbes@kpmg.ca
Partner, Restructuring Lead

Vancouver
Huey Lee
hueylee@kpmg.ca
Partner, Restructuring Lead

Montreal
Dev Coossa
dcoossa@kpmg.ca
Partner, Restructuring Lead

Calgary
Neil Honess
neilhoness@kpmg.ca
Partner, Restructuring Lead

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