Franchising

SumoSalad’s voluntary administration plan reportedly paying off in Westfield rent dispute: Are franchises finally done with shopping centres?

Emma Koehn /

Healthy food franchise network SumoSalad says it’s close to brokering a deal on rents with Westfield after placing two of its leasing entities in voluntary administration in June, but franchise experts say while the move is a bold one to assert the rights of franchisees, shopping centres are becoming a less attractive place to do business anyway.

In June SumoSalad chief executive Luke Baylis told SmartCompany the network wanted to work “amicably” with its landlord, but the decision to call in administrators for the companies that cover the rental agreements for 12 to 14 SumoSalad stores was done to force the hand of Westfield owner Scentre Group to come to the table on rent negotiations.

Baylis said the game had radically changed since the leases had been signed, as shopping centres moved towards a food hall strategy that had not been properly thought through in terms of its viability.

“You’re seeing the shopping centres’ main strategy has been food, but there are consequences to that when appropriate sustainability studies haven’t been conducted,” he said in June.

Today, Fairfax reports the move has put SumoSalad on “the brink” of a renegotiated deal, and while Baylis has said the insolvency strategy cost the business in the vicinity of $250,000, the payoff will be worth it.

SmartCompany contacted SumoSalad for comment on the progress of the conversations with Westfield but Baylis was unavailable to comment prior to publication. SmartCompany also contacted Scentre Group for comment but did not receive a response prior to publication.

Ferrier Hodgson administrator Morgan Kelly, who was appointed to the two SumoSalad companies last month, has told Fairfax the SumoSalad strategy is closer to the use of “Chapter 11” bankruptcy laws in the United States, in which insolvency laws are used for the purposes of getting businesses back on track through restructuring arrangements.

Founder of the Franchise Relationship Institute Greg Nathan tells SmartCompany this is a case of franchisors doing whatever they can to protect the interests of franchisees. It also reveals the long-bubbling issue of big shopping centres being seen as unflexible and unwilling to work with businesses on rent issues, he says.

“I’ve been concerned for a number of years about the behaviour of the shopping centres towards tenants. I think the rental increases they charge are unconscionable,” Nathan says. 

While it’s clear SumoSalad is taking a public stand with this action, Nathan says the community rarely gets to hear about the many cases in which businesses have collapsed under the weight of unfair tenancy agreements.

“It’s not generally publicised, but often franchisors and franchisees are forced to walk away from a business that could otherwise be viable.”

It’s a view shared by Stan Gordon, founder and chief executive of Franchised Food Company, who this week hit out at what he claims is “unconscionable behaviour” by shopping centre landlords.

“At Franchised Food Company, we have just recently been given an ultimatum to accept base occupancy costs in excess of 50% (when our sector should be a maximum of 18% – 20%). We walked away, resulting in yet another retail outlet closing, and some poor sucker being set up for damnation. Simply put it set the retailer up for failure … and they know it!” Gordon wrote in an article for SmartCompany.

The aggressive way big shopping centres negotiate rental agreements has led to the rise of SMEs and franchises using professional lease negotiators to broker deals on their behalf, says Nathan. But while centre owners have their eyes on redesigning higher-end food spaces, Nathan says it’s clear big centres are falling out of favour.

In the United States, there’s been a shift against shopping centres, and this will happen here. In the long term, centres are going to put themselves out of business, because it [rental terms] has to be fair and viable for everyone,” Nathan says.

Airports are a similar story, with Nathan suspecting franchises will also be finding those spaces less attractive bases in coming years, as rents stay high but shoppers change their approach to buying while they travel.

However, the humble shopping strip might be the benefactor of the long-running war between big centres and small businesses.

I think there will be a resurgence in strip shopping, as well as businesses getting smarter about how they use the internet to get shoppers in,” Nathan says. 

“Also, I just think franchises are getting smarter about where they place their stores — it’s about quality, not quantity [of shoppers].”

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Emma Koehn

Emma Koehn is SmartCompany's senior journalist.

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  • Jay

    Interesting article with bias looking at only one side and focusing on one metric in the P&L that more than any other expense, rent is transparent and known up front before the business even gets of the ground. The most relevant factor that is being overlooked is that going into business and buying a franchise does not guarantee success, business is the most legal and unregulated form of gambling, whereby if you don’t forecast your topline sales correctly and properly understand your customer and changing consumer tastes over time failure is only a matter of time. This is not the landlords issue or concernThe article has fundamentally overlooked the unsustainable franchise and marketing levies as percentage of sales that franchisors charge franchisees as high as 8% – 10% even 12% for doing little or nothing other than allowing a franchisee to use a brand name. Then for the franchisor to double dip again by locking franchisees into exclusive goods supply contracts charged at excessively marked up prices much higher than the franchisees could source from their own local suppliers (if they were allowed), but yielding lucrative rebates and kick backs to the franchisors from the suppliers. One would think that the Franchisors should be working for the franchisees but not the case, much more UNCONSCIONABLE than a very transparent Lease agreement. The landlord merely makes an offer at a moment in time under prevailing market forces, it is the Lessee that makes the decision to proceed with the contract, the presumption that the Lessor someone owes the Lessee the opportunity to revise contractoral terms in the future is ludicrous, does a bank allow you to revise a fixed interest rate without penalty, does a casino allow you to change a bet from red to black after the ball has rolled, does a stock exchange allow you to reverse a trade when the market turns. NO! Grow up people, business is business and guess what, people make bad investment decisions based on their poor assumptions and due dilegence. If they bet the house, be prepared to lose it otherwise don’t play.