A retailer in a major centre is pushing their landlord hard right now for a 25% rent reduction. They won’t get it.
The shop is in a centre with no trouble filling space. The lease has about seven months to run. The business is trading profitably. Every one of those facts sits on the landlord’s side of the table. The argument the retailer keeps making is that they’re a small local business and they deserve consideration. It’s sincere. It’s also not an argument a commercial landlord has any obligation to accept from a profitable tenant in a centre with a waiting list.
Meanwhile, their own sales data shows categories selling out, and stock the customer came in for sitting on a supplier’s shelf instead of theirs.
Before any of that, though, there’s a number they should have worked out and hadn’t.
The number: 11%
For a gift shop, bookshop, toy shop, newsagency or homewares shop, occupancy cost should be no more than 11% of sales. That’s the ceiling to work to across independent retail in these categories.
Achieve 11% and you likely have a profitable business. Go above that, and you’re less likely to be profitable.
Not rent. Occupancy cost. The two get confused constantly, and the confusion is why so many owners think they’re fine when they’re not.
Occupancy cost includes:
- Base rent
- Outgoings: council rates, water rates, land tax where it is passed through, building insurance
- Common area maintenance in a centre
- Centre marketing or promotional levies
- Percentage rent, if your lease has it
- Any car parking or storage charged separately
Measure it against sales excluding GST, across a full twelve months, so seasonality doesn’t distort it.
Eleven per cent is a ceiling rather than a target. Below it, the site is earning its keep and there’s room in the model for wages, stock investment and a return to the owner. Push through it and every other line in the business has to work harder to cover the same shop.
Now, something important to note here: sure, rent is a cost. The reality is, though, that percentage is a function of real cost ands the revenue for the business. Grow revenue and the rent percentage falls. Not enough retailers focus on the revenue side when looking at rent.
Why the published rent figures make things look better than they are
The ATO publishes small business benchmarks from actual tax returns across 100 industries and more than two million small businesses (ATO small business benchmarks). Useful data, and worth knowing. But the figure it reports is rent divided by turnover, not occupancy cost.
For a shop turning over $800,000, the rent-only benchmark ranges are:
| Category | Financial year | Rent as % of turnover | Rent on $800k |
|---|---|---|---|
| Homewares retailing | 2022–23 | 8% to 16% | $64k to $128k |
| Gift stores | 2023–24 | 7% to 15% | $56k to $120k |
| Newsagents | 2023–24 | 7% to 14% | $56k to $112k |
| Book retailing | 2022–23 | 6% to 9% | $48k to $72k |
| Toy and game retailing | 2022–23 | 4% to 8% | $32k to $64k |
Sources: homewares retailing, gift stores, newsagents, book retailing and toy and game retailing.
Read those ranges against the 11% ceiling and the problem is obvious. A gift shop at the top of its band is paying 15% of turnover in rent alone. Add outgoings and a centre marketing levy and occupancy is nearer 18%. That shop isn’t marginal. It’s structurally unable to make money at its current sales level, and no amount of good buying will rescue it.
Even a shop sitting at 11% rent is over the ceiling once outgoings go on. If you’ve only ever measured rent, you’ve been marking your own homework generously.
Work it backwards
Most owners know what their occupancy cost is in dollars. What they’ve never done is turn it into the sales figure it demands.
Your occupancy cost divided by 0.11 is the minimum turnover that site needs.
| Annual occupancy cost | Minimum sales at 11% |
|---|---|
| $40,000 | $364,000 |
| $60,000 | $545,000 |
| $80,000 | $727,000 |
| $100,000 | $909,000 |
| $120,000 | $1,091,000 |
| $150,000 | $1,364,000 |
This is the most useful calculation in this post. It converts a lease into a sales target. If you signed for $100,000 a year all up, that site needs to do $909,000 for the numbers to work. If you’re doing $650,000, you’re at 15.4% and the lease is beating you.
Do this before you sign anything. Ask whether the shop can realistically produce the number, based on the trade in that street or that centre, not on hope.
The bit almost nobody notices
Look at what the ATO benchmark does across sizes. Gift stores turning over $65,000 to $150,000 pay 13% to 23% of turnover in rent. Above $600,000 it drops to 7% to 15%. Book retailers go from 14% to 21% at the small end down to 6% to 9% at the large end.
The rent didn’t change. The sales did.
Occupancy cost is close to fixed. So your occupancy percentage is mostly a statement about your turnover, not about your landlord. That’s why lifting sales moves the ratio faster than negotiating does, and it’s within your control.
What a rent cut is actually worth
Do the arithmetic before spending three months of energy on it.
Take an $800,000 shop with occupancy at 11%, so $88,000 a year. A 25% cut is $22,000. Real money, worth 2.75% of turnover straight to the bottom line.
To generate the same $22,000 of gross profit through sales at a 48% margin, you’d need about $45,800 more turnover, a 5.7% lift. Not trivial either.
So the rent cut isn’t a small prize. The trouble is the probability. The sales lift is difficult but available to you. A 25% cut from a landlord with a full centre and a profitable tenant is close to zero, however good your case sounds to you.
Two other levers sit on the same page and get skipped.
Margin. One percentage point of gross margin on $800,000 is $8,000 a year, every year. Three points of genuine buying improvement beats the rent cut, and it recurs. Rent relief, if you win it, gets clawed back at the next review.
Cash tied up in stock. That shop with $416,000 in cost of goods, moving from three stock turns to four, releases around $35,000 of cash. More than the rent reduction, and it needs nobody else’s agreement. It’s also the same issue the opening example shows: money in the wrong stock while customers leave without what they came for.
When you can’t trade your way out
Here’s the hard part, and the reason the 11% number matters more than any negotiating tactic.
If your occupancy cost is 15% of sales, getting back to 11% by growing sales alone requires a 36% increase in turnover. Not 4%. Thirty-six per cent, because the ratio only moves as fast as the denominator.
Very few established shops grow 36%. So if you’re at 15% or above, the honest conclusion is that the site or the space is wrong, and trading harder won’t fix it. What actually helps at that point:
Less space. Occupancy is priced per square metre. If a third of your floor is producing very little, you’re renting storage at retail rates. Work out gross profit per square metre by area before you renew.
A different site. Sometimes the answer is a smaller shop on the same strip at half the rent.
Subletting or sharing. Depends entirely on your lease, but worth reading the clause.
A range change. Higher-margin, higher-turn categories in the same footprint. This is the only path that lifts sales enough to matter, and it takes a year or more.
Exit at the option date. Unpleasant to contemplate, but better contemplated twelve months early than seven months late.
Being over the ceiling isn’t a moral failure. Rents in some centres genuinely don’t work for independent retail any more. The mistake is not noticing for four years.
When rent is the right fight
Sometimes it is, and then press hard.
At lease renewal or expiry. Your only real leverage point, because the alternative to agreeing is you leaving. Start twelve months out, not seven.
At a market rent review. If your lease provides for review to current market rent, that’s a process with rules rather than a conversation. In Victoria, where the parties cannot agree, the Victorian Small Business Commission can appoint a specialist retail valuer to determine the rent (VSBC on rent review disputes).
When something is wrong. Incorrect outgoings, a lease that doesn’t match what you were told, or a disclosure failure. In Victoria a landlord must give a disclosure statement and a copy of the proposed lease at least 14 days before the lease is entered into, and a lease under the Act, including options, must run at least five years unless the tenant asks for less (VSBC on entering into a retail lease). The VSBC provides free preliminary assistance and low-cost mediation (VSBC for retail tenants and landlords). Every state and territory has its own retail leases legislation and its own small business commissioner or equivalent, so check the rules where you trade.
Notice what those three have in common. Each is a moment where you hold something, or where the landlord carries an obligation. Outside them, asking for relief is asking for a favour.
The tenant who walks into a renewal with three years of improving numbers and a shop that visibly works is having a different conversation to the tenant asking for help. Fixing the business isn’t an alternative to negotiating rent. It’s the preparation for it.
Common questions
Does occupancy cost include outgoings? Yes. Rent, outgoings, common area maintenance, centre marketing levies, percentage rent and any separately charged parking or storage. Measure it against sales excluding GST. Leaving outgoings out is the most common reason an owner believes their occupancy is fine when it’s two or three points higher than they think.
Is 11% right for every kind of shop? It’s the ceiling for gift, book, toy, newsagency and homewares retail. Categories with very different margin structures work to different numbers. A low-margin, high-volume business cannot carry 11%, while some service-led or very high-margin retail can carry more. Know your own margin before you borrow anyone’s benchmark.
My occupancy is above 11%. Do I close? No. First check the arithmetic, including whether the space is right. Then work out the sales the site needs and whether it can produce them. The decision that follows is about space, site and range far more often than it is about closing.
Is percentage rent better than fixed? It shifts risk to the landlord in bad years and to you in good ones. In a growing business, fixed rent usually wins. Read the turnover reporting obligations closely before agreeing to it.
How far ahead should I start on a renewal? Twelve months. You need time to know your numbers, understand comparable rents nearby, and genuinely explore alternatives. Seven months out, as in the case at the top of this post, is already late.
This month
Add up everything you pay for your premises across the last twelve months. Rent, outgoings, levies, the lot. Divide it by your sales excluding GST.
If the answer is 11% or less, stop thinking about rent and go and look at what sold out last month.
If it is 14% or more, the conversation you need is about space and site, not about a
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