Castro Model Ltd. (TASE: CAST) is leaving malls of Azrieli Group Ltd. (TASE: AZRG), and will close stores in five of the 15 Azrieli malls over the coming 18 months when its leases expire because of disagreements about rent.
The fashion retail chain is slated to leave the Azrieli malls in Hod Hasharon, Akko, Kiryat Ata, Beer Sheva, and Haifa. In Azrieli's most successful malls, however, Castro has long-term leases and is expected to remain. These include the Azrieli mall in Tel Aviv, the Ayalon mall in Ramat Gan, and the Malha mall in Jerusalem.
A source associated with the Castro group told "Globes" today that the negotiations between the Castro-Hoodies group had continued for several months, and that the parties had not managed to find common ground. The source said, "Castro is not making money from the Azrieli group in most locations, and there is no point in staying in weak malls merely in order to stay in good ones, where Castro is also not earning as much as it should. There is no reason why the group should lose money when Azrieli is making money. In a situation of surplus commerce and cannibalization of retail trading space, there is no reason to pay exorbitant rent that is disproportionate to current demand.
"In the current structure of competition, in which prices must be lowered and expenses are rising, among other things because a rise in the minimum wage, there is no possibility of paying the rent that could be paid a decade ago. In some cases, international brands have received far better terms than Castro."
Another source added that if Azrieli makes concessions to Castro, the latter may withdraw its plans to move. "It's not a matter of 10-15%; it's much more substantial. Castro has to make sure that it earns at least a little profit. The current formula is not a healthy one," the source stated.
A senior industry source said that even through Castro's terms in the Melisron Ltd. (TASE: MLSR) malls were better, all that was really involved was negotiations for renewal of the leases. "This is an effort to get better rents and commercial terms for when the options or leases expire. The dogs are barking and the caravan is passing. Chains with nationwide deployment cannot afford to be on bad terms with one of the major groups. I believe that Azrieli will be able to negotiate with them and offer them terms that will be more attractive for them."
This source added that if Castro leaves any malls, it will be Azrieli's two weakest malls: the ones in Kiryat Ata and Hod Hasharon.
The Castro-Hoodies group currently has 431 stores, 5,500 employees, and 61,000 square meters of commercial space. The group finished 2016 with over NIS 1 billion in revenue, compared with NIS 917 million in 2015.
The Castro group confirmed the particulars, while no response from the Azrieli group was available.
Published by Globes [online], Israel Business News - www.globes-online.com - on August 2, 2017
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