India’s economy is in focus globally, and is also at an inflection point.

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Faizan Haidar, ET Bureau
Jan 18, 2023

Tension has built up between retailers and malls across India, with leading malls planning to increase rentals every year instead of the current arrangement of every three years.

Industry insiders said large retailers are opposing the move given the number of stores they operate. Malls usually sign nine-year agreements with the retailers with a 15% increase in rentals every three years. If rents increase 5% each year, retailers will have to shell out about 17% in three years.

“It does not make any sense because we sign our properties for a long term, which is generally 12-15 years. An annual escalation in rent will not be viable and we would want to not go ahead with such short-term demands,” said a chief executive at a departmental store chain, who did not wish to be identified.

Rajendra Kalkar, president-west at Phoenix Mills, which operates more than half-dozen malls in Mumbai, Pune and Bengaluru, and in some tier-2 cities, said rentals are revised as per the originally agreed terms of the agreement. But in new agreements, the issue of annual rent revision is being negotiated on a case-by-case basis.

Another retailer said on condition of anonymity that brands invest a lot in fit-outs and annual rental hikes will make the business unviable. “A brand has to manage so many stores that annual hikes will lead to a chaotic situation where every month brands will have to keep rental hikes in mind,” said the retailer.

Other malls such as those of DLF, Nexus and Oberoi, Select City Walk and Vegas are also mulling over the issue, said industry executives.

“We have started something like staggered rental so that we can hike the rental every year. However, in the first year. we don’t put much pressure because the brand is trying to settle in. But once they start doing well, we push for a rental hike,” said the director of a leading mall, who did not wish to be identified.

Single-brand retailers said the demand is strong and they may be able to absorb rent inflation, if at all it goes through.

Mall developers said they will push for a 20% rental hike in three years given the inflation and cost of raw materials.

“The cost of everything has gone up and we will have to put it in a fresh condition to sustain. Retailers are doing good and they should not be hesitant in absorbing the hike,” said another mall developer.

India’s top ten listed retailers, including Aditya Birla Fashion & Retail, Shoppers Stop, Jubilant Foodworks and Tata Trent, have together saved more than Rs 1,500 crore in rents over the past two financial years, after negotiating discounts with malls and other landlords for the lockdown period.

“Covid impacted both mall developers and retailers, and mall developers may possibly be trying to recover from those lockdown losses,” said Devangshu Dutta, founder of retail consulting firm Third Eyesight. “Where there’s a dearth of quality retail spaces, well-managed malls may be able to negotiate more strongly for a frequent hike. But both retailers and malls need to come together for a symbiotic solution that works for both.”

Rentals have now returned to pre-Covid levels, as malls have returned to normal business and their tenants are seeing healthy footfall. According to ICRA, rental income reached 80% of pre-Covid levels during 2021-22 and is expected to surpass 2019-20 levels by 4-6% in the current fiscal.

“We have seen double-digit growth and understand that it was an unfavourable time for mall operators during Covid. So during renewal, we may accept rent escalation if we are not able to hold it. However, we don’t expect any adverse impact on our financials,” said Satyen Momaya, CEO of Celio, a French apparel brand.

Rental incomes have improved at a faster pace after the second wave of the pandemic, with recovery at 74% during the second quarter of 2021-22, as against 34% a year ago, and reaching 102% of pre-Covid levels in the second half of the current fiscal, said ICRA.

“Malls are investing heavily in events and every month there are two-three events to ensure footfall. With these initiatives, the mall expects sales to increase and the retailer to pay higher rent,” said a Kolkata-based mall developer, who did not wish to be identified.

Metro AG global chief executive officer Steffen Greubel said the company is at a “very advanced” level of discussions on its India business, suggesting for the first time that it could be looking at an exit from the country soon.

“We are very advanced in the process regarding India and are at a certain maturity level in the process. It’s too early to share any information, but we have discussed it greatly,” Greubel told analysts when asked if he is looking at a possible withdrawal from India and the status of talks. “We are very deep in the (sale) process in India,” he said last week while announcing annual earnings.

The German wholesaler grew its Indian business by 21% to $982 million during the year ended September, as per its latest annual report.

Last month, ET reported that Reliance had agreed in principle to buy Metro AG’s cash-and-carry wholesale India business for ₹4,000-4,500 crore.

Its unit Reliance Retail is already the biggest grocery retailer in the country with over 2,400 stores across formats while Metro operates 31 wholesale stores in India with seven of them on company owned land in prime locations. The company hasn’t publicly stated that it’s looking to leave India. Metro would be the second big international wholesaler retailer to exit India, if this happens. French retailer Carrefour wound up its India business in 2014 after struggling with sales for four years.

Globally, Metro is the world’s fourth-largest retailer by revenue. In India, it doesn’t sell directly to consumers and is an organised wholesaler or cash-and-carry operator that sells merchandise to local kirana stores, hotels and catering firms.

It decided to put the India business on the block as part of a global decision to exit the country due to heightened competition, a tougher regulatory environment and the lack of a level playing field between local and foreign retail companies, industry executives said.

Experts said the difficult European and global economic environment, regulatory restrictions in India, tough competition from domestic Indian groups and thin margins in the B2B business in India may have led Metro to focus on growing its core markets in Europe.

“Though India is, indeed, a long-term strategic market for companies looking at global growth, whether retail or B2B, not every business model from other geographies can be successfully transplanted or rapidly scaled in India, and Metro’s business footprint in India may be far smaller than they may have expected in the two decades of presence here,” said Devangshu Dutta, founder of retail consulting firm Third Eyesight. The choice to be present in different countries is always a dynamic one for global retailers and entry or withdrawal is driven by individual strategies, rather than solely on the merit of the market itself, he said.

“In September, the management board reported on the current status of the audit of strategic options for Metro India,” according to the annual report.

Overseas investment in offline trade has been a tricky issue, despite India allowing 100% foreign direct investment (FDI) in wholesale trade on a cash-and-carry basis. Metro was one of the first companies to enter the segment in India in 2003. Lobby groups representing small Indian retailers have accused overseas retailers of violating FDI rules, which the foreign companies have consistently denied. Some trade lobbies have complained to the government that a few global wholesalers have been flouting FDI rules by selling to consumers directly, which is not allowed as per current regulations.

(Published in The Economic Times)

Faizan Haider, The Economic Times

New Delhi, 5 December 2022

Shoppers Stop is planning to open a value format to attract consumers opting for lower priced brands such as Tata Zudio and Landmark Group’s Max, two officials privy to the launch said.

The idea is to open stores on ty to sustain and the lines of Zudio and Max and capture a larger market especially in smaller towns,” one of them said. “The first store, sizes anywhere between 7,000 8,000 square feet could open in the next three months.”

Shoppers Stop is foraying in to the mass-priced segment after three decades of selling premium apparel and lifestyle merchandise. Experts said India’s consumption structure has been skewed in the past over a narrow base of richer consumers accounting for a large chunk of the overall market. However, as the economy is broadening across many more cities and the impact is reaching further down the income ladder, the opportunity for value-formats and value-brands is expanding.

“Shoppers Stop’s competitors have demonstrated mixed success in the mass segment. and servicing this segment needs merchandising agility to respond to varying customer preferences across markets, as well as the financial ability to sustain and scale,” said Devangshu Dutta, founder of retail consulting firm Third Eyesight. “In the diversity of India’s market, scale alone isn’t enough to guarantee success.”

Shoppers Stop may open first few of its value format stores in tier 2 cities before taking them to metroci ties, people cited above said.

The company did not respond to the email query till press time on Sunday.

“The value format segment is growing and during Covid 19 we have seen consumption increasing in Tier-2 cities,” said Shriram PM Monga, cofounder at retail consultancy firm SRED.

“These cities also have grade A malls now, offering retailers quality space.” Tata Group firm Trent had earlier indicated that Westside accounts for 70% of its standalone business but Zudio, an affordable fast-fashion brand, has the potential to outpace the department chain due to the size of the opportunity in the value segment.

For Lifestyle International, its value brands Max and Easy Buy have already outpaced the department stores by sales – back in 2019 – indicating that consumers are increasingly seeking either lower-priced merchandise or opting for global brands such as Zara and H&M for fashion apparel instead of department stores.

Shoppers Stop has 296 stores spread across 3.8 million square feet, which include 91 department stores, 11 HomeStop home furnishing shops, 139 beauty stores, and 25 airport doors. It is on track to add 12 department stores and 15 beauty stores during this fiscal year.

According to Retailers Association of India (RAI), overall retail sales in October 2002 grew 15% year on year and by 19% when compared to pre- pandemic sales level (October 2019).

(Published in The Economic Times)

Sagar Malviya, ET Bureau

November 28, 2022

About half a dozen global apparel and lifestyle brands expanded anywhere between 30% and 70% to garner combined annual revenues of nearly $2 billion in FY22, reversing the performance from a year ago when Covid-induced curbs on mobility and business operations caused sales to shrink.

Sales of Swedish fashion retailer H&M expanded 49% while rival Zara reported a 61% increase in its topline. Japanese brand Uniqlo saw a 64% jump in sales while American denim maker Levi Strauss posted a 58% increase, latest filings with the Registrar of Companies showed. Dubai-based department store Lifestyle International, too, saw a 38% jump in revenues on a large base while German brand Puma expanded 68% despite being the biggest firm in the sporting segment.

“This is a combined impact of a rebound in industry-wide demand in India, a low base effect for some brands, and the visibility and mindshare advantage global brands have,” said Devangshu Dutta, founder of Third Eyesight, a strategy consulting firm.

Big Focus on Online Sales

“Global brands are aspirational not only for consumers but also for real estate developers. Perceived as anchor tenants, they get their choice of the best locations – this provides more impetus to their stores vis-a-vis Indian brands, which are shunted to higher floors in multi-level shopping spaces,” Dutta said.

The revenue surge comes at a time when most of these retailers are facing intensifying competition from both local and global rivals in an increasingly crowded market where web-commerce firms continue to offer steep discounts. Even multinational companies have upped their online focus and for some, web-based orders make up more than a third of their revenues.

For instance, Puma India’s online sales make up nearly half its total business, while for H&M the share is 42%.

Abhishek Ganguly, managing director, Puma India and Southeast Asia, said the affinity of young Indian consumers toward ecommerce is extremely high and that adoption of the online mode of shopping continues to accelerate even after the resumption of normal business operations.

“Consumers may have bought online for the first time during the lockdowns, but they have embraced ecommerce in their shopping journey,” said Ganguly.

“Almost half of our business is in the form of digital commerce today. Having said that, we are witnessing equally strong growth – both in our offline and online channels,” he said.

As the world’s second most-populated country, India is an attractive market for aspirational apparel brands as rising disposable incomes cause the consuming base of the pyramid to broaden further. The performance by global brands is also in line with the overall trend within the home-grown apparel and lifestyle segment, with Shoppers Stop, Tata-owned Trent and Aditya Birla Fashion & Retail also reporting smart performance rebounds, indicating a secular demand for discretionary products.

(Published in Economic Times)