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Malls – Surviving the Slump

By Vishal Krishna

Businessworld, May 28, 2010

Even the cautious are now convinced about the Indian recovery. The GDP projections are creeping up, production figures look good and, more importantly, demand is back. Organised retailers are heaving a sigh of relief with an uptick in sales after a bad year. But one group in the organised retail business is still not smiling: the mall owners.

The usual practice for mall owners is to have a revenue-share agreement with retailers. Most get about 5-7 per cent of monthly net sales, and if sales fall below a minimum level, the builder gets a fixed rental. A workable business model in ordinary times, this arrangement came under pressure when retail sales slumped last year. Things have improved in the past three months; sales are up 10 per cent as per industry estimates. But they are still a far cry from the 25-30 per cent growth of three years ago, which formed the basis of the revenue-share model. Some, however, believe that it is only a matter of time before the mall owners get their share. “Sales have picked up this quarter,” says Govind Shrikhande, CEO of Shoppers Stop. He says builders will have to be reasonable in their expectations and that in the long run the revenue-share model would benefit both parties.

Other experts believe that mall owners will have to think of new ways to drive business. Either find out the right mix for their malls, or explore the possibility of switching to commercial or housing properties as they offer quick cash exit. “Developers are struggling to think through what mix they can provide and make viable in that amount of space,” says Devangshu Dutta, CEO of Third Eyesight in India.

Throwing Anchor
When Sushil Mantri began building Mantri Square in Bangalore for Rs 900 crore, he realised that investing in organised retail was going to be a financial risk, and that it could also offer tremendous rewards if it succeeds. “Most builders now have three or four anchor tenants to increase the turnover per sq. ft,” says Mantri, MD of Mantri Developers. He says the job on the mall owner’s side was to engage customers. “We collect data on the sales of retail chains in our mall on a daily basis and then sit with them on ways to increase footfalls,” he says.

The mall owner-retailer relationship is changing too. One such change is that retailers are now pushing for sharing their revenue on usage-per-carpet area, unlike three years ago where rentals were also charged for the common area around the store. “Usually builders do revenue share with anchors and sell off the smaller stores to retailers. But the land will essentially be with the builder,” says Abhishek Malhotra, vice-president and partner of consumer practice at Booz & Company in Delhi. He says while retailers need deep pockets to survive, builders work on a yield basis for increasing revenues.

“Anchor stores in malls are beginning to pick up. But, the mall story is still slow in India,” says Dutta. He says smaller stores in malls are paying higher rentals and have not been able to manage their operational expenses. Whereas, retailers such as Shoppers Stop, Spar and Lifestyle have pared down their rentals below Rs 60 per sq. ft to be anchor tenants in large malls such as the 1.7-million sq. ft Mantri Square in Bangalore.

Restructuring Drive
Some believe that though macroeconomic factors such as rising incomes and industrial development would keep the mall market busy, only a few would survive in the future. “This is the time that we have to expand across India, as the space will saturate in 10 years,” says Atul Ruia, promoter of the 1.5-million sq. ft Phoenix Mills in Mumbai, in a previous interview. The company is expected to open 15 malls in five years and is likely to spend over Rs 600 crore in this space.

According to property research firm Jones Lang Lasalle Meghraj (JLLM), there are over 240 malls in India and 30-40 more are expected by the end of this fiscal. “Expansion is still the buzzword in the shopping mall space,” says Shubhranshu Pani, MD of retail services at JLLM in Mumbai. But, he says, fund flows continue to remain an issue because most projects are not tied with funding bodies in a structured manner. Mall launches are also plagued with licensing issues and government clearances. Over the years, in order to attract retailers, developers have been committing deadlines they cannot realistically adhere to. This has forced retailers to go slow on their expansion plans. Retailers, therefore, want a cushion effect in the form of lower rentals or a revenue-share spread over a long period to make up for the delay.

“Large retailers in malls and standalone properties have seen a growth of 10 per cent over the past two months,” says Pinaki Ranjan Mishra, partner and national leader of consumer practice at consultancy firm Ernst & Young. He says the industry will see an upward trend because of their expansion into tier-2 and tier-3 cities, but he believes that metro properties will grow at a nominal pace. Currently, small towns have a 38 per cent share in the organised retail space, with the top 10 cities accounting for 60 per cent of organised retail penetration. But, even in tier-2 and tier-3 cities, the challenge for mall owners will be to decide what mix of retailers they want. For example, analysts say, of the 40 million sq. ft recorded by the end of 2009-10, only food courts – which occupy just 5 per cent of the space – seem to be the most profitable for mall owners.

According to Ernst & Young, retailers across various formats were resizing and relocating non-profitable stores. Last year at least 4 million sq. ft of retail space shut down. Analysts estimate that at least 2,300 stores spread across malls and prime locations were closed.

Kim Culley, an expatriate from England, has been in the mall business for 30 years. Culley is anxious about his new Rs 750-crore project in Chennai, the 1.1 million-sq. ft Express Avenue mall. “I have been in charge of malls around the world and in this business you have to be fresh,” says Culley, COO at Express Infrastructure. He says after the initial momentum of sales dies, footfalls depend entirely on the builders’ ability to pull customers with attractive promotions.

Clearly, mall owners have to innovate to survive.

[From BusinessWorld]

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