The recent stock market mayhem brings to mind another ‘boom’ – the much-hyped retail boom.

Booms and busts are complimentary, and always follow each other (if history is a teacher which we would care to listen to).

We are already seeing the signs of what people might call a slow-down in the Indian retail market. (Those people would have built their business plans, made investments and planned expenditure based on 50-500% annual growth, and would see a 15-25% growth as a slowdown.)

But for the most part, retail is an organic business, and a 15-25% annual growth is far healthier for most companies. It allows for infrastructure and processes to grow in a planned way. It gives the companies time to mature their processes and their organizations, and build businesses that are more sustainable. It allows the development of brands that are more lasting.

Growing retail businesses over time also allows them to develop the ecosystem around them organically – in my opinion absolutely vital for a healthy economic and social environment.

The sector of retail that has been attracting the most corporate interest over the last few years is the food & grocery market.

Quite logically so, since this comprises the largest slice of spending – well over 40% in urban markets and above 50% in the lower income towns and rural areas. It, therefore, offers the maximum opportunity for rapid scaling. Working in sequential logic, the nature of that large business would be highly capital intensive, and the large amounts of investment and large footprint should logically act as entry barriers for competitors. Size should also drive costs down through efficiencies of scale and raise margins by removing intermediaries.

By that reasoning, the bulk of the small retailers should be out of business very rapidly, as the well-capitalised corporates buy their way into the market, whether by opening their own stores or by acquiring many retail chains and mashing them together into one company.

This has led some commentators and consultants to predict that within the next 5-10 years, as much as 25-35% of the food and grocery market would be taken by the so-called organised retailers.

That, in my opinion, is a gross overestimation of the pace of change.

Fortunately for the smaller retail chains and the independent mom-and-pop stores, and unfortunately for the large corporates, scale and efficiency is not enough of a competitive advantage at the local level. Retail is a business in which you have the opportunity of growing or diminishing your business’ future prospects every time a customer buys at your store, or chooses not to.

And the food and grocery business is tougher still, since you cannot impose a product top-down in India, with a mix of cuisines and cultures that are as varied as different countries in Europe.

Yes, change is coming to the food business. Like other products, food retailing in India will convert more and more towards modern retail, but it will happen in slices of percentage points. It will happen only when the modern retailers understand and respect the cuisine boundaries rather than imposing a sea of sameness for consumers across the country. It will also need retailers to plan and manage the supply chain and vendors at micro-levels.

There are plenty of speed-bumps and potholes on the way – proceed with caution.

Fresh out of a meeting with a large international retailer this morning, I would like to share something that I mentioned to them: that the Indian market is not as large as it seemed to most people 2-3-5 years ago (whatever base figures they may be using to calculate potential market size); neither is it as small as it seems today to brands that entered the market 10-15 years ago.

There are significantly different dynamics at play, which make the Indian market totally different from the growth curve you might have been accustomed to in the history of the US, Europe, or even more recently, China.

However, some fundamental realities remain common on the consumer side:

• Given choices, consumers will choose

• Given better environments, consumers generally will migrate to them

• Given lower prices for comparable products, consumers will compare, and choose not to spend beyond what is necessary

• A better merchandise mix will win out over a narrow / poor mix

The realities of real-estate costs are the same for everyone–whether the retailer is domestic or international. Domestic retailers may have an advantage in being able to move quicker on closing deals but foreign retailers may have deeper pockets to play with.

Politics remain the same as well–China opened its markets to investment by foreign retailers after allowing its domestic retailers to grow in scale; Eastern European countries may raise the occasional stink about the lack of competition when two foreign retailers decide to swap assets; even in their home markets, Wal-Mart and Tesco face determined opposition. In India we’re seeing just another version being played out.

All this, while everyone is mostly fighting for the top-tier consumer. There is a wider market out there, my friends, a very different one that needs to be understood well, together with its implications for your business model.

Mall Mania, Mall Madness – alliterate as you will – it’s a phenomenon that is certainly taking over the newsprint, airtime and, quite possibly, your neighbourhood.

A study published in 2005 estimated that by 2007 over 360 shopping centres would be operational around the country, with approximately 90 million square feet. A meagre increase of 0.08 sq. ft. in per capita shopping space doesn’t seem like much in a country of a billion-plus people.

But most of it is concentrated around the big cities – Delhi and Mumbai account for more than half of the total space projected, with the other metros and mini-metros such as Bangalore, Pune, Hyderabad etc. taking the total up to 90% of the space.

One may argue that money (real estate development) is only following the money (consumers) – after all, there are more consumers and higher incomes in these major urban centres.

But why would mall developers expect Delhi’s consumers to suddenly switch en-masse to shopping in Gurgaon, where 6 malls are already active in a short distance of about a kilometre, 3-4 more under hectic construction in the same area and several more scattered around that suburb? Or why do Mumbai’s developers expect people to drive several kilometres from the suburbs on a regular basis to the centre of town to grace only their shopping centre? It is only such expectations that can explain the gold rush mentality that is overpopulating certain areas with shopping centres and malls.

While per-capita availability of A-grade shopping real estate looks really low, in certain areas we foresaw oversupply, with developers thinking in terms of “property” rather than as retail space managers.

Most shopping centre developers have carried out only cursory studies on the customer catchments that their tenants will be expected to live-off. As a result, conversion of footfall into sales is low for the tenants, except for food-courts, which are benefiting from the window-shoppers rounding off a day or an evening of roaming the malls with a meal. There is a lack of differentiation in product and service offer between the shopping centres and, with nothing distinctive on offer, repeat visits and – more importantly – repeat purchases are a challenge.

Developers in smaller towns seem to be following the same model, scaling up space or scaling it down based on the capital cost vs. expected capital gain and tenancy income. They are pitching for much the same brands as tenants as the developers in the bigger cities.

There is competition for customer traffic between the shopping centres and large stores (such as Mumbai’s newly opened Hypercity, across the street from InOrbit Mall, both developed by the Rahejas), between the shopping centres and the traditional high street, and between large format stores and speciality malls.

For the most part shopping centre development in India in the recent years has been seen as an aspiration to be fulfilled – hence, the most important factors have been the size of the shopping centre, quality of fixtures, marquee tenants who can provide the glamour or the legitimacy). The focus has been more on the “positioning”.

The business will begin maturing and will begin taking developmental leaps forward when centres are seen as commercial infrastructure to be planned with the end-consumer in mind, and to be serviced over a certain lifetime.

Until then, we can look forward to announcements of many hundreds of shopping centres, the launch of a few hundred, and the conversion of many of those into uses other than as shopping centres within a few months or years of their launch. And for investors also it might be a game of Roulette rather than Patience.

Mall Mania, Mall Madness – alliterate as you will – it’s a phenomenon that is certainly taking over the newsprint, airtime and, quite possibly, your neighbourhood.

A study published in 2005 estimated that by 2007 over 360 shopping centres would be operational around the country, with approximately 90 million square feet. A meagre increase of 0.08 sq. ft. in per capita shopping space doesn’t seem like much in a country of a billion-plus people.

But most of it is concentrated around the big cities – Delhi and Mumbai account for more than half of the total space projected, with the other metros and mini-metros such as Bangalore, Pune, Hyderabad etc. taking the total up to 90% of the space.

One may argue that money (real estate development) is only following the money (consumers) – after all, there are more consumers and higher incomes in these major urban centres.

But why would mall developers expect Delhi’s consumers to suddenly switch en-masse to shopping in Gurgaon, where 6 malls are already active in a short distance of about a kilometre, 3-4 more under hectic construction in the same area and several more scattered around that suburb? Or why do Mumbai’s developers expect people to drive several kilometres from the suburbs on a regular basis to the centre of town to grace only their shopping centre? It is only such expectations that can explain the gold rush mentality that is overpopulating certain areas with shopping centres and malls.

While per-capita availability of A-grade shopping real estate looks really low, in certain areas we foresaw oversupply, with developers thinking in terms of “property” rather than as retail space managers.

Most shopping centre developers have carried out only cursory studies on the customer catchments that their tenants will be expected to live-off. As a result, conversion of footfall into sales is low for the tenants, except for food-courts, which are benefiting from the window-shoppers rounding off a day or an evening of roaming the malls with a meal. There is a lack of differentiation in product and service offer between the shopping centres and, with nothing distinctive on offer, repeat visits and – more importantly – repeat purchases are a challenge.

Developers in smaller towns seem to be following the same model, scaling up space or scaling it down based on the capital cost vs. expected capital gain and tenancy income. They are pitching for much the same brands as tenants as the developers in the bigger cities.

There is competition for customer traffic between the shopping centres and large stores (such as Mumbai’s newly opened Hypercity, across the street from InOrbit Mall, both developed by the Rahejas), between the shopping centres and the traditional high street, and between large format stores and speciality malls.

For the most part shopping centre development in India in the recent years has been seen as an aspiration to be fulfilled – hence, the most important factors have been the size of the shopping centre, quality of fixtures, marquee tenants who can provide the glamour or the legitimacy). The focus has been more on the “positioning”.

The business will begin maturing and will begin taking developmental leaps forward when centres are seen as commercial infrastructure to be planned with the end-consumer in mind, and to be serviced over a certain lifetime.

Until then, we can look forward to announcements of many hundreds of shopping centres, the launch of a few hundred, and the conversion of many of those into uses other than as shopping centres within a few months or years of their launch. And for investors also it might be a game of Roulette rather than Patience.