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Feb, 01 2005

India\'s malls are accidental by choice

HORACE Walpole in his 1754 fairy tale, “The three princess of Serendip” (now known as Sri Lanka) provides us with the title and its definition for this article.

HORACE Walpole in his 1754 fairy tale, “The three princess of Serendip” (now known as Sri Lanka) provides us with the title and its definition for this article.

Today the word “serendipity”, which means the faculty of making happy, and unexpected discoveries by accident, aptly describes the current mall development situation in India, except that not all outcomes are happy ones, unless you are the seller of the land.

Firstly, and for international readers, we must understand the location. Gurgaon is in the state of Haryana, but encapsulated within the NCT (National Capital Territory, some 1,483 sq km) with a population of about 1.37 crore, as per the 2001 census. That census also showed that the NCT has recorded the highest growth rate in India since the 1991 census. During those 10 years, New Delhi and the NCT grew by 46.31 per cent in population against the national average of 21.34 per cent.

There has been considerable discussion as to why the area between New Delhi and Gurgaon has been chosen by the NCT planners as the ideal location in which to provide a concentration of mall development blocks. In our research we discovered that the greater catchment areas surrounding those mall blocks appeared to cover a massive 859 (57 per cent of the whole NCR), and 6.9 lakh persons (50 per cent of the population).

This is a highly populated area in global terms, and Gurgaon has been specifically identified as a growth area for middle to upper class people with disposable income. A fertile field for mall development, but a potential disaster waiting to happen if not planned correctly, both by the government and the mall retailers.

Note, we do not mention the mall developers or mall owners, because they are still evolving, some slowly and others reluctantly.

The warning signs

The opening paragraph of the article under review, describes a typical modern Indian mall.

“The glass and metal facade of the Sahara Mall in Gurgaon, a thriving township south-west of New Delhi, looks like the perfect emblem of the new India. Emblazoned with logos of clothes stores, gift shops and fast food restaurants, the mall’s glistening exterior seems to capture the exuberance of India’s economic boom. Inside, however, except for a busy restaurant and supermarket, business is sluggish, and many shops are slathered with signs proclaiming SALE.”
The article, then, proceeds with cries of woe from failing retailers, who tell about lookers and not shoppers,about just breaking even, about not making profit in one and one-half years, about 50 per cent discount to attract customers and about the future of this discount process to stay in business, etc, etc, etc.

But, wait, there is more.

We agree with Mr. Adiga that these sparkling new malls could be one of the symbols of India’s transformation to an emerging superpower, and noted his eloquent description of the scenes within these new halls of retail therapy, and remind him that this is how it is worldwide, if left to chance to organise.

We then read about the real estate developers’ plans to construct up to 600 malls by the year 2009 and offer, with all due respect, the following comment.

Following the successful formulas from Europe and the USA, we design our malls for the retail customers and manage them for the retail store owners. On that basis, Gurgaon could host up to 80 malls if they were designed and managed with the same philosophy as ours. But, now, the truth must dawn... 70 per cent of the malls in India will fail. Using my calculations, 70 per cent of 81 would mean that 24 are likely to survive. But most of these have not been designed or built yet.

The article examples a comment from Vikram Bakshi, managing director of McDonald’s India, who clearly states that they will not be in 70 to 80 per cent of those new malls. It was once said that a mall without a McDonald’s would die in any event. Usha Varadharajan of The Next Shop in Noida reinforces the cries for help by saying that most people walk in and walk out empty handed.

The article then proceeds with quotes from a wide range of disappointed retailers who see the people but do not see their money for a wide variety of reasons. Many of these are based upon the perception that mall stores are more expensive, and that retail evolution will take care of this issue as both the retailer and the shopper realise the valuable benefits of mall shopping both for consumer quality maintenance and shoppers comfort satisfaction.

One retailer advices that the middle-class Indians that are being targeted as shoppers for these malls (and they are) perceive that prices are higher in malls. In India, in our experience, that is a fact. If the retailer is a tenant he is almost certain to pay more for his rent than on street side strip shopping. If he owns the real estate of his shop, which has been a common factor in Indian malls, then he has to pay for the real estate investment and the cost of retailing. Bad business.

A ‘loot and scoot’ model?

What is not happening is a concerted effort by mall managers to drive customers to their malls so as to assist the retailers and in turn justify their rental and existence.

Quotes of 80 per cent lookers and 20 per cent shoppers seem almost unbelievable. However, it also provides another variation of the Pareto Rule, that 20 per cent spend the money and 80 per cent look on.

But wait, there is more.

Even in a “retail therapy” educated society such as our own in New Zealand, we are still monitoring conversion rates with tools such as our own Retail Eye and Census products. Many an overconfident retailer has taken stock of his affairs when the real numbers are highlighted, and many a mall manager uses the same tools to manage and improve his rental levels.

We have checked the conversion rates in some Indian malls, and the rate of 10 to 15 per cent of visitors turning into shoppers is generally accurate. All except for Gurgaon, which is verified by the comments of Pia Singh of DLF Universal for their City Centre Mall. But, even they could do so much better. There are others in Gurgaon who are seriously failing.

The article by Mr Adiga is well-composed and well-researched, but has only scratched the surface of the problem that India will face over the next 10 to 15 years. We sincerely believe that over 70 per cent of malls will fail as shopping precincts, and many will revert to warehouses, cheap apartments, or other low rental investments because the retailers will fail not only as retailers but also as their own landlords.

Again, Mr. Bakshi of McDonald’s hits the nail right on the head. The “loot and scoot” model, currently in operation in most of India, is the root cause of the problem. He also lays blame fairly upon the heads of local governments who are selling off land at high prices as mall sites. We agree this is where the rot starts. Once the land is sold at high base prices, a developer sees only one course of action “to get out quickly”. Then, the “buyer”, who is often a speculator, sells off the individual parcels at a profit. And so the erosion begins.

The Haryana Urban Development Authority may have justification for 20 to 25 malls in the Gurgaon area, and, frankly, we agree with them, but, they have provided little or no infrastructure for them to exist, and, more importantly, there are no guidelines on what the developer should design and construct. We are not advocating a restrictive rule book from the city planners, but it would be very useful to the population at large should the local governments understand what a mall really is and what it needs to survive. It is not only a case of water and electricity supplies but also more a case of creating an infrastructure that provides guidelines to uneducated developers on how to create a mall that works.

Issues that make or break a mall

Now we come to the part that uncovers the real issues that will make or break a mall. The questions I ask are: Who are the ones who act as “the faculty of making happy and unexpected discoveries by accident”? Who is serendipitous?

Does the answer lie in the following?

Is it the local governments for happily discovering a new source of revenue?

Is it the developer who “loots and scoots”, or his servants, the designers and constructors, who build just for the sake of it?

Is it the ubiquitous middleman profiteers who pass the headache on to another, the failing retailer?
Is it an accident?

Lets see if they follow the proven format.

Before the local government even considers zoning land potentials they must ensure there is a need for a mall in the area.

Then, they must limit that design and structure to suit the current demographic, not heap a bulk and location model upon the land in the hope that it can reach five levels above ground and, therefore, provide greater wealth for their coffers.

They must ensure that the developer uses the greater catchment areas for his calculations.

They must provide the infrastructure in water, electricity and transportation.

The mall developer should generally be the owner and manager of the real estate upon completion.

The mall designers must be experienced in mall design. A mall is not a cluster of spaces joined together by a pedestrian thoroughfare.

The leasing agents must be experienced in providing a balanced tenancy mix to satisfy the demographic.

The retail tenants must be bound by codes of practice for design and fitout.

All this to create a retail environment that fulfils the wants of the shopper, for, without due consideration to their needs, how can you expect them to not only enjoy the experience but also return for more retail therapy.

The whole concept and advantages of an effective mall is not understood or practiced.

Having said that, there are a few smart landowners who can see the writing on the wall. They listen to proven reason and end up as the owners of a mall property and are now beginning to learn to support that with the infrastructure that will provide them with an effective and sustainable business model. But it will take time. This company has been slowly changing that scenario for the last two and one-half years, but is still, regretfully, having to preach to many unconverted.

Once the Indian market realises that short-term profit is minute when measured against the potential long-term gains for all, then the scene will change for the better.

The opinion voiced in this article are those of the author.

Pictures show some overseas malls

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