Mall rage to rat race

FOLLOWING the perceived success of the first few malls in India, the country has seen frantic activity in the sector since 2001. Developers have announced mall projects at every available location. Keeping in view the profits made by the pioneers, retail development is seen as the next money spinner. The question that haunts is, ‘who is the profit maker?’ Is it the retailer, who makes the actual investment in the retail space? Or is it the developer who makes the initial investment? Or do the profits go to the middle man, the investor who purchases or leases the property from the developer and further leases it out to the retailer?

The usual scenario in India is that real estate is acquired by a builder or a developer who proposes the mall and then leases or sells a percentage of it to investors even before the operations begin. This investor usually holds on to the property for a while and once a profit margin is available, further leases it out or sells it to a retailer at a premium. The remaining percentage of real estate with the developer is usually leased out or sold at a premium just before operations begin. So even before an investor or a retailer knows whether the mall would be successful or not, he has a stake in it.

Says Mr Pushpendra N Sharma, CEO, Mantra Consultants, “The success of a mall cannot be quantified since there are various definitions of the term. For a retailer, a mall is successful if he can sell his merchandise and make profits. A developer defines a successful mall in terms of the profits that he can earn by selling or leasing property.”

According to Mr Shubhranshu Pani, retail head, western region, Chesterton Meghraj Property Consultants Limited, “Out of the proposed 282 malls expected to come up by 2006 in India, there are only 77 real mall projects which are under construction or under serious stages of planning in the six metro cities of India and 58 malls in tier-two cities which will see the light of the day.”

With malls proposed across the country and the media hype created about them, a large number of retailers, small and big are investing in what is considered, ‘the future of retailing’.

Says Mr Sharma, “There has been a tremendous outbreak of mall mania, developers are investing in malls without really considering where the future of retail lies.”

The price factor

The biggest challenge for any retailer to expand is that of finding suitable real estate and that too at a price that is affordable. As the largest fixed cost element in the retail business plan, varying from 7 to 11 per cent of turnover, is real estate, it becomes a critical factor in determining profits. With the high pricing of space in a mall, where does this leave a small retailer? Is it right for him to invest his savings in a mall?

Says Mr Kishore Biyani, MD, Pantaloon Retail (India) Ltd, “We judge the price that we pay for the real estate on the basis of the profit that we generate. If we get a sizeable return on the investment then it is worth it.”

The same is applicable for a small retailer as well, but a large number of these retailers get lured into the mall culture because of the expected footfall and end up ignoring this perspective. Elaborates Mr Biyani, “The price of real estate shoots up the minute we sign up with any developer. This no doubt, benefits the developer but a retailer has to take a decision to invest in a mall on the basis of his own research, product offering and expectations. We do not promise any footfall or conversion rate, we generate a footfall but this is only because of what we offer and we do not take it as our responsibility to generate profits for others. It is ultimately in the hands of an individual retailer to be successful or fail.”

The current scenario

The developer community has been able to achieve the current rate of acceleration largely because of the support extended by the financing model followed in the country. Most mall developers sell a large percentage of the mall space prior to and during the construction phase to generate funds. Says Ms Reema Menon, Parasvanath Developers, “We have proposed 11 malls at the moment.

These would be operational in the next two years. Amongst the first to start functioning would be the MMX Mall at Mohannagar. About 40 per cent of this has already been leased out or sold to investors. This is primarily done for generation of funds.”

Suncity Projects has proposed three malls, out of which two would be ready within six months while the third would take another year. Says Mr Ashok Bansal, director, Suncity Projects, “Lease agreements with a number of brands have been signed for these malls already, while negotiations are on for the remaining space.”

Clarion Properties has one mall at the moment, and has proposed two more malls at Gurgaon. Says Mr Johnson Micka, VP, Marketing, “Fifty per cent of our mall is either leased or sold out.”

In certain cases, the malls are leased out completely before operations begin. Says Mr Tarun Mehrotra, head, residential and retail, Unitech Ltd, “We follow a leasing structure with a minimum lock-in of three years and a rental deposit of 6 to 12 months. None of our malls are operational as yet and they are almost 100 per cent leased out.”

Similarly, Mr Aslam, director, City Centre, Skill Promoters, says, “City Centre, Hyderabad, covering an area of 2 lakh sq. ft with six floors, would be operational by October or November 2005. Approximately 60 to 70 per cent of the mall has already been leased out. The lease agreement largely depends on the credibility of the retailer and the brand. If we are confident about the retailer we are flexible, on the other hand, if it is a new or a small retailer we have a lock in period of two to three years.”

This further becomes another point to be considered by smaller retailers. Even though they have limited resources as compared to bigger retailers, the deal offered to bigger retailers is definitely better. This sentiment is echoed across the industry. Says Mr Sunil Bedi, MD, Regent Plaza, JMD Properties, “Fifty per cent of the mall has been already leased out. We started leasing out after 95 per cent of the project was completed because this draws higher rents. And undoubtedly, we are more forthcoming while negotiating with bigger brands. Investment made by these retailers is larger and they also act as the crowd pullers, in other words, they bring the footfall.”

Mr GS Pillai, president, Aerens Developers, says “Pricing and the negotiation of terms largely depends on demand and supply. Price of real estate is negotiated depending on how desperately we want the retailer to be there. Any company is willing to bend if they need a retailer.”

Says Mr Mehrotra, “World over anchor pricing and small store pricing is different. Anchors lease large areas spread across all floors, so the average rentals come down. They also commit at very early stages, that is why they get the first mover advantage.”

Further, to make the best of the current scenario, a number of developers have taken the initiative to set up specialty malls. An example of this is Gold Souk jewellery mall, a project undertaken by Aerens Developers.

“A specialty mall ensures that the retailers get the right kind of footfall. There is a difference in the mindset of a consumer who walks into a jewellery mall as compared to that of a person who walks into a general retail mall, as only focussed jewellery shoppers would come here. At the same time one needs to keep in mind that the investment made in a jewellery store is quite high, so it takes time to earn returns on the investment, in fact it takes at least two to three years for a retailer to break even in this business,” says Mr Pillai.

Fort Knox, Kolkata, a venture of Fort Project Limited, covering an area of one lakh sq. ft is also a jewellery specialty mall. Says Mr Ashok Bengani, president, Fort Projects, “The retailers at a specialty mall get a focussed clientele therefore the conversion rate in this case is much higher than in other malls. We intend having the best jewellery brands at the mall.”

This would obviously lead to an increase in internal competition as the catchment area would be the same for all retailers. “This would help retailers grow and provide better services and variety to consumers,” justifies Mr Bengani.

Considering the investment that has already been made in terms of the real estate and the overheads, this might be a catch 22 situation for small retailers. At the same time, if another jewellery specialty mall comes up in the periphery, the catchment area would also be divided. Says Mr Bengani, “We cannot stop another mall from coming up but what we can definitely do is try and improve our standards and offerings to retain our customers.”

This would invariably imply a hike in the investment that the retailer would have to make and with a fixed lock in period, there aren’t too many options available either but to give in to the requirements of the developer.

Again, a lot of times, investors due to a lack of expertise and research invest in malls because of the promise of high returns and the credibility of the developer, and later realise that the picture portrayed to them is not really true. Anant Kumar* invested in a retail outlet at the DLF Mega Mall, Gurgaon three years back. He says, “I was handed over the property last year, incidentally 70 to 80 per cent of the mall is still unoccupied. As a result, I still haven't been able to find a buyer or for that matter even a tenant. One looks at the long term perspective when you are investing but developers across the country secure their position by finding investors and to top it all, they charge ridiculous amounts for maintenance. I get a bill of approximately Rs 7,000 per month.”

Another complaint made by a lot of investors is that the developers make promises but as the completion of the project comes nearer, the promises start collapsing. Complains Mr Kumar, “We were told that the parking space would be ours and we would have to buy it. Then when they were handing over the possession they returned the money and told us that we would have no right over the parking space. So now, every time that I have to visit my shop, I pay the parking fee.”

According to a research conducted in the US market, up to a third of the nation’s 1,200 malls are already obsolete. Yet in India, looking at the number of proposed malls and the retailers and investors who are getting lured by the culture one can hardly foresee such a dismissal state of affairs. Investors consider the retail property as a means of making profits through resale or leasing out. As a result, their interest is not limited to the profitable functioning of the mall. Most of these people do not have any retail expertise. Consequently property is resold or leased out to the highest bidder. Says Amit Khurana*, another investor at DLF Mega Mall, “I had thought that I would be able to resell this property at a higher rate or at least rent it out, but with the increase in number of malls and the underlying dissatisfaction amongst the retailers in malls, no one wants to invest here. As a result, my money is stuck in that property and I am earning no returns from it, instead I have to pay maintenance charges.”

Considering the whole picture and after digging into the facts, the retailers reaffirm this opinion. Says Mohit Juneja*, “My food outlet at Fun Republic is running into losses and I haven’t even managed to break even. In fact, my stand alone outlets are performing much better than the one in the mall. There are a number of reasons for this, the primary reason being that the investment made in the mall and the overhead charges are much higher than those in a stand alone outlet. Also, the food retailers have to pay rentals for a part of the food court as well, yet, a lot of people pick up food from vendors who are not a part of the food court. As a result, we pay for the place that they utilise but they are not our customers. At the same time there are numerous restrictions in terms of advertising and offering discounts or schemes to attract consumers.”

Considering this, the question that arises is that why are small retailers investing in malls? Says Mr Juneja, “When the offer came to me from Fun Republic, they gave a very lucrative picture. They promised a very high footfall. What a retailer does not realise, at times, is that high footfall does not necessarily mean high conversion rate since most of the footfall is generated by the multiplex. A number of people who visit these malls do not have a high spending capacity but are just there to pass their time.”

One of the investor at the DLF Mall said that inspite of his repeated efforts to contact the concerned people, he was unable to do so. We understand his sentiments, because inspite of persistent efforts on our end to contact Mr Ajay Khanna, CEO Retail, DLF Retail, we were unable to get his views.

As mentioned above, developers and investors usually offer a better deal for bigger retailers. “When negotiating with big brands we have to be flexible to bring quality to the mall. Once 30 to 40 per cent sold to big names then we can get a little stubborn about terms and conditions. Supermarkets are also offered the real estate at lesser rates because they bring a lot of business,” says Mr Aslam.

Undoubtedly, this makes things much simpler and easier for big brands. Says Mr Nigam Patel, director, Provogue India Ltd, “As a retailer one needs to understand that a mall promises footfall, not necessarily customers. At the same time, for a big brand, having an outlet in a mall works as a great advertising medium because the footfall is usually very high. In fact, malls provide an ideal scenario for well established brands with an existing customer base. So ideally, in the initial stages, a retailer should establish himself and then walk into a mall.”

The promise of co existing with big brands acts as an attraction for smaller retailers. Says Mr Ankur Sharma*, a retailer at Metropolitan mall, “We were given the assurance that a number of big retailers would have their outlets here. We were later told that some of them have dropped out. And then there are quite a few of them who have also shut down. We have a lock in period of one year, so, no matter whether we are making profits or running into losses, we have no option but to continue functioning. Also with the novelty of malls gradually fading, the footfalls are also decreasing.”

Says Mr Vikas Jain, proprietor, Classic Centre and a retailer at Fun Republic, Chandigarh, “To attract consumers, the product mix offered by the retailer has to be right. One has to remember that hardly any planned shopping happens at malls, so one has to offer impulse purchase items that are not highly priced. For a retailer who has such a product mix and at the same time has the money that is required for investing in retail space in the mall, an outlet here can act as a great means of advertisement.”

Fun Republic, positioned as a family entertainment centre, is already present at Mumbai, Ahmedabad and Chandigarh with plans to set up centres at Delhi and Lucknow by the end of the year. The company has already started leasing out retail space in the proposed mall. Says Mr Atul Goel, executive director, Fun Republic, “Before deciding a location we usually conduct a study to determine the competition in the area, the profits made by existing malls, and also have talks with retailers regarding their presence in that area.”

Yet, does this ensure that it is profitable for a small retailer to venture into a mall. The multiplex usually generates a high footfall but the conversion rate is quite low. This thought has been echoed by a number of retailers including Mr Juneja, quoted above. Considering the lock in period, a retailer has to either find a replacement that would be beneficial for the developer or investor or else has to forget about getting the deposit back.

“If a company is running into losses they would obviously shut shop. If we find someone to take the place then we don’t mind returning the deposit. If we can’t, then it becomes a difficult situation and then the retailer has to take a call whether to continue operations there or lose the deposit,” says Mr Goel.

This again raises the question that if a number of existing retailers are already running into losses, then how does the company plan to ensure that the new centres will not follow the same route.

Nirula’s recently pulled out of the Metropolitan mall after a stint of about 9 months with them. Says Mr Vikas Attri, technical advisor operations, Nirula’s Corner House Pvt. Ltd, “We managed to walk out of the mall without much of a problem because at that time the rate was higher than what we had got the property at and there were a number of retailers who were willing to pay a higher rate. As a result, it was in the interest of the developer to let us go. For retailers who want to step out now, it’s a problem because the rates have fallen because of the mushrooming of malls and at the same time a lot of retailers have realised that it is not really profitable to be a part of a mall.”

Nirula’s was losing money because of the large number of food retailers in the mall. “The footfall at the mall remained more or less the same over the period that we were there, but with the increasing number of options available for people, the customer base obviously became less. The maintenance and operation cost remained the same but our sales dropped. As a result, it was not profitable for us to be a part of the mall. It would be a similar situation for all other food outlets there and every other day retailers are closing down outlets. One needs to be very careful while taking a decision to invest in a mall,” says Mr Attri.

Says Mr Deepak M Sharma, proprietor, Gwalior Sweets Pvt Ltd, “Our food outlet Cine Masala is present in a number of malls and we also have standalone outlets. These stand alone outlets are definitely more profitable than those present in malls. In the first year, usually a mall has high footfalls so there are more customers but in the following years the footfall reduces and this directly affects retailers. On the other hand, in a standalone outlet, the profits increase with every passing year. Also, in a mall an outlet cannot have its own identity it is just a part of a mall, this acts as a deterrent as far as customer loyalty is concerned.”

Other areas of concern

Other than the constraints already discussed, there is also the point of reaching a saturation level. With malls mushrooming across the country there are certain areas that would definitely have an over supply. An obvious example in this case is Gurgaon.

Says Mr Kekoo Colah, executive director, Knight Frank India, “Market forces are a great leveller and Gurgaon is no exception. Once the first mover advantage wears out and competition increases, mall owners and managers will have to learn to operate in a dynamic, complex and competitive environment. In a crowded market, some of the key factors to be considered would be differentiation, accurate pricing, active mall management, top quality facilities management to ensure the most favourable ambience and being in tune with the changing needs of the end customer and the store owners and operators.”

How far would this be possible? With developers leasing out property to investors and then further on to retailers, most of the malls do not belong to a single owner. As a result, the interests are varied and therefore a common action plan is a rare possibility. Also, with a lock in period for retailers varying from one to three years, developers and investors are not at a risk it is the retailers who have to bear the brunt.

Says Mr Colah, “Generally speaking, single ownership of a mall is desirable simply because the focus, branding, mall management and other crucial factors are under single control and the paramount agenda is the overall success of the mall. Different ownerships could (and invariably do) lead to differences in priorities, some conflicts of objectives, etc which could be detrimental to the overall interests of the mall. In most developed markets worldwide, single ownership is often the case, with the professional operations of the mall looked after by experts in their respective fields.”

A lot of projects lack clear positioning, proper space planning, adequate infrastructure, parking and understanding of the basic principles of mall management. There is a lack of retail expertise being applied while designing the mall. This once again affects retailers. Says Ms Menon, “DT mall is not performing well largely because of the retail design. The anchor brands have been given the prime space while other retailers are losing money because of unfavourable locations and wrong retail design.”

At the same time developers are continuing to design malls without any specialised support and on the basis of their own retail expertise. Says Mr Aslam, “ I designed the tenant mix myself keeping in view the consumers point of view and also consulted retailers who are already present in malls.”

Says Mr Dheeraj Verma, Adobe builders, “Our mall at Jaipur covers a retail area of 2,50,000 sq. ft. We have in house designers for the mall layout design.”

Developers feel that they can bank on architects for the designing but they tend to overlook the fact that these architects are not retail specialist and just because they are handling a number of projects does not mean that they understand retail strategies completely. Says Mr Bedi, “We have left the retail designing to the discretion of our architect of course the final decisions are taken according to our consent. We did not feel the need to hire any specialist because our architect is handling mall projects across the country.”

India is undoubtedly on the verge of a ‘mall boom’, but then, after observing the facts and reflecting on them, doubts are created whether it would really be a boon. And then again, the same question, ‘who would benefit?’

A piece of advise, retailers and investors must review their decision to invest in a mall and base it on thorough research before actually taking the plunge.

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