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Sep, 10 2010

IS RETAIL A VIABLE PROPOSITION?

RETAIL viability depends on various factors such as location, real estate prices and business strategies. Location is a key component, as retail expenditure of a franchisor should be in line with his investment.

RETAIL viability depends on various factors such as location, real estate prices and business strategies. Location is a key component, as retail expenditure of a franchisor should be in line with his investment. It is, in turn, dependent on the rentals. During the downturn, the retail expenditure even went close to 50 per cent towards property, which does not make the business viable.

As per experts, the right revenue share to make the business viable should be 20 per cent of the total cost.

Sharing his views, Bipan Jain, Managing Director, Madame, says, “Exorbitant rise in the prices of real estate has hampered the retail expansion because the rental part, which is 15 to 20 per cent globally, is more than 40 per cent in the Indian scenario.” According to Andreas Gellner, Managing Director, Adidas India, “In the last three years, we have seen retail rentals escalating to levels where most retailers cannot break even, what to talk of Return on Investment.”

Malls have mauled the retail space so far but not much attention has been paid to long-term success measures. Less thought-out or hasty expansion always affects the business, be it boom time or slowdown. Selecting properties without proper surveys did affect the sales of many retailers.

Meeting the challenges

However, things are now changing for the better. “Developers are getting their act together, the success criteria for malls is better established and it is far easier to predict success or failure,” informs Vinod Mahboobani, Vice President, Business Development and Legal, Yum! Restaurants  India,

V. Govind Raj, Vice-President, Retail and Marketing, Titan Industries Ltd, says, “Malls are now prepared to take risk in exchange for an opportunity to partake in the upside through revenue sharing, which they were not completely ready for earlier.”

Malls have chalked out new strategies to keep the shopping momentum high. Companies, which were closing stores during the downturn, have again started expansion. As per Sanjay Vakharia, Director, Marketing, Spykar, “The malls have started taking vanilla stores more seriously rather than concentrating just on the anchor stores.” Vakharia expects a further 20 per cent lowering of revenues to make it more viable for retailers. Though the rentals have come down, retailers feel there is still a need for more correction in the market to make the business viable. As per Govind Raj, “While the rents have come down, there is more scope for correction and it is in that context that the concept of revenue sharing becomes relevant.”

However, Mahboobani says, “We do not see any significant drop in real estate prices, as the market is picking up again. It is also not possible to generalise. For example, real estate prices in places like Bangalore, Hyderabad and Chennai are conducive to do business, but places like Delhi/NCR and Mumbai are out of whack.”

Gellner states, “The market has corrected itself slightly but not to the level that retail gets profitable. Furthermore, despite the slowdown, the prime markets (both high street and malls) have not seen broad-based rental reductions.”

Learning the lessons well

Lack of adequate facilities and appropriate anchor tenant have been the primary reasons for malls not doing well. Issues like culture and demographics clearly need to be understood. Zoning is another major aspect, which mall developers ignore.

Mahboobani observes, “Malls have added another dimension to retail. Malls in the wrong location with the wrong tenant mix and those not really malls will not survive. Only the best malls in terms of size, retail mix, etc will.” Samir Kuckreja, Chief Executive Officer (CEO) and Managing Director, Nirula's, explains, “The rents in prime high street areas are very high and this is a challenge for viability of the unit. Food courts have great potential because of their affordability.”

Sharing the lessons learnt by retailers post slowdown, Vakharia says, “Supply chain management needs to be concentrated upon, training needs to be provided at various levels, extensive local intelligence needs to be taken into consideration and each player must concentrate on its own strategy rather than the competitor's one.”

Besides, given the slowdown, many retailers have relocated or resized their stores. Adidas has re-seized, renegotiated and relocated stores in the last 18 months. Titan made some of its jewellery stores much larger and relocated and resized some of its eyewear stores. Even Spykar had to relocate its stores in metros apart from Madame, which had to resize and relocate too. However, recently, some retail players have started getting more aggressive again and we fear that same mistakes of the past are being repeated.

Jain believes retail is a perfect game if one has a property at his disposal. This proves that major retailers look for franchising in retail as a means to grab the right real estate. Says Govind Raj, “The Indian retail market is very large and organised retail is a small portion of that market and offers a very viable proposition.” Experts believe that real estate sector has now entered a phase wherein long-term developers will focus on design and management of malls. This further calls for a situation where mall managers rather than retailers should be responsible for the success and failure of shopping malls

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