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Sep, 10 2010

Malls maul high streets?

MALLS are coming up in every nook and cranny of the country, offering apt ambience, colourful interiors, a mix of shopping, entertainment and leisure and facilities like parking and tight security.

MALLS are coming up in every nook and cranny of the country, offering apt ambience, colourful interiors, a mix of shopping, entertainment and leisure and facilities like parking and tight security. Simultaneously, they are also beginning to pull the consumer traffic away from India's high streets.

Right property space

Location is always considered a crucial factor in the success of any retail or franchise business. Depending on the size of the franchise and the investment of the franchisee, a franchisee opens his/her store in both malls and high streets as it assures a lot of good customer traffic. As far as location is concerned, it is considered pertinent for the success of any fashion outlet. While selecting the location, a very careful scouting is required. For a franchisee who invests in apparel or footwear business, it is considered significant that he/she must go through in-depth research to find out the commercial and technical viability of high street and a mall, as the total return on investment depends on the type of location and retail format he/she picks to open an outlet.

A perfect location is defined in terms of the type of consumer footfall it attracts and the profits it get in return.

Balvinder Singh Ahluwalia, President, Koutons, says, “Choosing a location needs a lot of research work. Some of the important ones are target audience, catchment area, parking and size and location of the store.”

K. K. Roy, Head, Business Development, Business Head East, Levi Strauss (India) Pvt. Ltd, feels, “Franchisee will usually look at his business viability from investment v/s returns point of view as well as do some research on what business other brands (similar) are doing.”

Jay Gupta, MD, The Loot Stores, says, “Either the franchisee should have his own property, else he should take it on rent. The location should ideally be on the ground floor only. It should preferably be on the main road with potential for good footfall, there should be enough parking spaces and the rentals should be feasible for the business model. Only then, normally 10 per cent of expected sales are predicted.”

Before the evolution of high streets, there were local markets which catered to basic needs of consumers. These markets changed into high streets as marketers were attracted by the notion of catchment area's profile. They started thinking about their target consumers and scouted for best locations, which are usually located near the commercial heart of the city, road facing, arterial streets, easily accessible by public and private transport to attract major footfalls.

High street low on choices

Although India claims to offer almost a mix of domestic as well as international brands for every class of consumer, it still lacks in offering a perfect avenue to its customers that could totally be called a high street, in comparison with London's Oxford or New York's Fifth Avenue. Looking at the Indian context, high streets have not been properly constructed due to the lack of in-depth market research and strategic planning, which led to parking hassles because of high-consumer traffic during weekends and festive seasons. Other problems include unhygienic public toilets and lesser security in high-street shopping areas.

Over the past few decades, major high streets in India such as Delhi's South Extension, Khan Market, Cannaught Place and Karol Bagh to Mumbai's Linking road, Colaba Causeway, Marine Drive and Bengaluru's Indira Road, Brigade Road and Commercial street have been successfully serving the brand-conscious consumers.

During the economic downturn, retailers and franchisors experienced lesser sales, as people were not ready to spend on fashionable brands. To avoid sky-scraping real estate rentals, malls were developed in every big and small city, keeping in view the local market needs, target consumers, middle class income and their monthly expenditure on branded stuff and competitors in the market. They evolved strategies involving consulting firms. Malls were built to suit the need of every retailer, franchisor and consumers with stylish ambience, beautiful interiors, different entry and exit way-outs (to prevent parking troubles) and tight security, keeping in view the basic requirements of the consumers. The presence of malls at the right location arms the enterprises with the capacity to pull consumers into malls.

Check out the basics

Before taking up space in a mall or high street, always consider these parameters.

Floor preference:

In a mall and a high street, the floor preference depends on the size of the store and the type of investment a franchisee makes for opening the store. For example, companies like Benetton, Pepe Jeans London, Park Avenue, Lilliput, Raymond, Nike, Levis, Koutons, Spykar, Louise Phillippe and Wills Lifestyle have a strong foothold in the Indian market with their availability in the retail locations such as malls and high streets.

Ahluwalia says, “If you are talking about a mall, then the most preferred space is the ground floor. But having said that when a shopper comes to a mall, he/she usually looks at all the stores in the mall and then goes ahead with the purchase. Whereas on a high street market, the customer prefers the ground floor rather than specially going to the first floor to do his shopping.” He says this is common amongst almost all the shoppers in a street/market shopping. “If you want to open a franchise store in a high street, another important factor to keep in mind is to try buying the one that is nearer to the main entrance of the market,” he adds.

Anil Lakhani, Director, Giny n Jony, says, “Yes, generally the ground or first floor is preferred when it is in the mall. Zoning of brands is also one factor. Brands and franchisee likes to be on the floor where the entire kids brands are located. On a high street, care has to be taken whether it is a shopping destination or a residential area.”

Putting across a different point of view, Jalaj Kakkar, CEO, Remanik Apparels Pvt. Ltd. adds, “In women’s  apparel business, it is mandatory to have space on the ground and the first floor only, as women don't move more than that, except for food.”

“The ground floor is preferred and higher floors avoided on the high street,” says Gupta. Pavers England also prefers its stores to be on ground floor.

Exclusive rights to franchisee:

The franchisee has the right to ask the franchisor about the area that has been assigned to cover. He/she must get the exclusive rights to sell within it. If the franchisee is offered exclusivity for operating the store, then s/he can easily draw the different consumer segment to his/her store in an eminent way. According to Raj Rawtani, Director, Zedds Footwear Pvt. Ltd, “Some franchisors provide exclusivity to the franchisees while others do not. In our case, we do offer exclusivity.” “It depends on the territory and commitment of the franchisee,” says Utsav Seth, Chief Executive Officer, Pavers England Footprints Limited.

Taking up a licence:

High streets are usually constructed by the government authorities of the particular region or a state. If you are looking to set up your own or franchised outlet in that case, a government approval is required. Ahluwalia affirms, “Yes, for opening a store, licence under the Shop and Establishment Act is required from the municipal corporation concerned (generally called as Trade Licence).”

Rein in rentals:

Depending on the size of the store, the real estate cost in malls and high streets varies from location to location and city to city. In malls, the space is provided on the first-cum-first-serve basis. According to the 2010 India Organised Retail Market Diagnosis & Outlook report by Knight Frank, rentals in malls and high streets differ. In Delhi's Cannaught Place Inner Circle, the high street rentals are in the range of Rs 400-900 sq.ft per month while in Cannaught Place Outer Circle, it is about Rs 225 to 450 sq.ft per month. In South Extension, it is about Rs 550 to 1,000 sq.ft per month whereas in Greater Kailash, it is in between Rs 225 to 350 sq.ft per month.

In Delhi, the rental in malls is about Rs 158 sq.ft per month and Rs 96 sq.ft per month in Noida. From Faridabad to Ghaziabad, the rentals range between Rs 82 to Rs 88 sq.ft per month. In Gurgaon, the rentals are around Rs 177 sq.ft per month.

Looking at Mumbai, the rental in high streets and malls is substantially lower than in Delhi. In Mumbai's Banjara Hills, the rental ranges between Rs 95 to Rs 135 sq.ft per month whereas in Jubilee Hills, it is Rs 120 to Rs 140 sq.ft per month. In malls of Mumbai, the rental ranges from Rs 66 to Rs 134 sq.ft, in Old CBD to peripheral. In both the formats, the space rentals on ground floor are considerably higher than those on first and second floors.

Besides malls and high streets, Gini & Jony prefers to open its stores at  airports, and through websites and e-shopping formats. Koutons will now be expanding in tier II and three cities, which usually do not have the culture of high street markets and malls.

Revenue-sharing or minimum guarantee?

In the last two years, due to uncertain economic conditions, most retailers and developers had to scale down their expansion plans. To beat the slowdown blues, many retailers, franchisors and realty firms are progressively skipping on to the notion of revenue-sharing model. Revenue-sharing model is a money-spinning model for both the retailers and real estate players, under which the retailers share a percentage of their sales with the realty companies. It increases the accountability of the developer to bring in footfall in the mall by providing good maintenance of the infrastructure. This model is also sustainable during the downturn, as it brings retailers, franchisors and real estate companies on an equal footing. It means that the developers are now ready for flexible revenues instead of fixed rentals. About its success in today's market, Ahluwalia opines, “In revenue-sharing model, developers get the share of extra revenue that is earned by the retailer. This brings the entry cost down and is an acknowledgment for the developers for their contribution in developing the mall. In minimum guarantee model, the retailer has to give the assurance of returns, irrespective of the sales done. There is a fixed amount that a retailer has to pay. It depends on the location and size. On the other hand, in revenue-sharing, a retailer has to pay fixed percentage of the revenue earned. This varies in accordance of fresh and discount sales.”

Susil S. Dungarwal, Chief Mall Mechanic, Beyond Squarefeet Advisory Pvt. Ltd, states, “Any business model can be feasible only if it is a win-win situation. Revenue-sharing model helps create this to a great extent, which is why it is slowly becoming popular. In revenue-sharing model, the tenants/occupiers only share a part/percentage of the net revenues of business with the mall developer, whereas in the minimum guarantee model, the occupant pays a minimum amount for sure and also a revenue share percentage, in case the revenues have been higher.”

Roy adds, “Brand equity decides the feasibility of revenue-sharing model. High street landlords do not accept revenue share usually. Revenue-sharing model is business revenue linked whereas minimum guarantee is return on investment (RoI) linked.” When companies are not in position to pay higher rentals, they prefer revenue-sharing model than minimum guarantee, as it gives them the benefit of paying variable rentals rather than fixed ones. Gupta admits, “In revenue-sharing, the risk is distributed between both the parties. Minimum guarantee is a certain minimum fixed amount that has to be given to the opposite party, irrespective of the sale.”

Revenue-sharing model is highly acceptable among the retailers, as the risk is shared between the real estate owner and the retailer. Also, it makes developer more accountable for generating footfalls and conversion rates in the mall. For the developer, it lessens the risk of high vacancy in the mall while counting on the probability of better revenues in future. According to a news source, under the pure revenue-sharing model, the retail company will have to share 3-20 per cent of the store's revenues per month.

Profitability factor

High streets and malls pull two types of consumers, the impulsive shopper and the focused shopper. Very few retailers and franchisors do something to attract them.

In malls, a right tenant mix, selection of the right anchor tenant, perfect zoning and their right placement can help them to draw both the kind of consumers. For instance, a perfect zoning in malls creates a favourable tenant mix like a food and beverage outlet next to a designer apparel shop instead of an accessories or a footwear shop. While in high street retailing, the apparel segment pulls the sheer traffic and it has the wide assortment of brands to choose from. Some experts feel that the conversions on the high streets are pretty higher. With the availability of different vanilla tenants with distinguished product categories for every strata of society, malls attract more walk-ins and give facilities like parking, proper security, etc to the consumers. They also provides lower store rentals that are the guiding factor in setting up the store within a mall. Some mall developers tend to lease out retail space on first-come-first-served basis.

The disadvantage of opening a store in malls is that many times, the large crowd does not mean high sales. Due to the availability of competitors, there is less brand recognition, which makes it tough to survive. At present, most of the popular malls have long queues and congestion outside their main entry points during weekends and festive seasons. Having only one entry and exit point also leads to overcrowding. Also, the visibility of retail stores from all vantage points is poor in many malls.

As compared to malls today, high streets and neighbourhood stores have a good brand penetration in the metro cities. Seeing the growing brand consumption among the consumers in tier II and tier III cities, companies are now opening their stores in such cities because of lower real estate rentals, which make its easier for them to ensure strong footfalls in such cities. In comparison to opening stores in malls, the cost of real estate space in high streets could be heavy on the franchiser's pocket.

Perfect blend

In the coming years, malls and high streets are likely to receive profits from rising footfall base, as customers are flocking to such a street, where they can find a blend of both high-street retailing and controlled shopping in new malls.

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