WITH rising rentals eating into profit margins, retailers are preparing to fight back with a multi pronged strategy that includes exiting malls, innovating with formats, opting for a revenue sharing model with developers and stepping up focus on smaller towns.
Levi Strauss India, for instance, says it will be pulling out of a substantial number of malls in 2008. Alongside, it will increase its presence in small towns in line with its strategy of establishing presence in every district headquarters. “Profit margins are getting lower and we cannot wait for the next four to five years for things to stabilise. Passing on costs to the customer is also not an option. So we will exit places that are too expensive and increase our distribution network in small towns instead,” Shumone J Chatterjee, MD, Levi’s, said. Real estate accounts for around 35% of Levi’s total costs.
The high cost of real estate in metros is drawing retailers to tier II cities where operating costs are lower. Mall rentals in metros have gone up by 25-45% in the last one year, according to a Cushman & Wakefield estimate. At present, rentals stand between Rs 550 and Rs 1,000 per sq ft, depending on the location and size of the mall.
Some retailers are also looking at innovating with their formats to increase margins. Arvind Brands, the retail arm of Arvind Mills, is increasing productivity of exclusive outlets by converting some of its mono-brand outlets into multibrand outlets and by selling higher-value products. “We had opened our largest Arrow showroom in Bangalore and found it was not profitable. So, we innovated with the product offering and introduced a suits gallery, which has increased our sales. We will also be introducing other brands in some of our mono-brand outlets,” said Suresh J, CEO, Arvind Brands (Brands & Retail).
Also, city high streets will soon be able to sport only those retailers who can afford the high rentals. “Rental values are surely nearing the point where only certain set of retailers can afford prime highstreets or malls. This would slowly reposition the markets and developments. The highest revenue-generating store, in all probability, will be on a high street for a retailer. Prime highstreets have continuously provided better revenues as the focus is purely on shopping here compared to a mall,” said Rajneesh Mahajan, national head, retail services, Cushman & Wakefield (C&W) India.
A revenue-sharing model, where the retailer gives a minimum-assured sum from sales to the mall owner, is also being seen as a fast-moving option. “The mall owner benefits from the market situation. And, the retailer would end up paying a fair rent to the developer. Mall developers are also looking to cross-subsidise rentals, by leasing out entire floor plates to vanilla retailers,” said Mr Saksena.
Mall developers too have their side of the escalating cost story. They are forced to pass on the high costs to tenants as construction and maintenance costs have gone up manifold in the past few years. “Construction costs stood at around Rs 1,800 per sq ft two years ago. Today, it hovers between Rs 2,800 and Rs 3,200 per sq ft. These costs would eventually be passed on to the occupiers. Given the escalating costs, some retailers find it difficult to break-even within five years,” Mayank Saksena, head retail, south India, JLLM, said.
High rental values are impacting the profitability of the retailers across segments. According to him, hypermarkets are most affected because they work on margins of 12%-14%. “In India, we sell at MRP which means FMCG and consumer durables carry a similar price tag irrespective of where the hyper market is located,” he adds.