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Evolving retail landscape in India

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The Indian retail scenario has traditionally been dominated by small neighbourhood convenience stores. Such stores, with limited assortment of goods, have helped conceal the state of unemployment in the country and dominated the retail landscape across most parts of it. Over the past two decades, since economic liberalisation was ushered in 1991, the retail real estate market in the country has slowly evolved with the introduction of Foreign Direct Investments (FDI) in single brand retail, cash and carry stores, retail mall development and, more recently, in multi-brand retail. Equally seminal was the entry of some of India’s largest conglomerates in the retailing sector and thus contributing significantly to the changing retail landscape in the country. Hence, in larger cities, retailing has undergone significant changes over the past few years, as witnessed by the modern shopping facilities there compared to some of the more developed global markets.

The liberalisation of FDI norms in real estate development and the subsequent investment glut during the growth period of 2005–08 saw unrestrained construction of malls across a number of cities, which resulted in an oversupply situation across many markets. A number of projects that were not backed by modern retail mall development and management practices and developed without professional advice on the catchment, positioning, optimal development size, zoning, amenities, etc. failed miserably. In the past few years, as the funding for the sector tightened, mall developers were forced to take a closer look at the key determinants of success at few such properties and adopt the best practices to drive growth and reach a sustainable level.

Some of the key trends in the country’s retail markets are discussed here:

Increasing size of malls

The average mall size has been growing over the years, a phenomena best witnessed in the malls which have opened since 2011, during the market recovery period post the Global Financial Crisis. As the funding for projects dried up during the period, it forced a critical evaluation of the success factors of malls. It became clear that apart from the location, positioning, tenant mix, zoning, parking and other critical factors, the size of the mall is also one of the key determinants of success. Larger malls offer greater flexibility to cater to different consumer segments in the target area as they can accommodate more number of stores across categories and hence are able to cater to the shopping and entertainment needs of a variety of shoppers.
The average gross leasable area in Grade A malls across the six cities was 0.20 million sq.ft. in the pre-2011 period, which has since then increased to 0.44 million sq.ft. in malls which opened over the last three years. It has been observed that malls with a critical threshold size of around 250,000 sq.ft. gross retail area have greater chances of attracting larger footfalls. Hence, the older practice of redeveloping old or defunct movie houses into modest-sized shopping malls with multiplexes have come down significantly.

Change in the average number of stores per mall

With the increasing size of malls, they are hosting a larger number of stores thus accommodating a wider variety of brand options and stores addressing niche shopping needs. The newer malls giving the feel of a modern shopping experience  offer opportunities for not only newer domestic brands but also facilitate the entry of global brands in new geographies. This helps the developer give the stores to move to a smaller or larger area during the life-cycle of a store. The average number of shops in malls in the pre-2011 period was 64, a number that rose to 105 in more recently opened malls.

Retail product category distribution

Mall operators have been attempting to fine-tune the retail area distribution across product categories so as to have optimum representation of stores across categories based on the experience of more successful malls. In malls that opened till the end of 2010, hypermarkets contributed to only 6 per cent of the area; ones that have opened since 2011, with strong focus on catering to shopping needs of the entire family, have 11 per cent of the retail area and are earmarked for hypermarkets. It is critical for malls to get the product categories and the area allocation to an optimal level since the size of a store plays a significant role in the success of the store and thus the success of the mall itself.

The top five store categories across the six cities, in terms of the area occupied, are apparel, food & beverage, departmental store, multiplex and hypermarket accounting for close to 60 per cent of the leasable area. Apparel stores occupied the largest area within malls, accounting for 19 per cent of gross leasable area. This was followed by departmental stores at 13 per cent, where also apparel remains the largest product category (Figure 1).

Mall operators understand the importance of giving a variety of food and beverage (F&B) and entertainment options to shoppers and it is reflected in the presence of both these segments in the top five categories. F&B includes quick serve restaurants (QSR), fine dining, casual dining and food courts. Hypermarkets also play the key role of an anchor and together they comprise the top five.

Retail product category distribution  (% total retail area)


DTZ Research

The contribution of both apparel and department stores have also increased during the recent years, which has partially  been due to the emergence of new domestic brands, entry of international fashion brands and the increasing penetration of several apparel brands including Zara, , H&M, , , Celio, etc. Apparel and department stores together accounted for 34 per cent of the total retail area in malls which opened since 2011, up from 29 per cent in malls that opened till the end of 2010.
Rental plans in malls

In line with well-developed retail markets across the globe, the country’s retail markets have also turned to revenue share or turn-over rents from a pure rental until a few years ago. Among the different types of rental models which are linked to the performance of the retail store, the most prevalent is the one where there is either a minimum guaranteed rental or the revenue share, whichever is higher.  The revenue share percentage to be shared with the developer varies according to store category, the gross margins in the business and the trading density. The rates for the above vary greatly from around 2 per cent in some categories including gold jewellery to 35 per cent in others like F&B kiosks in food courts.

Outlook

As the Indian retail market continues to mature, developers have adopted learning from the performance of existing malls. The importance of undertaking market studies and catchment is clear to developers. The adoption of some of the global best practices, including modern mall development and management practices, would gain importance in the years to come.
About the author:  Rohit Kumar is Head of Research at DTZ India. DTZ is a global leader in property services.