India is the last frontier for modern retail development. Our consumer is emerging from decades of minimal choice, restrictive legislation and stifling cultural concerns. A consumer who has always held high aspirations is now freely able to exercise his or her right to a comfortable lifestyle without guilt or judgment. Emerging modern retail formats are offering exciting customer interaction, pleasing ambience and a connection with previously unseen product. New retail formats that have taken several decades to evolve in the West are available to us overnight here. Such is the exciting scenario that our real estate industry faces.
With this scenario come certain factors unique to India and not previously seen in the world. Few of these factors are covered by any western experience or learning.
The rush to exploit the seemingly endless opportunity of modern retail sees just about anybody from any background or experience either launching new retail business’s themselves or becoming shopping mall developers. Of the many new entrants into the retail business at least a third will fail dramatically in the coming years. Short term success though is almost guaranteed with little competition (only 5% of retail is currently ‘organised’ hence there is currently room for many new players as market share is too easily available) As competition intensifies rapidly over the next few years the amateurs will face challenges to re-capture market share from the subsequent new entrants.
Shopping in modern formats is a mainstream leisure activity for our consumer and the novelty effect is still prevalent. As more and more choice becomes available this novelty factor will wane and the massive footfall enjoyed by the few today will be hard won by the many in years to come. The current impulsive shopper character of the Indian browser will metamorphose into a shopper who shops because she needs something specific and she will be more considerate about her choice of venue amongst the many more available.
The amateur developer may find the going tough when he realizes his multi floor mall with no credible anchor, poor upward traffic flow, low budget maintenance and insufficient parking for a more affluent consumer has left him losing the race.
Our current building and zoning legislation makes it tough for any developer to provide adequately for an attractive retail destination that will sustain the 25 year life cycle that is ordinarily necessary to gain decent returns in the shopping mall business. Firstly, our apparent lack of any effective town planning legislation permits too many malls to be built in the same zone with the ridiculous extreme being Gurgaon highway eight. A reported 23 malls being built in a 3 kilometer stretch. We needn’t bother speculating if they will all survive. For a developer to confidently invest substantial amounts of money into a significant shopping destination he needs to know with a high degree of certainty what the future infrastructure plans are for the area and when they are going to happen. He also needs to know that his 1 million square foot mall will be the only one permitted in the immediate catchment. The current doubt around these factors is one of the reasons for the greedy rush that is taking place. Our landowners and developers can’t wait 25 years for good returns as the future is completely uncertain. Hence they acquire, design and build as quickly as possible.
The letting of many malls is a haphazard process carried out at the same greedy pace. Little or no thought is given to winning an anchor tenant who will last the distance with an aspirant consumer over the next 25 years. Careful and professional consideration of the rest of the tenant mix and their adjacencies in the mall will sustain the development against weaker competing venues. Increasing affluence will require much more parking than is currently allocated today. Our developers are unable to adequately provide for this as our legislation includes parking in the floor space index restrictions. Quick returns are critical before competition and increased consumer selectiveness leads to failure of some.
These are just some of the reasons for the chaotic frenzy of current retail real estate development. In some cases this frenzy has lead to bizarre schemes where a developer ‘sells’ his mall to the retailers. Sustenance of a shopping mall requires professional management of maintenance, security, marketing and tenant mix management. This cannot be done in the long term by the equivalent of a housing society cobbled together by the individual retail owners of such malls.
With the above in mind, our developers have lost sight of the complex pricing mechanism that is an essential part of a successful mall. The current insatiable demand of modern retail is grossly outpacing the available mall space. This has led to some rental prices that would out do malls in the US. Some of our retailers are fueling these prices in their rush to acquire space in order to ‘block’ competition. In some cases mere words of intent for massive demand from a new retail entrant is enough to double asking prices.
A profitable shopping mall is a careful arrangement of retail offering. The most important part of this arrangement is the anchor tenant.
It is the anchor who is the ultimate footfall driver. Without an anchor who is in the game for the long run with a format that is a destination in itself the mall will succumb to competitors with stronger anchors. Signing the very best anchor is a strong driver of subsequent retail tenant demand. Smaller players will pay for the guaranteed footfall that the right anchor will bring. With much greater destination choice available to the consumer in the future, the anchor will also determine the malls’ customer profile. An up market anchor will attract up market customers and consequently up market retail tenants will demand space. Conversely if the requirement is for a lower end customer profile because of the catchment demographics then the best discount operator will attract tenants of the same ilk.
The pricing of the developers offering to the right anchor is therefore crucial to his future success. In the highly developed western markets the pricing differential offered to the right anchor versus the smallest tenant is 1 is to 10. In India we are experiencing offerings of 3 is to 9. In South Africa, where we saw something of a mini explosion of malls in the early 90’s the right anchor was offered free rental for the first 3 years together with a cash allowance for shop fitting costs to build his store. Such is the importance of the lessons learnt there about having the right anchor in a competitive retail environment. The mall owners’ ability to demand conversely higher rentals from the smaller tenants is that much easier with the best possible anchor.
What feeds this formula is also the fact that the right anchor will always be a food and grocery outlet as this category above all ensures consistent repeat footfall. Food and grocery is an extremely price competitive business and therefore endures the lowest of margins. For their model to prosper and remain competitive their rentals have to be the lowest.
As a footnote on the subject of the retail industry’s demand for space is the interesting observation that the hectic pace of signing up by some retailers sees them with footage commitments that would require more than 30 times their current capital base to actually develop.
Another factor in retail real estate development that is unique to India is our very poor road infrastructure. This has significant influence on our retail development that is not prevalent in the developed world. 20 minutes of travel time (research indicates this is the acceptable travel time to a shopping destination) in an Indian tier one city is sometimes 3 kilometers. In the west this would be up to 20 kilometers. Whilst our demographics see a higher population density in the 3 kilometer radius, the proportion of ‘consuming class’ would be much less significant. It is therefore crucial that we develop retail destinations that will attract customers from further afield than the traditionally accepted ’20 minutes’
Our malls need to be much stronger ‘one-stop’ destinations to not only persuade customers to travel further but also prolong their visit. This is one factor that influences the size of the development.
The current size of our retail outlets particularly in the food and grocery sector are much smaller than in the West. This is driven by our much smaller width of product range. In the FMCG category western outlets would offer up to 50 variants of bath soap for example. In India we have less than ten at present. This is changing fast as more and more product becomes available. This means we will catch up in necessary size quite quickly. This may leave many current outlets short of space to compete. This will become a factor in the future which needs to be considered.
In summary we have blue sky for retail real estate development with a few scattered clouds. There are a handful of visionary developers who are going to prosper in the coming decades. Along with them will be a handful of super successful retailers who will set new benchmarks for the world. Most important of all is the impact on the Indian consumer. Increased competition will undoubtedly lead to lower prices and much wider choice. For her or him, the sky is all blue.
ABOUT THE AUTHOR
ANDREW LEVERMORE, CEO, Hypercity
Andrew Levermore, a South African, with retail career spanning over 23 years in both luxury and value retail is CEO of HyperCity. He is responsible for the entire gamut of operations at Hypercity. Prior to joining K Raheja Corp., Andrew was in executive buying and merchandising management, with Macro, South Africa. Earlier to this Levermore was managing director of Guys & Girls, a fashion chain trading across five Southern African countries followed by his next assignment as managing director of The Hub, a department store chain and Sheet Street a home ware chain, both located in South Africa.