Retailers go for revenue sharing model over rentals
Atanu Kumar Das / New Delhi Sep 03, 2010, 01:17 IST
Retail players are planning to expand but with caution. It seems the slowdown of 2008-09 is still weighing on their minds.
Most companies like Shoppers Stop, Spencer's Retail, Madura Garments and Aditya Birla Retail are shifting to a revenue sharing model, where a retailer pays a share of the revenue a store earns every month to its landlord. This model helps retailers to offset rentals, at least in the initial months of opening an outlet, when the business is not profitable and footfalls are lower. The usual practice is to take stores on rent, where a retailer pays a fixed amount every month, irrespective of the business the outlet is doing.
"Three years ago, most retailers just kept on opening stores, without thinking about the viability of the location, the footfalls it will get. Moreover, rents in metros were skyrocketing and retailers found it very difficult to earn profits. Now, most retailers are looking at a revenue sharing model with the property owner when they open a new outlet," said Govind Shrikhande, customer care associate & CEO, Shoppers Stop.
The company recently announced that over the next four years, it planned to double its flagship outlets in the country. In the next five years, it intends to increase the number of Hypercity Retail outlets to 26 from seven. The company has earmarked Rs 120-crore investments for this financial year.
Madura Garments Lifestyle Retail says rental is a key factor. It is opening its first luxury store, The Collective, in Delhi, on September 5.
"In Delhi, we are opening the 17,500-sq ft store on a revenue sharing model because that gives us a breather in the first few months, when the store is new and footfalls are lower," said Ram Narayan Iyer, chief operating officer, Madura Garments Lifestyle Retail.
"We do not want to play the number game. First we ensure that the stores we open become profitable and then we think about opening another outlet. It is a very bad feeling when any retailer opens an outlet and then has to shut it down because it is not sustainable."
"Consolidation has been the key word for us because now we want to expand, but are equally aware that there is no point opening a store which will not be profitable. As rent is the key component for a retailer, many of them are opting for a revenue sharing model, as it gives the retailer time to make the store profitable," said Thomas Varghese, CEO, Aditya Birla Retail. The company plans to open 100 supermarkets across the country, including three in the Capital.
"Revenue sharing model" is not at all a new concept. For decades, Apna Bazar Co. Op. Society, in Mumbai, has been allowing outsiders/retailers to open stores, on revenue sharing basis (plus minimum rent), in its Departmental Stores. After commencement of Shopping Malls, many of such retailers have either shifted to the Malls, or closed down.
It is an indication of lack of confidence in the business model. These businesses have limitations in scaling up. The retailers are understanding that now.
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