Retailers expect to gain from falling rentals

Indian retailers, who ended 2008 on a depressing note, expect to gain from lower rentals, down-trading, focus on special segments and aggressive sales promotions this year.

"The overall slowdown has proved to be advantageous as falling real estate prices have enabled the company to negotiate with developers," said Kishore Biyani, the founder of Future Group, a retail major.

Property experts expect a drop in mall rentals as additional supply comes into the market and a few retailers may hold back their expansion plans. According to Bappaditya Basu, vice-president and associate director (retail) of global real estate consultancy firm Jones Lang LaSalle Meghraj, "Over the next six months, retail rentals in metropolitan cities may drop by about 30 per cent and about by about 50 per cent in tier-II cities. So far, rentals were very high but soon the scenario will change and rentals will become more realistic."

Reflecting the trend, Spencer's Retail, the retail arm of the RPG Group, has seen a 30–40 per cent decline in the rentals in tier-II and -III cities. In tier-I and metropolitan cities, the correction is in the range of 15–20 per cent.

The retailers, stung by depressed consumer sentiment, are also negotiating with mall owners to shift to a revenue-sharing model. The Future Group is entering into revenue-sharing agreements with mall developers and is willing to offer 4-5 per cent of revenues, which is less risky than entering into fixed-rental charges.

Close to 65 per cent of retail deals between retailers and mall-owners in the country are on fixed rental per square foot basis, and the remaining is profit sharing. In the next six months, Jones Lang LaSalle Meghraj forecasts a complete reverse in retail arrangement between the retailers and mall-owners.

"Retail rentals have declined by 30-40 per cent in the last few months and we are in discussions with mall owners on rental reductions as well as alternative models like revenue-sharing to arrive at mutually beneficial commercial arrangements," Atul Chand, divisional chief executive of Wills Lifestyle, the retailing arm of ITC, said. Retailers also expect to improve margins in 2009 as input costs drop, helped by a decline in commodity prices. Value retailers expect to benefit the most as consumer shift their focus to cheaper alternatives.

Value retail is growing by 15-20 per cent, while the lifestyle retail market has dropped to less than 8 per cent so far this year.

Value formats such as Big Bazaar, Food Bazaar and D'Mart are intensifying their bargains and discount offers to encourage consumption.

The Tata Group’s Westside is setting up specialty stores for target consumers. According to Smeeta Neogi, head-marketing of Westside, the company is test-marketing the initiative with its recently-launched 5,000 sq ft 'Westside Women' store in Delhi, catering only to women.

It is also planning specialty stores for men and children where all its merchandise for the target groups will be available under one roof. Spencer's Retail is renewing its focus on hyper format stores. It has devised special discount schemes and bundled offers in order to ensure 15-20 per cent higher sales during December-January.

"We will scale up the number of hyper stores from 35 to 50 across the country by the end of this March 2009 since they are relatively more revenue earning," Samar Singh Sheikhawat, vice-president for marketing at Spencer's, said.