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Rediff.com  » Business » Most malls getting costs wrong; may fail

Most malls getting costs wrong; may fail

By Sunil Jain in New Delhi
October 16, 2003 08:20 IST
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India needs around 120 million square feet of incremental retail space each year, so even if all the 300 malls being planned come up, that's just 45 million square feet, and can easily be absorbed," begins consultant Arvind Singhal who heads KSA Technopak.

But just when you think Singhal is painting a rosy picture of the current mall mania -- 23 malls each are coming up in just Delhi and Mumbai -- he tells you of malls in places like Coimbatore and Varanasi, which remain vacant till date, whose owners are constantly approaching him to help find good retailers.

Cut to Pranay Sinha, who heads the retail practice of real estate consultancy Jones Lang LaSalle, and you get a similar response: "Yes, I get such requests all the time. I've just got one from someone in Pune, and I don't know what to do with it."

Adds Vikram Bakshi, who runs the McDonald's franchises in north India and is chairman of CII's National Commission for Retail, "I think 70 per cent of all malls planned in Gurgaon will fail."

And yet, at the same time, retailers appear to be queuing up at different malls. Despite a Pantaloon, a FountainHead and a Shyam Ahuja walking out of the Piramal's Crossroads Mall in Mumbai within just a few years, according to the mall's CEO Krish Iyer, there are two people waiting to take the place of any one person who leaves.

Clearly, malls are hot, but there are three or four basic issues that most mall developers need to address if they are to survive.

First, and foremost, most malls have outpriced themselves -- Bakshi says Gurgaon malls are at least 30 per cent too expensive.

"As the anchor tenant in Metro in Gurgaon, my rents are very low, but at the current ground floor rates of around Rs 150 per square foot, even I can't break even -- even at Ansal Plaza in Delhi, I can be profitable only at around half the current rate of Rs 200 or so."

While affordable rentals differ across retail categories, few retailers can afford to pay more than 8-10 per cent of their turnover for rent -- the figure comes down to around 5-6 when dealing with super markets whose gross margins are typically 10-12 per cent.

Taking into account the usual sales various stores make today, according to Singhal, this translates into a monthly rental of anywhere between Rs 25 and Rs 75 per square foot.

Yet, apart from the anchor or main tenant -- who is supposed to draw in the crowds to the mall -- few retailers get property at such rates.

In fact, according to Span Capital Services, while the Crossroads Mall is profitable, Piramyd, the Piramal's own department store that occupies over a fourth of the mall, is a loss maker.

Even Iyer, who is director and CEO of Piramyd, admits as much when he says Piramyd pays a rental equal to 14 per cent of turnover (around half its gross margin), and "ideally this should be under 9 per cent, which we will achieve in 2-3 years with higher turnover."

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Sunil Jain in New Delhi
 

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