Retail: The darker side of 'mall-mania' - Views on News from Equitymaster

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Retail: The darker side of 'mall-mania'

Oct 3, 2007

The retail sector is expected to witness an investment of US$ 30 bn over the next four to five years. One of the indicators of retail sector's health is the growth in mall activity. According to the survey of ICICI Property Services and Technopak, the Indian retail sector is expected to grow from the current level of US$ 330 bn to over US$ 500 bn by 2011. The growth will create unprecedented demand for at least 500 m sq ft of real estate, with shopping malls accounting for 50% of the requirement. This fast-paced growth of mall development has been further fuelled by government bodies that have released real estate space for retail development in prime areas. Many mall developers, in a bid to offer distinctive value propositions, are planning specialty malls. These niche developments will emerge as one-stop destinations in their chosen product categories. The Delhi-based Aerens Group is one such exclusive jewellery mall. Further, a number of developments have taken place in line with there plans to offer speciality malls like a wedding mall by Omaxe Group, automobile mall, in line with international trends, home malls offering the entire range of building and interior decor solutions are also coming up in various parts of the country etc.

Though the mall developers across the country are creating superior real estate options at robust pace, there is likely shortage of 40% retail space as the developers' plans will offer only 143 m sq ft of space for the retail industry.

There are many other issues and challenges with regard to retail real estate acquisition, which shopping malls need to address:

Competition from unorganised sector: Malls generally are perceived more expensive as compared to neighboured stores. The high street shops and the neighbourhood markets continue to coexist with the malls and will always give stiff competition to them.

Quality retail space at feasible rates: This is another factor, which is casting a shadow on the future of malls. The most crucial infrastructural problem of modern retail development is the availability of quality retail space in India. The preferred form of retail real estate acquisition is through long-term leases in India. Few retailers prefer a mix of owned and leased real estate space and some own it. With the increase in demand every other developer in the country today, has plans to put up massive retail and entertainment centres, however, they lack complete shopping experience for customers. This point out that retail real estate development in India, particularly mall development has been prone to poor planning. The result has been poor utilisation of space and low returns on investment. To give a perspective, approximately it takes a mall around eight years to break even if it's leased out entirely. So certain developers, who do not have money to hold on to the property in the initial phases, sell it to investors in order to book profits. Investors in turn with the increasing competition and the cost of operation struggle to scale up topline and book profits. Prices for mall space in metros have gone up from Rs 15,000 to 20,000 per sq foot, to up to Rs 50,000 per sq foot in two years.

Poor planning: There has been a failure of malls to match up to international quality standards and no conscious efforts at branding. The consumers are facing problems such as inadequate parking space, which was often overlooked by developers, impacting footfalls. However, mall developers and retailers have recognised such issues and are accordingly planning the forthcoming developments. Further factors such as lack of infrastructural planning in terms of power supply, connectivity, ambience and optimum utilisation of space (around 30% space is actually accounted by shops) etc. only indicate unplanned development and improper management of malls. Mall running is a long-term project and needs constant looking after and attention. This is essential not only so that each customer who is visiting the malls is happy but also so that the tenants are fully satisfied.

Going forward, innovation, striking the right tenant mix, effective mall management and provision of ample parking space are components that will decide the future success of mall developments.

There are many lessons that India can take from other countries, which have moved along the path of retail evolution. The retail sector has proved to be of immense significance from macro-economic point of view on account of sector's capability to give strong growth momentum by creating multiplier effects on other sectors is indisputable. By permitting partial FDI in the sector government has made a cautions move to further develop the sector. The retailing sector is at an inflexion point where the growth of organised retailing and growth in consumption by the population is expected to take a higher growth trajectory. Given the scope, the retail sector is certainly expected to witness a further fillip.

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