Mall mania: The great gamble

A discussion with a large real estate developer in Mumbai lets you in on a few secrets of the current mall mania in India. Mall construction is just one of the many activities handled by the developer. So a developer isn’t overtly concerned if one of his malls flounders.

“If it doesn’t work, we still own the land. We will convert it into a commercial property or residential complex,” he says, nonchalantly. It’s an attitude that marketers ought to prepare for before betting their crores on any of the 400 malls scheduled to be up and running in India in the next four to five years, or even the 200-odd currently in existence.

Remember Crossroads, in Mumbai? In the late 90s, Crossroads, one of the first malls built by the Piramal Group, brought in a paradigm shift to the Indian shopping experience. The mall enjoyed large footfalls in the early years of its operations, even as the phenomenon caught on in other parts of the country. And then it all started going downhill.

Unused to having people browse without necessarily forking out cash, the management decided to introduce entry fees, hiked parking charges and made it mandatory for customers to carry identity cards or credit cards. Within months, footfalls plummeted, tenants started renegotiating rentals and moving out, till McDonald’s, which had bought its space, was the sole tenant that remained.

While developers busy themselves erecting malls and counting the moolah, it’s nothing less than a high-stakes gamble for tenants. The right choice, and it’s jackpot for the brand. But if the location fails, brand marketers are left with an unviable investment. Concerns about the supply of real estate often compel brand marketers to take quick decisions — some of which may backfire.

“Too much analysis leads to paralysis. One has to take a chance. We realise that when it comes to malls, one will make mistakes,” explains Subhinder Singh Prem, MD, Reebok India. Coffee chain major Barista is present across 25 malls across India, with 35-to-40 others signed up.

Partha Duttagupta, CEO, Barista, believes the success rate in malls has been around 80%. For the remaining 20%, Duttagupta says factors like bad location, high rentals or the absence of a multiplex often spoils the party, and a wait-and-watch policy has to be resorted to. “If things don’t improve, we either renegotiate or do promotions to increase offtake,” he says.

To renegotiate, brands go back to the developer if he still owns the premises and has merely leased the space to the tenants. But if he has sold the mall to a third party, who further sells it to various retailers, accountability flies out of the window. Samar Singh Sheikhawat, VP – marketing, Spencers, says that in the west, tenants get into talks with mall developers prior to construction.

“They consider and incorporate your store design. Out here, if I am not interested, there’s a queue waiting to take that space,” he says. This wait, say retailers, often is prolonged as most malls overshoot their deadlines. And there are numerous instances of developers wanting to renegotiate rates as the date of completion approaches.

“Ideally, one wants the mall to be ready when one moves in. But developers want to catch the season and open a half-done mall,” says Prem. “Tenants today approach mall developers with skepticism as three years after signing up, developers turn back to renegotiate citing a spike in real estate prices,” admits Sandeep Runwal, director, Runwal Group, which runs R-Mall in Mumbai.

India may be witnessing a mall rush, but the very definition of a mall is convoluted. Ideally, a space above half a million square feet falls in the category of a mall, but in India, supermarkets are labeled and sold as malls. “They are actually shopping centres like Delhi’s Palika Bazaar on steroids,” says Raman Mangalorkar, MD, Greenbox Realty, a real estate company which develops, builds, leases and manages retail property.

Adds Ajay Mehra, CEO of Times Retail, “Malls today may have upgraded customer experience and have become evolved shopping centres, but they cannot be called malls in the true sense.” According to realty consultants, quite a few malls across metros are currently underperforming, owing to reasons as varied as lack of adequate parking facilities, wrong tenant mix, poor internal circulation and the lack of a multiplex or hypermarket.

“Developers didn’t know what malls are all about and hurried to build them in the past few years. There is a need to put aside the earlier knowledge, understand mall culture and manage malls as a product,” says Kunal Banerjee, president – marketing & communication, Ansal API, which currently has four malls, and plans to add 16 more.

Mall-Practice

It doesn’t help that most mall owners liken themselves to landlords. “They look down on the tenant rather than jointly cooperating for the welfare of the mall,” rues Amit Jatia, MD & JV partner, McDonald’s India – West & South. Being a tenant in the worst sense of the term brings with it a slew of problems.

Retailers have to bear common area maintenance charges like air-conditioning, toilets and general space upkeep, which constitute half the rentals paid. “Area maintenance is high because of inefficient management of space,” explains Mangalorkar. According to Saket Bhatnagar, principal consultant, Technopak, the primary source of revenue for any mall is the rental from various tenants (around 85%-90%). The rest is through advertisement space and parking.

The rental figures vary significantly for different malls depending on factors like city, location and proposition of the mall. The rentals for new malls in cities like Delhi and Mumbai range from Rs 150 to Rs 400 per sq ft. For the smaller cities, the rentals are much lower — at Rs 80 to Rs 100 for tier I towns and Rs 60 to Rs 80 for tier II towns.

“Rentals are extremely high and form a large chunk of overall cost structure. Compared to international standards, it’s about twice the revenues earned by retailers. A lot of retailers will have to stop business if this continues,” says Times’ Mehra. Industry estimates reveal that real estate costs in India sometimes reach as high as 8%-10% of the revenues, whereas in the West, it accounts for 2% of revenues.

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