Retail's pain point

India Inc.’s first flush of romance with organised retail is now getting tempered by the realities that often crop up in a long-term relationship. The big boys of the game have realised that the pot of gold at the end of the rainbow is not quite as near as it earlier appeared. While receding footfalls have been a problem, it’s the real estate crunch that is forcing most players on the backfoot.

Retail rentals, touching almost Rs 300 per sq. ft per month in Delhi and Mumbai, have forced retailers to shy away from mall-side retailing, where the brand mix of upmarket brands existing cheek by jowl with their mid-market cousins is creating confusion in the mind of the shopper—who is happily giving both a miss. That can certainly sting when a retailer’s real estate costs consume up to 18 per cent of his gross turnover, compared to the global average of about 8 per cent.

Not that the retailers’ grouse is unjustified— developers have admitted that there’s an urgent need to rationalise retail rentals to about Rs 175 per sq. ft per month, though most retailers will be happier with a rate closer to Rs 100 per sq. ft per month. And it’s not just mass-product retailers who are feeling the pinch— luxury product retailers, too, are getting the heebie-jeebies over spiralling lease rentals. A store in any of the upcoming malls in Delhi or Mumbai costs as much as five similar stores in secondary cities, according to luxury product retailers.

Even High Street rentals are beyond the budgets of most retailers in the business, given that an outlet on Mumbai’s Linking Road in Bandra can cost over Rs 1,000 per sq. ft per month. The current economic slowdown and the resultant cutback in spending by consumers means retailers are preferring to down shutters on outlets that are proving to be financially unviable.

As it is, most of them operate on razor thin margins, which even in the most optimal locations, do not exceed 3 per cent. Continuing down the same trajectory could seriously impede organised retail’s plans of achieving revenues of Rs 8 lakh crore by 2017—up from the current level of about Rs 75,000 crore.

Developers have realised this and instead of shooting themselves in the foot, are collaborating with retailers to ensure not just occupancies in their malls but also footfalls—one way out has been the revenue sharing model that is picking up. That could be a ray of hope for retailers for whom organised retailing so far has been a zero-sum game.