Retail players leverage falling rentals

Organised retailers are leveraging the slowdown in demand for commercial property and falling rentals to expand operations in many cities.

With store rentals dropping as much as 35 per cent in the last one year, retailers say opening stores in certain locations has become profitable.

As a result, some retailers plan to roll out their bigger format stores and others are booking retail spaces that will come up in two years at a much lower cost.
 

"With the correction in rentals, we hope to roll out our hypermarkets much faster now," said Thomas Varghese, chief executive of Aditya Birla Retail, during a recent retail summit.

Until a few months back, store rentals were 300 to 400 basis points higher than even international levels (one basis point is one-hundredth of a percentage point). Retail rentals in Linking Road in Mumbai, South Extension in Delhi and Brigade Road in Bangalore have risen 50 per cent in the past 3 years.

Grocery and apparel retailers were paying 10 to 20 per cent of their sales as rent against an ideal payout of 6 to 12 per cent respectively.

As grocery retailers operate on a net profit margin of 2-3 per cent and apparel retailers at 3-4 per cent, analysts believe the current correction will widen margins 50 basis points.

In fact, Subhiksha has seen average rental cost drop 20 per cent in the last six months from the Rs 42 per square foot that it used to pay in 2007-08.

"The fall in rentals will boost our expansion and we plan to add about 600 stores over next 12 months", said R Subramanian, managing director, Subhiksha Trading Services, which has 1,650 stores in the country.

Kishore Biyani's Future Group, the country's largest retailer, plans to have a total retail space of 15 to 16 million sq ft by March 2009 from 11 million square feet last fiscal.

The group's rental cost-to-sales has dropped to 5.5 per cent now from 6 per cent six months ago and is expected to drop below 5 per cent by the end of this year, according to a top company official, who did not wish to be named.

Realty experts say it's a right time for retailers to book properties now because quality retail properties are available at good prices.

"Whatever retailers book today, they will get those properties in next two years. Going forward, they can reduce their rental cost substantially," said Susil Dungarwal, chief executive of Squarefeet Management, a mall management company.

Despite the slowdown and high inflation, compainies remain attracted by the growth opportunity in organised retail.

The sector accounts for around 5 per cent of the estimated $350-billion Indian retail market and is expected to expand its share to 14 to18 per cent by 2015, according to a McKinsey report.

Meanwhile, even as they expand, retailers are also closing or shifting unviable stores. RPG group's Spencer's Retail has shifted 30 stores in the last year in West Bengal, Kerala and Karnataka to other locations due to high rentals and lower footfalls.

ETAM, the French lingerie brand, pulled out of five malls in the last year in cities such as Mumbai, Delhi, Surat and Ahmedabad, to save on exorbitant rentals.

"We are convincing our clients that transactions will not materialise unless rentals are brought down," said Rituraj Verma, director, retail, Knight Frank, a global property consultancy.