High rental costs hit speciality retail
08 Nov 2007
Industry sources indicate that in the Indian context, developers plan and develop malls without keeping the retailer in mind. Additionally, with the kind of rentals demanded, most retailers find it hard to break even, let alone make decent margins, which is why speciality retail will prove to be a tough business in the future.
Industry experts indicate the absence of an "outer limit", or cost of leasing out retail space, which is looked at as occupation cost as a percentage of the overall revenue. Typically, sources indicate that lease rentals for a specialty or small store should be no more than 12 to 15 per cent of the revenue. However, in practice, numerous retailers are paying over 20 per cent, which impacts their overall business viability.
By the same token, lease rentals for a departmental store, according to industry sources, should be no more than 6 to 7 per cent, which translates to the Rs35 to Rs50 per square ft range, except for certain part of Delhi and Mumbai where the range goes up to Rs100 per sq ft. Most departmental stores are reported to be running at rentals of around 8 to 9 per cent.
Sources in the real estate development business say that while speciality retail is here to stay, the long run will see the departmental store formats as more vulnerable to high rentals, with pressures on operating costs and margins because of the market positioning they necessarily have to maintain. According to estimates, electronics, furniture, luggage, etc. at off-mall locations will flourish, though they may feel an impact in the near term.
According to company sources, Shoppers'' Stop for one is choosing to focus on categories it already has, and does not plan to add any new ones to its offering.
