Malls and Anchors – the inseparable cousins!

A year after Borders Group collapsed, a survey by Colliers International shows that one-third of 205 bookstores shut down by the company are still vacant, according to the Wall Street Journal. Stores that replaced Borders in U.S. malls and shopping centers are leasing at rates an average of 30% lower than Borders paid. In at least one case, tenants demanded rent decreases to make up for Borders' absence. Bizarre, as it may sound, that’s the real power of anchor tenants. Anchors are those Retailers who attract the most number of shoppers walking into a mall. They could be of different formats such as Hypermarkets, Supermarkets, Specialty Retailers, Book Stores, Leisure Stores, Factory Outlets. Cinemas and Multiplexes and even Cafes and Restaurants.

While planning and zoning a Mall, the developers provide a lot of importance to the placement of Anchors. As the name suggests, they literally hold the ship (the mall) on their shoulders. They usually have a road-facing presence, mostly on the ground and upper floors and on either sides of the Mall if the Mall has two entrances or more. Anchors are also the first to be signed up by the Mall Developers because it is easier to attract smaller tenants basis the power of footfall attraction of the Anchors.

Let us look at some of the most common Mall tenants;

Hypermarkets

Retailers such as Big Bazaar, Hypercity, Spar, etc. qualify under this category. Hypermarkets are usually located in the lower ground as this is an area that is otherwise difficult to lease. Hypers however have the ability to pull footfalls due to their pricing and promotion strategies. Due to their low cost of operation, Hypermarkets command a very low rental structure, which is usually expected to be maintained at 6-8% of their Turnover. Malls usually provide a separate entry / exit for Hypers if they are in the lower basement with large escalators and elevators and pathways for customers with trolleys to move comfortably and safely. To have established Hypers in the Mall is a sure shot way to ensure continued heavy footfalls through the week.

Department Stores

Shoppers Stop, Lifestyle, Reliance Trends, Westside to name a few have been the Mall developers first choice to sign up in their premises. Inorbit Mall at Malad, a suburban area in Mumbai was one of the first malls to have two Department stores within. Needless to say, it attracts one of the highest footfalls for any Mall in India. Department Stores are good tenants, from a return per sft point of view to the Mall Developers. They peg their rentals at 10-15% of their Turnover and can hence pay a slight premium compared to Hypers. Also, they attract a superior set of customers which benefits the Mall overall. Premium customers also means more amenities, such as large car-parking areas, valet parking services, premium architecture, more elevators and escalators, etc.

Specialty Retailers

Brands such as Tommy Hilfiger, Aldo, Zara Calvin Klein, Mont Blanc, Apple, Electronic and Consumer Durables Retailers such as Croma and Ezone, home improvement retailers such as Home Stop, Home Town, Home Centre etc. are considered Specialty Retailers who stock premium merchandise. These Retailers are extremely choosy in terms of their choice of location, sometimes no more than 2 or 3 per city. Specialty Retailers pay premium charges for high-profile locations within the Mall, usually road-facing two-tier stores or atrium-facing outlets. Since they are available sparingly, customers flock to their stores and hence the brands maintain their exclusivity.

Books and Leisure

Crossword, Odyssey, Landmark, to name a few are chains of books and leisure stores commonly found in Malls in India. They usually do not occupy the ground floors – mainly due to compelling rents. Instead, they prefer higher floors and have a strong pull of customers who are more of impulse shoppers. Their rent-to-sales ratio is no more than 20% and also operate with heavy staffing, mainly due to pilferage issues. E-Commerce has threatened the existence of many book stores and it’s a common sight these days to either see many of them empty even during peak hours and weekends or a few of them shutting their shutters for want of business.

Factory Outlets

Suburban Malls, usually located outside the city have tenants such as Mega Mart, Brand Factory, Loot, Coupon, etc. who are deep discounters. These stores sell merchandise that belong to the previous seasons and hence at a discount. India has over 500 million people under the age of 30, and hence there is a huge opportunity to sell to a third of customers in this bracket who are aspirational, yet price-sensitive customers. They pay not more than 12-15% of their sales as rent and hence maintain a lean-mean operation. Most of their stores are non-air-conditioned and staff strength is minimal.

Cafes, Restaurants and Foodcourts

Café Coffee Day, India’s leading café chain with over 1,300 cafes across the country is among the trusted tenants to double up as anchors. Being a youth brand, it attracts the right target group for malls. Restaurant & Bar chains such as McDonalds, KFC, Geoffrey's, TGIF, Hard Rock Café, etc. are sure-shot crowd pullers mainly due to their limited presence in the cities. Also many boutique restaurants, usually high-end also are considered as anchors in some way. They are unique in their offering and are usually entrepreneur driven, which means superior service, great food and a superb ambience, consistently and all through the year. Cafes and Restaurants can stretch upto 25% of their Turnover as Rents, to gain maximum visibility.

Multiplexes

The boom began around 2006 when the country’s first chain of cinemas PVR began rapid expansion in Delhi and surrounding National Capital Region (NCR) and later followed by the Northern, Western and Southern Markets. And then came others such as INOX, Big Cinemas, Fame Cinemas, Fun Cinemas and the most recent being the world’s largest exhibitor, Cinepolis. The movie screening business is considered to be one of the most lucrative ones in India, given the fact that India produces over 2,000 movies every year across several genres in over 15 languages. Although it is a high investment business, the returns are equally exciting.

Going back to the opening statement, sadly there is not a single retailer in India who commands the respect and power as the one that Borders does. Not yet. Developers and Retailers are always at logger heads due to high rentals charged and low / sometimes poor maintenance of the Malls. Mall Developers and Retailers are constantly in a love-hate relationship. Both need each other and cannot do without one another. Yet, there are very few successful stories of collaboration between the two, maybe countable with both hands. Thanks to the ongoing opening up of FDI in Retail and with more and more International Retailers coming in, this is one area that would only get better. And hopefully, I would get a chance to chronicle a few of them.

Another New store Opening?!?

Retailers in India seem to be continuing their efforts to open new stores, despite a slowing economy, higher import values, a falling rupee, increasing inflation and a weak consumer sentiment. This has been evident in the Retail Sales over the last two Quarters of this calendar year especially in high-value items such as A/Cs, Refrigerators, LCD TVs, automobiles including two-wheelers and four-wheelers. On one side, Retailers are offering huge discounts to lure customers – in India, Q1 & Q4 (for Financial Year starting April onwards) are essentially the most difficult times for clearing inventories and it is relatively easier in Q2 & Q3 due to the impending Festival and Marriage seasons. The above mentioned macro-economic factors haven’t helped them either. And Product ECommerce (excluding Ticketing services which account for over USD 8.5 Billion) which is estimated at over USD 2 Billion (approx. Rs. 11,500 Crores) is the biggest competition today for many Brick & Mortar Retailers, at least in the metros and mini-metros where Consumers have a reasonably quick and safe internet connectivity. And on the other side, large stores are being inaugurated in the hope that consumers would still like to visit and shop. We truly live in two contrasting worlds, to say the least. India's largest retailer, Future Group, which runs Central Malls, Pantaloon Fashions – a Department store chain, Big Bazaar Hypermarkets and FoodBazaar supermarkets among various other formats and models has scaled back its expansion from 2.5 million to 2 million square feet this fiscal year due to an economy growing at its weakest in nine years. The growth rate was 5.3 percent on an annual basis in the March quarter.

To drive footfalls to the store, continuously and consistently is one of the key challenges for Retailers anywhere in the world. That the population in India is huge is a bonus factor. However, conversions are miniscule. In the apparel and lifestyle formats, conversions range from 8-15% (those who buy as against those who enter the stores) while in consumer durables and brown goods, it is even lower. For Malls, which are destinations and are expected to attract significant footfalls, the conversions range from 3-5% and maybe lower in some cases (on a lower base of footfalls, usually). Given this fact, Retailers are in a frenzy opening newer stores within existing cities as well as in newer cities. One such example is Viveks, one of the oldest Consumer Durable Retailers in South India which was also the first one to start an EMI option in the early 90s when the Indian Economy was just opening up. It is rather surprising that the Retailer chose to remain a regional player, unlike its later counterparts such as EZone (part of Future Group) and Croma (from the house of Tatas) who quickly increased scale and went national with their presence. EZone is having operational challenges but that is not because of expansion but rather due to internal issues. To add to the woes of Consumer Durable Retailers, Hypermarket Chains such as Hypercity, Big Bazaar, Star Bazaar, etc. also stock Electronic Goods.

Challenges for Consumer Durable Retailers

Footfalls

To expect continuous footfalls all through the week is rather not practical. Instead, Retailers focus on weekend shopping festivals, usually for short durations. This is the time when Shoppers visit Retail stores and chances of conversion are higher!

Service

Superior Customer Service is something everyone talks about but is not generally followed all the time. And Customer Service is not just a gentle staff doing some smooth-talking and smart selling. It includes all the moments of truth – from hygiene factors such as lighting, A/c, Parking, etc. as well as product knowledge and friendly staff.

Differentiation

Multiple Retailers sell the same Brands and products. So why should a customer actually shop with one Retailer and not with another? Honestly, there is no clear answer. Consumers do not buy products, they buy Brands. And this includes the Retailer’s Brand Value as well, on which they should be focusing on.

Ecommerce

Showrooming – a prevalent concept in the West where shoppers visit Retail stores to check out products and prices but ended up ordering on Amazon.com or other ECommerce portals is brewing in India too. So, the difficulty of touch-and feel is negated. Another challenge is paying by Cash which is also something that ECommerce players have started over the recent months. Lastly, the convenience of getting the product on hand immediately – something that ECommerce players are finding it difficult to deliver but are successfully meeting customers’ requirements within 2-3 days in general.

With so many challenges, I wonder at times whether Retailing is worth the effort at all. For some, it’s a question of growth, for many it’s a matter of survival. With the opening of FDI in Retail sooner than later, the Big boys with boat loads of cash are going to lap up market share easily and faster. Interesting times ahead.

Franchising–The first step towards Entrepreneurship

 

Franchising has been around for long. Many global brands such as Adidas, Benetton, Levis, Subway and a lot more have grown globally due to their extensive franchisee network. Even in India, Madura Garments (which owns brands such as Peter England, Louis Philippe, Van Heusen), Arvind Mills (Lee, Wrangler and Arrow), Nilgiris (a chain of Supermarkets), Gitanjali Limited (which retails brands such as Asmi, Gili, D’Damas, Lucera, etc.) Crossword Book stores, Barista (Café chain) and many other Retailers have grown their businesses through successful Franchisee Partnerships. Franchising offers a quick scope of expansion for the Retailer while the investment is incurred by the Franchisee. Many first timers and wannabe Entrepreneurs choose the path of Franchising because it is an easier model to crack – the brand (is usually) established and has equity in the market, which pulls footfalls in to the stores. In case the brand is relatively new, then the Franchise fee (usually a one-time fee paid by the Franchisor to the Franchisee) is low, keeping his / her investments within reach. Kaatizone, an Indian QSR chain with a presence largely in South India is on an expansion spree through Franchising. Mr. Kiran Nadkarni, CEO, Kaatizone told in an interview recently. “Franchising has helped us in two major ways: We have been able to generate momentum in expansion quickly. Secondly, the local entrepreneurial talent has helped manage the store operations and brand experience better. Since we are planning to set up a large number of stores, franchising is the best strategy for growth.” Kaatizone has 19 franchises in six cities now and is planning to expand across the country.

The gestation period for recovery of investment can vary from 6 months to 3 years, depending on the location of the store (Malls, High Streets, Corporate locations,etc.) product category, and Brand identity and recognition. Investments could vary from Rs. 5 lakhs to Rs. 2 Crores, depending on the Brand. Some Retailers charge a one-time Franchise Fee and others charge monthly/annual commission on Sales in addition.

Advantages of Franchising

Scalability of Business

The Franchisor would be able to scale up instantly by going through the Franchise model. The prospective Franchisees could be spread across the country and hence the business could be expanded quite fast. This is one of the most important reasons that Retailers choose to go the Franchising way.

Immediate availability of capital

The Franchisee brings in the additional capital that is required to invest and operate the business which is a very important factor for the Franchisor.

Day to-day Operations

Usually, the set-up costs, which are substantial are borne by the Franchisee. He also bears running costs such as daily operational expenses (manpower, electricity, housekeeping, interest on capital, depreciation, etc.)

Drawbacks of Franchising

Customer Touch-points

One of the biggest drawbacks in Franchising is that the Retailer usually loses touch with the customers. The front-end is managed by the Franchisee and hence the Brand doesn’t have much role to play in the Customer Engagement as such.

Loss of Operational Control

The daily operations are managed by the Franchisee. Although there are parameters which need to be followed, there are occasions when the Franchisee takes things under his control which could be potential threats in terms of running the business.

Loss of Focus

Once a Franchisee believes in the model, he / she expand their business across various brands and categories. Therefore, the required focus on the business may dwindle over a period of time. It is quite unlikely that the Franchisee would spend the same amount of time and effort on businesses that don’t yield similar returns.

FDI in Retail has already opened up for Single Brand Retail and the country is eagerly watching the Government’s steps towards their decision on allowing FDI in Multi-Brand Retailing. This is indeed a good time for individuals and entrepreneurs in the making to take their first steps towards Organized Retail through a Franchise Opportunity.

Best of Luck.