Retailers are seeking further reduction in rentals as sales fall and the amount of rents as a portion of sales remains high.
Spencer’s, Future Group, Reliance Retail and Aditya Birla Retail, which are on a relocation spree, said they were open to shutting more unviable stores if there was no further drop in rentals.
Retail rentals have dropped 30-40 per cent in the past six months. As sales drop, stores are increasingly becoming unviable, forcing retailers to seek further reduction in rentals.
Globally, says real estate money management and services firm Jones Lang Lasalle Meghraj, rentals account for 4-5 per cent of sales. In India, the retail rentals have spiralled in the past couple of years to as much as 20-40 per cent of total sales. If these go beyond 28 per cent, it will result in an operational loss for small-format shops, according to Jones Lang Lasalle Meghraj. Reebok, with more than 720 stores in India, paid about 10 per cent of sales as rent three years ago. This has risen to 25 per cent.
Globally, stores break even in one-two years. In India, this can take as long as three-four years and sometimes even longer. When the period crosses four years, shops usually shut down, say experts.
“A number of retailers are closing shops. They will lose customers, but since they are losing money, they may choose to shut down or relocate,” said Shubhranshu Pani, managing director (retail), Jones Lang LaSalle Meghraj.
Foodland Fresh, a Mumbai-based retail chain, recently shut 39 of its 42 outlets. French lingerie brand ‘Straps’ and kidswear brand ‘Kanz’ have put on hold their expansion in India.
Since September 2008, Aditya Birla Retail has closed around 50 stores due to various reasons, including location and high rentals.
“There is belt-tightening. The country is going through a realignment of consumption patterns. We are not immune to the happenings in the rest of the world,” said Retailers’ Association of India Chief Executive, Kumar Rajagopalan.
The association has slashed its growth forecast to 15-20 per cent from 30-35 per cent for this fiscal to March.
Though many retailers confirmed that rentals had fallen by 30-40 per cent in key metros as a portion of sales these continue to remain high. Retailers continue to pay as much as 12-20 per cent of their sales as rent.
The situation was supposed to have changed after mall-owners started negotiating rents with retailers and getting into revenue sharing in the late 2008. Although mall-owners have reduced rentals 30-40 per cent, the profit margins of retailers are under pressure as sales are continuously falling, a key reason why retailers are seeking more cuts. Retail sales have dropped 10-50 per cent. While for some retailers, consumers’ discretionary spends have stopped completely, others say the drop has been 15-20 per cent.
Vineet Kapila, president of Spencer’s Retail, said, “We have registered 30-40 per cent decline in rentals in Tier II and Tier III cities. In Tier I and metropolitan cities, the correction is in the 15-20 per cent range, but a further correction is needed. Ideally, 3-4 per cent of sales should go towards paying rents, but that will take years to happen. So, we are relocating stores as and when they become unviable due to high rentals and drop in sales. Our expansion, too, will be more controlled this year.”
At Future Group, rentals account for 6 per cent of sales. It plans to bring this down by another percentage point or so in the immediate future.
According to Kishore Biyani of the Future Group, “The overall slowdown has proved to be advantageous as falling real estate prices has enabled the company to negotiate rents with developers.”
For instance, Biyani is entering into revenue-sharing agreements with developers and is willing to offer 4-5 per cent of revenues, which is less risky than entering into fixed-rental deals.
Reebok plans to bring down its rental payout to 15 per cent of sales in the next few months as it has embarked on fresh negotiations with owners, according to Vishnu Bhagat, chief financial officer, Reebok.
