I had the opportunity to walk the high streets of select Mumbai suburbs throughout the last fortnight, seeking to assess retail spaces for a proposed small format retail store chain. The format is a concept that needs only around 250 square feet of carpet space. It has been a new experience for me to study the suitability of retail spaces of such 'petite' size! Examining market potential, understanding catchment profiles and their purchase behaviour, studying store adjacencies, visibility, signage significance and bill-board value, traffic patterns and footfall flows, and applying parameters to ensure easy accessibility, etc. - all being carried out as a routine practice during the process of store premises selection that brings in a good deal of excitement.
Every high street market is visibly punctuated with a few vacant shop premises here and there. On looking into the reasons why store premises are available in such busy high streets, it was a revelation that small store lease agreements are made usually for just a one year period with no option to renew the lease! Premises are available for fresh occupancy mainly for two reasons - either the landlord becomes greedy and demands an unaffordable increase in monthly rentals that the store owner decides to call it 'quits' or the store is unable to do adequate business to sustain the rental amount agreed and decides to vacate. In very rare cases the reason attributed to vacating the premises is the fact that the store has outgrown its space by doing thumping business resulting in moving to larger spaces to operate from! However the crevice in the location consistency created so soon as within a one year period, sets the store back in time in its business leaving a lot on the part of the store owner as burden to shoulder in order to bounce back! Many successful small retail stores in high streets like Andheri, Lokhandwala, Seven Bungalows, Oshiwara, Thakur Village, etc. operate from their own premises and others do struggle considerably to make both ends meet as rentals in these markets are in the range of Rs.300 to Rs.400 per square foot depending upon the significance of the store location. 'Solus' positions demand even more rentals! So, the rentals when mapped on the proposed store P&L along with the humongous deposit equivalent to six months' rental value render many premises unviable, which brings in challenges in a large measure.
They call themselves 'retail consultants' and show vacant retail premises to prospective lessees. They are real estate brokers who say that the rentals are often 'lump sum figures' and cannot be calculated on a per square foot basis! They often keep hiking the rent as their remuneration/commission is based on a fixed rate of one month's rental from both sides - the lessor and the lessee. The more the rent, the more the earnings! Further, as the vacant premises to be fixed are many nowadays and the 'consultants' too are many, the income from the deals, though within practised norms, are shared by more than one 'consultant'! There are 'cross-area consultants' who specialize in specific high street markets and they refer clients to their 'partner consultants'! In many cases one does not get to see the owner of the premises until the final leg of negotiations (sometimes one does not get to meet the owner at all) and such rental negotiations often happen for long, through such middle-men alone and that brings in a frustrating experience!
Finally the writing on the wall is quite clear: There are more reasons in the sector for fearing small retailers to vanish into thin air, than just FDI !
Every high street market is visibly punctuated with a few vacant shop premises here and there. On looking into the reasons why store premises are available in such busy high streets, it was a revelation that small store lease agreements are made usually for just a one year period with no option to renew the lease! Premises are available for fresh occupancy mainly for two reasons - either the landlord becomes greedy and demands an unaffordable increase in monthly rentals that the store owner decides to call it 'quits' or the store is unable to do adequate business to sustain the rental amount agreed and decides to vacate. In very rare cases the reason attributed to vacating the premises is the fact that the store has outgrown its space by doing thumping business resulting in moving to larger spaces to operate from! However the crevice in the location consistency created so soon as within a one year period, sets the store back in time in its business leaving a lot on the part of the store owner as burden to shoulder in order to bounce back! Many successful small retail stores in high streets like Andheri, Lokhandwala, Seven Bungalows, Oshiwara, Thakur Village, etc. operate from their own premises and others do struggle considerably to make both ends meet as rentals in these markets are in the range of Rs.300 to Rs.400 per square foot depending upon the significance of the store location. 'Solus' positions demand even more rentals! So, the rentals when mapped on the proposed store P&L along with the humongous deposit equivalent to six months' rental value render many premises unviable, which brings in challenges in a large measure.
They call themselves 'retail consultants' and show vacant retail premises to prospective lessees. They are real estate brokers who say that the rentals are often 'lump sum figures' and cannot be calculated on a per square foot basis! They often keep hiking the rent as their remuneration/commission is based on a fixed rate of one month's rental from both sides - the lessor and the lessee. The more the rent, the more the earnings! Further, as the vacant premises to be fixed are many nowadays and the 'consultants' too are many, the income from the deals, though within practised norms, are shared by more than one 'consultant'! There are 'cross-area consultants' who specialize in specific high street markets and they refer clients to their 'partner consultants'! In many cases one does not get to see the owner of the premises until the final leg of negotiations (sometimes one does not get to meet the owner at all) and such rental negotiations often happen for long, through such middle-men alone and that brings in a frustrating experience!
Finally the writing on the wall is quite clear: There are more reasons in the sector for fearing small retailers to vanish into thin air, than just FDI !
- Dr. Gibson G. Vedamani
Excellent perspectives from India's real "Retail Consultant"!
ReplyDeleteTimo
Thanks Timo!
DeleteDear Gibson,
ReplyDeletethis is an excellent observation which has provoked me to add my own experience. But for decency's sake I cannot publish some observation/suggestions on improving yield per sft to survive in high street retailing. Property owners, particularly second and third generation owners are like cash cows. Real estate consultants are like milk men, who without any investment but by virtue of possessing a mobile hand set and a network of consultants at different locations, make it hard to get prolonged lease, lest they lose their next year's commission !
But at the end who pays for all these, it has to come out of the Customer's pocket, is he willing to pay in the emerging scenario of e- business ? I could not think of shoes being sold through e-network till recently. Look at the options, you can have a 360 degree vision of a shoe which the sales people are not capable of showing in a store, you can measure your correct size, you can pay upon arrival, you can return if you are not satisfied. With the increasing fuel costs, limitations on travel time, parking cost and inconvenience, gradually the delivery system is bound to change which in turn would bring down the cost of occupancy in unviable locations.
Have a nice day
JBShetty
I can't agree more with your views, sir. The cash cow-milk men analogy fits in well with the current situation. Your prognostication is very appropriate and customer buying patterns and delivery systems will bring marked changes to brick-and-mortar retail formats in India. If rents continue to go through the roof, without sustainable returns, brick-and-mortar formats may fall apart. Thank you for your valuable opinion.
DeleteHi Mr Gibson,
ReplyDeleteMy comments as follows.
You are right rentals are definitely pushing the Bep of a store on higher side sometimes for a retailer with low top line is very difficult to sustain. Today important is to go for search without brokers and initial home work is required like knowing rentals of 10 adjoining properties this will give a levy for a retailer to negotiate well. Thanks Gaurang
I completely agree with you.
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ReplyDeleteOil and gas leases are written agreements under which a property owner allows a company to use tracts of land to drill for oil and gas for a specified period of time. The mineral lease is granted in exchange for royalty payments to the lessor or owner. However, these can be tricky due to the uncertainties of the global economy, costly legal expense, and the hassles of tracking, liquidating and turning your royalties into cold, hard cash.medical office leasing
ReplyDelete