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  2005 Jan Issue
   
Retail Outlook 2005
Battle lines are drawn as barriers fall
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Better prospects or tougher challenges?
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Affluent urban consumers drive modern retailing
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Higher consumer spending to drive KL’s retail growth
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Vibrant retail prospects for Manila


 




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Retail Outlook 2005
Affluent urban consumers drive modern retailing

 

India is on a roll. As its economy grows at an impressive rate (8.2% in 2003 and forecast to be close to that figure for 2004 as well), the country is making millionaires at a record rate.
According to Merrill Lynch’s World Wealth Report, India may have just 61,000 millionaires, compared to Russia’s 84,000 and China’s 236,000, but the number of people hitting the US$-million mark was 11,000 in 2003, and is expected to be around 18,000 in 2004.

Released by economic liberalisation from the restraints of a very finite salary and little choice apart from shoddy home-grown goods, increasingly wealthy Indians are looking for the best of the West. A booming economy and a vibrant stock market have combined to increase wealth multi-fold — and allowed aspirations to get actualised.

Delhi-based management consultant KSA Technopak says that wealthy Indians are leading a spending spree that boosted urban consumption by 12% in 2002 and 16% in 2003, accounting for three-quarters of the country’s total growth. KSA has forecast the increase in 2004 urban spending to be 12%-15%, and feels this level will continue into 2005.

Shopping malls are multiplying across the country at a dizzying rate, consumer credit has tripled in five years and Indian psychiatrists are reporting a new condition — obsessive, compulsive shopping. Luxury brands like Mercedes and Gucci are flocking to the country.
International premium-luggage brand Louis Vuitton is opening outlets at most of India’s major cities. “These people aren’t just rich; they’re super-rich,” says Louis Vuitton India’s general manager Thierry de Longeviale.

Or, as management guru and former Procter & Gamble India chief Gurcharan Das says: “Money, like sex, is out of the closet. India’s become a candy store. It’s about wanting to own, to possess, to be in the newspapers, to show off and be recognised. Everybody wants to be rich and live rich.”

Retailing in India is entering a new phase — and 2005 promises to take this trend further. The more ostentation, the better. The more garish and colourful the displays in mall windows, the more window-shoppers they attract.

But, these days, window-shopping is not restricted to flattening your nose against the glass and gazing longingly at the goodies. There is enough wherewithal in the pockets to pick up the stuff on display, particularly if it causes the Desais or the Shahs next door to turn green with envy.

“The Indian middle class is showing all the signs of a nouveau riche society,” says BR Nagesh, chief executive of Shoppers’ Stop. “It is literally drowning itself in consumerism. It has an unabashed desire to own everything that the upper classes have, and which was beyond its means not all that long ago.”

All this wealth has caused a big rise in the number of footfalls at most malls, which is good news for them. The bad news is that it has also resulted in a sharp increase in shoplifting and theft incidents; and no amount of security measures seem able to prevent or reduce them.

“So large are the crowds milling around that it becomes extremely difficult for the store detectives to even monitor a suspect,” says DT Vohra, owner of Amarsons, a mall in Bandra, situated in Mumbai’s fashionable western suburbs.

The mall has beefed up its central security by hiring more people, having additional surveillance cameras and installing more sophisticated anti-theft devices to protect its merchandise.

“But these measures have had only limited success,” says Jaydev Mody, CEO of Crossroads, the mid-town mall owned by Ajay Piramal’s flagship company Piramal Holdings. “We often find that it is the super-rich kids who shoplift for the sheer thrill of it. It is not that they cannot pay for the merchandise; they just like to brag to their friends that they made fools out of the security people at Crossroads!

“We have reached the conclusion that we lose at the roundabouts a little of what we have gained at the swings. So we try to be as alert as possible, try to make an example of the shoplifters we catch, so that it proves a deterrent to others and, basically, make a slightly larger allowance for losses due to shrinkage.”

One disturbing statistic offered by property consultant Jones Lang LaSalle is that, by end-2004, there should be a massive mismatch between demand and supply of mall space in most Indian metro cities. Mumbai, for example, has a demand of just 1.80 million sqf, while the supply is as much as 3.27 million sqf (see Table 1).

A similar study by Knight Frank claims that no less than 25 million sqf of organised retail space will be available across India by end-2005. The numbers reveal that a staggering 23 malls are coming up in New Delhi, an equal number in Mumbai, and eight each in Bangalore and Pune.

Therefore, despite the generally healthy bottom lines in 2003-04, the future for large shopping malls would appear tense. One word explains the worry creases across the brows of the mall promoters — competition.

Experts have started sounding warning bells on whether the cities can sustain so many malls, given the high costs of real estate (in spite of rentals coming down, the fixed costs in comparison with collections are still inordinately high) and the relatively low levels of household expenditure in India, despite the move towards rank consumerism.

“Even if there is a considerable shift from high-street shops, it would be very difficult for these malls to survive,” says Anil Rajpal, director of KSA Technopak.

The construction cost of a mall of global standards is in the range of Rs2,000-Rs2,200 (US$45-$50) per sqf. For this kind of investment to break even, the mall needs to generate at least 4,000 footfalls per day, with 50% of these people actually making purchases. A surfeit of footfalls brings its own share of problems, as shown above.

Mody of Crossroads says that customers are becoming blase about malls, and it is becoming increasingly necessary to attract them by either having innovative consumer schemes or something different from the others. “We have positioned ourselves as a mall that provides a different shopping experience, combining entertainment with the shopping,” he says.

“It is becoming difficult to retain customers, who prefer to shop around the areas where they live. We have to come up with new entertainment ideas and new loyalty schemes to retain their custom.”

A few malls have felt the pinch in the past few years, and folded up. Several real-estate developers have tried operating malls by themselves, and signally failed. The lack of experience on their part has been a major factor in the failure of several recent malls.

“There is a huge difference between being a developer and being a mall manager; sadly, very few developers understand this,” says Dharmesh Jain, chairman and managing director of Nirmal Lifestyle, a 500,000-sqf mall which has been operating in Mulund, in Mumbai’s eastern suburbs, for the past two years.

Some mall developers have started fixing up turnover sharing arrangements with retailers, called maximum guarantee deals. The developer fixes a floor rate as rental and then moots a share in the percentage of turnover.

“The idea is to provide a floor to the rentals, with the guarantee that better performance by the retailers would ensure higher profits for the developer,” says Anuj Puri, managing director of property consultant Chesterton Meghraj. “Such deals work at 1%-10% of the turnover, depending on the type of retailer.”

Developers are also taking special care when designing the malls — calling in international consultants such as Chapman Taylor. Thus, malls are sporting a new, better-organised look, with specially designated areas for food, apparel, lifestyles and entertainment.

For instance, Globus, in Bandra, has an elevated theatre that screens four shows a day, and then empties out the audience into the fourth floor of the mall. The only way to get down to street level is by using escalators that take people down floor by floor, allowing them to take a good look at the merchandise that the mall offers.


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