As they line up to woo Hennes and Mauritz (H&M), the Danish fashion brand, top mall developers are willing to forego the fixed rentals they typically charge retailers, three people familiar with the development said. H&M is slated to open its first India store in New Delhi’s Select City Walk mall and is believed to be scouting for at least three locations in Mumbai. The company had earlier announced it would be launching the Delhi store in September while the entry into Mumbai is expected in December. In the run up to its launch, H&M is understood to be negotiating just a revenue-share agreement without any rentals built in, persons aware of the transaction said.
Five years ago, when Spanish retail brand Zara came to India, it had cut similar deals with developers — in the initial one or two years, it paid out only a share of revenues and subsequently, the agreement pencilled in a fixed rental.
Responding to FE’s queries, H&M said, “For competitive reasons, we do not comment on business deals with our partners and would not be able to give further details.” Inditex, which owns Zara, said it never makes any comments about realty business strategies.
For five years now, Zara has enjoyed a monopoly of sorts — it is the only international brand here which is also a top notch mall anchor. Now, H&M is trying its luck but experts caution the brand might not be able to sign a pure-play revenue-sharing deal in all locations. Pankaj Renjhen, MD, retail at JLL India, points out that the revenue-share model works only where sales velocity is high. “Otherwise developers will not be able to sustain long lease agreements,” he explained.
That’s corroborated by some back of the envelope calculations.
For instance, at Select City Walk, where Zara makes an estimated Rs 6,800 per sq ft per month, the mall owner can make around Rs 540 per sq ft per month, if the revenue share has been negotiated at 8%. But the Spanish brand’s average sales across its top four stores would be around Rs 4,500 per sq ft while at some of its other outlets it would be much lower at Rs 1200-1500 per sq ft.
H&M should, at the very least, match Zara’s performance but in that case those mall owners who negotiate a pure revenue-sharing deal might not make too much in some locations, given sales are uneven. H&M, for its part, may bargain hard and pay less than 8% of revenues at premium malls where the occupancy is 90% plus; however it may share more than 8% where the sales momentum is lower.
Nevertheless, right now no mall would not want to let go of a star brand like H&M given how the fashion heavyweight can bring in the footfalls like few others can. American clothing brand GAP recently opened its maiden store in Delhi with stunning revenues of Rs 7,000 per sq ft that surpassed even Zara’s performance. As two developers in talks with H&M observed, while brands such as Vero Moda may fetch developers better returns, on a per sq ft basis, malls need a Zara or an H&M to pull in the crowds, which will help other retailers too.