Malls see small hit from e-tail in long run but brace for short term

Written by Aveek Datta | Shubhra Tandon | Mumbai | Updated: Oct 24 2014, 22:02pm hrs
Shopping mallSales at physical stores, especially franchisees of brands that sell electronics, apparel and footwear, have taken a hit, despite the ongoing festive season. (Reuters)
Though online retail in India is attracting a higher share of the customers wallet by offering products at discounts that brick-and-mortar stores cant match, shopping malls owners are unfazed by the challenge posed to their business by online marketplaces. Some of them may, however, change the way in which rent agreements with their tenants are structured.

Though mall owners agree that there has been a temporary impact on the business of their tenants due to the deep discounts offered by e-tailers, they dont perceive a long-term threat to their own rental income since they believe these discounts arent sustainable in the long run and will peter out soon.

But till that happens, some developers observe that the structure of rent contracts may be altered to protect their income. Typically, the rent shop owners have to pay to the malls follow a minimum guarantee plus revenue-share model. The minimum guarantee is what the stores have to pay irrespective of the quantum of sales, and the rest is paid as a percentage of the stores revenues.

Kishore Bhatija, managing director and chief executive of Inorbit Malls, which operates shopping malls across cities like Mumbai, Hyderabad and Pune, says that mall developers may keep the rent they charge unchanged when they come up for renewal but increase the minimum guarantee portion to compensate for loss of income due to declining sales at the stores.

Sales at physical stores, especially franchisees of brands that sell electronics, apparel and footwear, have taken a hit, despite the ongoing festive season.

Varun Patil, manager at GD Cellcom, which is a franchisee for Reebok at the R-City Mall in Mumbais Ghatkopar area, says that sales at his store have declined 30% in the last two months. The discounts offered by the e-commerce companies has impacted our business in a big way. Many customers demand discounts similar to those that they get online, Patil says.

Nikes store at the same mall has seen a similar drop in revenues over the last few months. Rahul Gupta, manager of the Nike store in R-City Mall, says visitors try out products at his store and buy them online.

It is true that the deep discounts offered by the e-tailers is hurting the brick-and-mortar retailers currently, Bhatija said. But these wont last forever and brands themselves are realising that such discounts dilute their value and profitability.

Nirzar Jain, vice-president (mall), Oberoi Realty, says that there are still a number of customers who like to touch and feel the products they buy and who would continue to shop in malls. Even in developed markets like the US, online retail constitutes just 10% of the overall market, Jain says. We do not foresee making any changes to the way we form lease agreements with retailers. We are watching the online space and lets see how it shapes up.

In India, online retail is around 1% of the organised retail market.

Gayatri Ruia, director of Phoenix Mills, which operates malls in cities like Mumbai and Pune, says e-commerce is in fact beneficial for brick-and-mortar retail. There are many customers who are introduced to products online and they end up buying these products after physically inspecting them at stores. Consumer spending at Phoenix Mills properties has been increasing, Ruia says.

But if e-commerce makes a bigger dent on the fortunes of brick-and-mortar retailers and some of the standalone store owners find it difficult to foot the rent, malls may explore options such as shifting them to smaller stores within the same premises, Bhatija said.

With inputs from Lalitha Srinivasan