US retailers Gap, Forever 21, Aeropostale cut shop size in India; see reason why

By: and |
Mumbai | Published: December 12, 2017 6:09 AM

A shuffle is taking place in the retail sector, with brands looking to right-size their outlets. Three American clothing and accessories brands — Gap, Forever21 and Aeropostale — have significantly cut down the size of their stores. The reason: to improve their revenue per square feet, which boosts profitability.

Aeropostale has moved out of a 3,000 sq ft shop and shifted to an 800 sq ft retail space.

A shuffle is taking place in the retail sector, with brands looking to right-size their outlets. Three American clothing and accessories brands — Gap, Forever21 and Aeropostale — have significantly cut down the size of their stores. The reason: to improve their revenue per square feet, which boosts profitability. Aeropostale has moved out of a 3,000 sq ft shop and shifted to an 800 sq ft retail space. Similarly, Gap has relocated to a smaller shop from its 7,000 sq ft floor space. In both the cases, US Polo Assn has occupied the vacated areas. The swap, in this case, was easier, say developers, because the retail businesses of Aeropostale, Gap and US Polo Assn in India are all managed by domestic retail company Arvind Lifestyle. These stores are located in Oberoi Mall in Goregaon and Infiniti Mall in Malad. Arvind Lifestyle, which is a leading player in the segment, turned around last year, posting a profit of Rs 14 crore in FY17 (against a loss of Rs 52 crore in the preceding year) on a 11.4% growth in revenues to Rs 2,559 crore. Meanwhile, Aditya Birla Fashion Retail (ABFRL), which is the Forever21 franchisee in India, is also re-sizing two of its existing stores. The brand had at least three stores in Mumbai and Delhi, which were between 10,000 sq ft and 15,000 sq ft in size. But going forward, the company is looking for a little smaller – 8000 sq ft to 12,000 sq ft – stores, said Ashish Dixit, business head at ABFRL.

The downsizing of the stores fits in well with the aim of the brand to turn profitable by the end of the financial year, Dixit said. Forever21 has shut down one of its Mumbai stores and is in the process of “right-sizing” one of its Delhi shops. “Most of the foreign players, when they entered the country, took up large format stores. But now that they have realised the depth of the market and are increasing focus on profitability, they are downsizing,” said Rajneesh Mahajan, CEO, Inorbit Malls, a chain of malls owned by K Raheja Corporation.

Fast fashion brands of ABFRL, including Forever21 and People, saw EBIDTA losses climb to Rs 26 crore in H1FY18 from Rs 15 crore in H1FY17. And a cut-back in floor sizes needs to be viewed in this context. Dixit contends that reduction in size will help boost revenue per square feet for the stores, and hence the profitability. Industry experts agree with this approach. Rajat Wahi, partner, Deloitte, said: “For a foreign brand to be successful in the country, it needs to focus on the right pricing, right size of stores and customer connect. The problem in India is that beyond tier I and tier II cities, many people are not aware of the brands. So while a large format store gives bigger exposure to brands, at the same time operational costs and inventory costs are higher, which the brands are trying to correct through right-sizing of stores to increase their sales per sq ft.”

Mahajan said, “Big brands after losing money have realised the depth of the market, and are now focusing on trimming store sizes to become profitable.” Pankaj Renjhen, MD (retail), JLL India, observes that when revenues per sq ft are under pressure, merchandise needs to be consumed quickly. “Smaller stores also require less capital.”

While costs and consumer patterns are the main reason for smaller stores, the lack of affordable and quality real estate is also a problem. In the past too, several brands, both domestic and international, had to trim their retail formats owing to limited space available in top performing malls. For example, when Swedish multinational brand Hennes & Mauritz (H&M) entered the domestic market, several mall developers had to relocate brands such as Pantaloons, Big Bazaar and Central and cut down the area they once occupied.

To squeeze into one of the most productive malls, the aim is to have a higher trading density rather than a larger store size. “Each brand will strive to build optimum efficiency while not compromising on the brand offering,” said Mukesh Kumar, vice-president at Infiniti Mall in Mumbai.

Among international brands, the trend of starting out with a large flagship store but consequently downsizing is slowly becoming the norm. For instance, industry experts said, London-based Marks & Spencer has gradually reduced stores sizes from about 20,000-25,000 sq ft to 10,000-15,000 sq ft. The company made an entry into the Indian market through a joint venture with Reliance Retail in 2008.

Globally, Gap stores are sized between 10,000 and 15,000 sq ft. According to sources in the mall development business, when Gap started its recce to set up operations in India two years back, it was looking for stores measuring 15,000 sq ft, but in several locations, it had to settle for just half the size.

Similarly H&M and Zara, the two international “anchor” stores, once insistent on 20,000-25,000 sq ft shops are now much more open to considering smaller spaces. In fact, some of Zara’s most productive stores are sized approximately 15,000 sq ft to 16,000 sq ft. Some of the trimming is natural because in non-metro cities, one cannot sustain a 15,000 sq ft space, as the catchment also plays an important role in deciding the most profitable size, Mukesh said.

Both Zara and H&M are now aggressively expanding in Indore, Amritsar and Chandigarh, where they have no option but to re-size. The moves by big retail to right-size are being driven, therefore, more by profitability and market dynamics, rather than by their international store standards.

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