Rental Vs Revenue sharing

Written and Posted by Dr. Vishesh Rawat

As the corporate houses – the Piramals, the Tatas, the Birlas, the Ambanis, the Rahejas, the Mittals, the Biyanis, the Goenkas, and mega foreign retailers- Walmart, Carrefour, Tesco and Landmark Group race to revolutionize the retailing sector, retail as an industry in India is coming alive. However current global and Indian economic scenario has brought a caution in supersonic expansion (Reliance’s slogan of one store a day) and operations of new stores in last couple of years. With shutters coming down on non profitable stores of many major retail chains, the initial euphoria in retail is settled now and the retailers have become more pragmatic in their approach. To survive and grow retailers are now looking for different cost cutting measures including staff reduction, salary cuts, spending less on ads and rationalizing the real estate rentals. However in last one year rents have gone down 30-50% on an average, still retailers are finding it difficult to sustain on these rentals and now try to get revenue sharing deals with the developers.
In retail real estate “Rent vs Revenue share” is one of the most frequently debated aspect, Proponents of both ideas have their own unique reasons. According to mall developers they invest huge money in developing shopping malls so they need to raise funds by selling the units for developing the project and once sold to investor’s mall have no right to give it to retailers on revenue sharing. Due to high construction cost and very expensive land the retail real estate is pretty costly. Most of the retailers have yet to establish themselves as a totally professional outfit with transparency in sales and accounting processes to inculcate faith in the mall owners. Mall owners/investors have no experience of retail so it’s difficult for them to have faith in the format of the retailers; most of the retailers are comparatively new and don’t have long and successful track record of retailing profitably in Indian markets. Why revenue sharing with mall owners, do retailers has a revenue share arrangement with their suppliers or warehouses, do multiplex operators do revenue share with producers/distributers? Mall owners allege that this is only an arm-twisting gimmick of the retailers and retailers are into profits or losses mainly due to their business format and operations, why the mall owners should have a stake in profit or loss of the retailers.
On the other hand retailers feel that they are paying 12-15% of sales as rentals in India compared to 2-3 % of sales in western countries. Such a high rental makes the entire retailing a loss making preposition. It is very important that the developer do not abandon the project after constructing and selling the mall, they must take the responsibility of running the mall efficiently by proper promotions, events and management of the assets. A stake of the developer in sales of the retailers in the mall will make them more responsible and participative in mall management and the mall will continuously strive to increase footfalls and conversion into sales. Revenue sharing model will help the retailers in expanding at lower risk of fixed costs as the rent will be directly relate to the sales of the store.
Both parties have some valid and logical points and for the sake of the retail industry they need to work together to create synergy. As per AT Kearney’s 2009 global retail development index, India’s largely un-modernized retail sector remain attractive to both domestic and international retailers, in spite of government regulations that prevent 100 per cent foreign ownership of retail stores. Lots of potential is there to grow for both stakeholders.