India Shopping Centre Forum is initiating this “Retail Real Estate Knowledge Series” platform to encourage frequent knowledge sharing among peers of the industry.
The enclosed malls have been around for some six decades globally, but in India malling business started in real earnest with the advent of 21st century. Malls in the West thrived for over 50 years with solid support from spendthrift consumers who indulged in conspicuous consumption basis their credit limits, that was much higher than their actual worth. It took the meltdown of 2007-08 to ground these consumers to the common-sense reality of spending within affordable limits. Indian consumers, in general, have always preferred to spend wisely. A slight aberration were the young blue collared services professionals, who indulged in conspicuous consumption for about a decade prior to the 2007 economic crisis.
The rapid pace of transformation in consumer behaviour in India makes the task of developers and managers of malls all the more complex and challenging. Malls and shopping centres require huge investments. Structural designing of a mall is directly based on the planned positioning and character of each mall, which cannot significantly be altered once it is constructed. It becomes all the more important therefore to have a futuristic view and understanding of consumer trends before finalising the blueprints of a mall.
In the West, amusement park and family entertainment centres (FECs), other than a multiplex, were incorporated within malls after nearly three decades of the coming of enclosed malls. Early pioneers of such retail destination centres or retail resorts were West Edmonton Mall in Canada and Mall of America in Minnesota. Contrary to this, developers in India adopted the concept Retail Entertainment Malls (REM) from the very beginning. Challenges to upgrade these destination centres, differentiate from the clutter and to keep the attractiveness fresh are therefore more pronounced in India.
State of the Economy
The GDP for year 2016-17 at current price is estimated at Rs.152.54 lakh crore as against Rs. 137.67 lakh crore in previous year. At 2011-12 constant prices the growth was 7.1% in 2016-17, which is lower than the 8.2% growth in 2015-16. The Gross Savings for the two years is estimated at Rs.45.73 lakh crore and Rs.43.02 lakh crore respectively.
Private Final Consumption expenditure (PFCE) at current prices is estimated at Rs.90.05 lakh crore in 2016-17 as against Rs.80.91 lakh crore in 2015-16. At constant prices, the share of PFCE in GDP is estimated at 55.9% and 55.8% respectively. The per capita net national income and per capita PFCE at current prices is estimated at Rs.103,870 and Rs.69,322 in 2016-17 as against Rs.95,731 and Rs.63,065 in 2015-16.
At constant prices, the growth rates of primary sector (agriculture, forestry, fishing, mining, quarrying), secondary sector (manufacturing, electricity, gas, water supply, construction, other utility) and tertiary sector (all services, retail) have been estimated at 7.4%, 6.1% and 7.5% respectively during 2016-17 as against a 2.6%, 9.4% and 9.6% respective growth in previous year.
From these it is clear that consumption is on the rise, even if its growth was impacted by major economic policy decisions like Demonetisation and GST.
State of the Industry
Organised retail in India is valued at $60 billion, which is just 9% of total $670 billion Indian retail market. While overall retail is expected to grow 12% per annum, organised retail would expand at 20%. Online retail is witnessing fastest growth at 23% per annum, and it currently stands at $17.8 billion; due to the high pace of digitization, experts expect it to equal offline brick-and-mortar organised retail in the next 5 years.
However, there is more likelihood of online and offline retail merging as one category under organised retail – it follows from the fact that major online players are buying out or partnering with brick-and-mortar retail, and vice versa. “Considering the potential of offline retail, it won’t be wrong to perceive that both offline and online retailing may coexist in India,” says Sanjay Dutt, CEO Operations & Private Funds, Ascendas-Singbridge India, and adds: “We have seen online retailers doubling as offline stores that serve as experience centres that also ensure faster delivery of high-demand products.”
A recent report by Boenning & Scattergood says the 20 top malls in the US contributed roughly $21 billion in annual sales, raking in more than $1,000 per sq.ft, well above the industry average. This is in contrast to several underperforming malls shutting down. It is a similar situation in India.
In the year 2009 retail real estate contributed 41% to the incremental commercial space in India but by 2016 its share fell to just 22%: developers feel retail rental growth is too slow and requires almost 10 year gestation period to construct and turn around the mall, the reason why they shy away. Only a handful of big developers – including DLF, Phoenix Mills, K Raheja – remain active in construction of premium mall space.
As per JLL India, in 2008 there were 74 developers engaged in construction of malls, the numbers fell to 63 by 2011 and by 2016 only 45 of these developers managed to complete and deliver their projects. For the first time since 2004, there has been a reduction of three lakh square feet of retail space in India: five malls closed down, 10-12 malls changed over to commercial, educational, healthcare and banquet functions.
There is unanimity amongst experts that REMs are the ideal option for mall developers, to remain profitable. But a decision on positioning of the mall with regards to retail-entertainment-food-leisure-mix has to be taken after detailed consideration of the emerging consumption trends. Consumers generally view entertainment as an activity that provides a diversion from routine functions – which would include movies, live performance, restaurants & bars, and admiring the visiting crowd, the lobby design, and so on, besides shopping.
Based on a number of studies by reputed agencies we list below some of the pronounced changes in consumer behaviour:
- Consumers can now distinguish between wants, needs and affordability, they no longer prefer to spend beyond their means. In fact, conspicuous consumption is now considered a bad habit. Ritesh Jain, chief investment officer at BNP Paribas MF is of the opinion that “Showing off is passé and very middle class now. The rich are becoming less flashy, preferring inconspicuous consumption over spending on material things, which the middle class seems to enjoy more these days.”
Mall of America, Minnesota
- Buying less is fashionable, consumers prefer articles they consider to be emotionally in sync with their personality. They now display higher preference for savings and borrowing for investment rather than for consumption; hence will spend less on goods.
- Purchase decisions are increasingly aligned to the needs of the larger community, the family, society and the environment.
- Increasing number of non-buyer teenagers are hanging around mall stores, they are not interested in buying goods, but would likely spend on food and entertainment.
- People are shopping less often, devoting less time on shopping, even though they may be spending the same amount on purchases – indicates towards high ticket purchases per visit.
- Online shopping is gaining time share as well as market share. – entertaining experiences could play crucial role in drawing customers to the store.
- Today’s busy work-schedules coupled with the growing habit of keeping glued to TV and internet has left no room for social bonding – within the family or with friends and relatives; REMs provide an effective away-from-home occasion.
- With increase in awareness levels, consumers are looking for unique experiences like having fun and also getting to experience and learn something new.
- Entertainment seeking customers tend to (unknowingly) spend more on purchase of retail goods than customers visiting for purely retail purchases – in this case spending on retail goods becomes more a function of resultant mood and temperament post the entertainment and leisure; the more the satisfaction from entertainment, the higher the spend on shopping.
- Entertainment seeking customers are also willing to travel longer distances as compared to product seeking customers.
- Visiting the mall as a family is found to be in the ratio of 70:20 in case of Entertainment-seeking customers to the pure product shoppers; hence REMs will pull more people.
- Nearly three-fourths of destination mall visitors also participate in fooding-entertainment-leisure activities.
- A study by the International Council for Shopping Centres (ICSC) shows that multiplexes draw in sizeable number of customers who otherwise would not have visited the malls for shopping, 60% of them actually shopped, and contributed nearly 35% of total retail sales in the mall.
- Multiplexes tend to attract younger customers and its combination with food court ensure family visits, usually for a whole day at the mall.
- Female shoppers are more inclined towards retail entertainment malls, they view the same as an ideal place for relaxing and de-stressing, and also doing some planned shopping.
- Males on the other hand consider destination centres as good place for socializing, for getting the routine necessities and indulging in some impulse buying too.
Challenges & Opportunities
Given these changes in lifestyle and consumption pattern, it is only natural that brands, retailers, malls and shopping centres who fail to address the same appropriately would incur losses resulting in closings. Closures and consolidation of established anchors, the department stores and other brand stores further reduces the choices for consumers, concomitantly reducing the charm and excitement for visiting malls.
Mall of America, Minnesota-2
Fewer department stores and presence of the same brands and products in most of the malls kills differentiation, presents no reasons that can inspire consumers to visit the malls. This necessitates the introduction of elements of unique entertainment in order to liven up things. One major issue here is that revenue per unit of floor space realised from entertainment zones is obviously lesser than the revenue from retail space, and hence malls will need to lower the rentals for these tenants, just as they do for the retail anchor department stores.
We list below some of the likely solutions towards enhancing the attractiveness of retail entertainment malls:
- Retail entertainment malls (REMs) need to re-enforce the destination status by adding more and more unique experiences – which can be in food & beverages, entertainment, sports, learning games, and so on. Mall developers and architects need to think out-of-the-box in order to create a real unique centre, to provide a whole new reason for customers to be there, to be spending on not just goods but also on the unique leisure experiences. “Infrastructure aspects like the design and layout of mall space are important in order to make it (the REM) more vibrant along with the right tenant mix and leisure amenities,” says Sanjay Dutt.
- The focus on selling goods should get reduced, more so because with closures and consolidation, there aren’t enough retailers and brands to differentiate between the malls; recent government decision to allow 100% FDI in single brand retail through the automated route with relaxation in local sourcing norms would somewhat increase the choices in coming years.
- Some entertainment concepts include: ○ Seniors leisure and shopping ○ Adult dining and game-zones ○ Cinema-dining hybrids ○ Experiential food-zones also called themed restaurants or theatrical dining, which are as much visual and sensual entertainment as they are a restaurant ○ Teenager fun zones ○ Children’s edutainment ○ Retail entertainment, includes creating a fun, festive atmosphere within stores ○ Snow-zones, including indoor ski slopes, etc ○ Under-sea experiences ○ Mother-child fun zones, and so on
- In line with the overall mall positioning, target customers and catchment, care should be taken to select the retail anchor as between department stores and value retailers.
- Movie anchors too are evolving, offering different experiences, which with the right retail mix, can establish malls as a one stop destination.
- Mall owners need to professionally manage the shopping centre operations, including the entertainment components. Outright strata sale of mall space is neither feasible nor desirable; leasing out, holding, controlling and managing the asset for superior and unique customer experience will prove rewarding.
- The entertainment quotient within malls should be of excellent quality and, more important, should be planned to have high repeat appeal.
Destination retail centres have much larger catchment and seem to be less impacted by the element of location. But that’s not true. Sanjay Dutt is of the view that “Location with right infrastructure is a key factor that supports retail activity; as a recent trend we are also seeing retail destinations as part of mixed-use developments.”
Anuj Puri, Chairman, Anarock Property Consultants, says “Retail real estate developments are only feasible in and around residential and commercial catchments, since retail needs (daily) customers,” and not just the weekend crowd: “The logical manner in which residential and retail spaces follow each other seems to tell a different story … like water, lifestyle appears to always find its own level in India.”
The potential for REMs is very much there. “The trends in the retail sector are related to the demographics and income profiles of an economy … the lack of open and recreational spaces in cities has increased the appeal of malls and retail entertainment zones for both leisure and social gathering,” adds Sanjay Dutt.
All said and done, mall profitability will remain directly related to its image as a unique retail entertainment destination!