Shrikanth Swaminathan is livid. It’s 3 pm on a hot Saturday afternoon and the software professional is baking under the mid-day sun on the hot concrete pavement outside Dreams Mall in Bhandup, with 100 others for company. On any given day at any of the better-known malls in Mumbai, Swaminathan and his motley crew would have blended in with the rest of the weekend shoppers. Not today and not here, though. Swaminathan and the others have plonked themselves down outside the north-east suburban Mumbai mall precisely because there is nothing inside: no power supply since Thursday, no water supply for over a year and — no surprises there — no sign of even window shoppers. “We have been taken for a ride,” says Swaminathan, as his fellow picketers nod in agreement. That’s quite an understatement, given that shopkeepers have been using generators since November 2014 thanks to the erratic power supply at the mall. Swaminathan says he regrets buying his 500 sq ft shop for the princely sum of Rs 30 lakh in 2009. “It was a great location and I thought I was making a sound business decision,” he says. Now, he and 1,092 other storeowners have been left to fend for themselves.
An HDIL project, Dreams Mall is built over a total area of 8.5 lakh sq ft and was completed in 2008. Not including the common area, nearly 5 lakh sq ft of space at the mall is divided equally between the developer and the shopkeepers, who say the company assured them that a society would be formed to ensure that the mall was well-maintained. “Nothing has been done towards that end over the past five years and the company has now stopped responding to our calls and emails,” says Swaminathan. The mall by itself paints a very sorry picture. While it has since shut down, during our last visit a little over a week ago, we found little indication of business as usual, with most of the shops occupied by chartered accountants or coaching centres. The place was run-down, messy and dusty, with its small food court and multiplex forlorn and empty even on a weekend. Just about 40% of the shops were occupied and non-payment of electricity dues had plunged the place into darkness.
Though HDIL officials declined to comment, the mall occupants — who are struggling to pay back their bank loans — make no bones about the fact that they feel shortchanged by the Rs 954-crore Mumbai-based developer. The mall is nowhere close to the “landmark commercial hub” that HDIL professed it to be on its website and shop-owners like Swaminathan have no choice but to sell their property for a loss.
Thanks to the lack of footfall in the mall, what used to be a food court is now a gym. Almost 80% of the shops are empty or locked. Looking through some of the locked glass doors, one can see that the former occupants haven’t bothered to take their furniture or signage with them. Those who still hold shop here no longer pay any maintenance. Two months ago, there was a fire in one of the stores, resulting in a burnt capsule lift path. The damages from the fire remain untouched.
Hanish Gupta, who runs his property dealership from a 10x10 shop on the first floor, has also given up. “Since the power companies have cut supply, I had to arrange my own,” he says. He bought the shop for Rs 25 lakh in 2005. “Today, there is no market here. Nobody will pay me Rs 25 lakh after 10 years,” he laments.
Mirroring the growth of real estate in the country, nearly 180 malls have mushroomed across India since 2005, with 86 of them having been launched in the 2006-09 period. As per recent estimates, close to 500 malls have been built across the country to date, with at least 450 being operational failures. While around 40 have been shut down, the rest are just about getting by. Only about 50 operational malls can actually be called successful, with the others failing to get the basics of the business right. Normally, a mall must attract as much footfall per month as the square feet area it has for it to survive i.e., if the mall has an area of five lakh square feet, it should attract a footfall of five lakh per month. Currently, less than 125 malls in the country make that cut, according to Beyond Squarefeet, a mall advisory company. The lack of quality infrastructure, the short-term and opportunistic mindset of developers and getting the viability mix wrong are just some of the problems plaguing this sector. The inevitable culling that followed should ideally not come as a surprise to anyone.
Selling Themselves Short
While Mumbai’s satellite city Thane is commonly referred to as lake city, it wouldn’t be inaccurate for someone to rechristen it as mall city either. Apart from the R City and Nirmal Lifestyle malls in neighbouring Mulund, Thane also boasts of seven others within a five-kilometre radius. Rasesh Kanakia’s Wonder Mall (set up in 2003 over an area of 1 lakh sq ft) and Eternity Mall (set up in 2006 and thrice the size of Wonder Mall) are part of this formidable list, though he doesn’t like being reminded of this detail. This is because the malls business is the one segment where Kanakia — who’s better known for his movie exhibition business Cinemax — has tasted failure. He thinks the small size of the malls and the absence of anchor tenants worked against him, though there is another important factor that may have played a part — he sold off retail space of all sizes in both the malls. “My construction cost was Rs 3,000 per sq ft and I was getting offers around Rs 6,000 per sq ft; lease rates were barely Rs 40 per sq ft,” recalls Kanakia.
Perhaps Kanakia’s first and biggest mistake was to sell retail space. It is harder to figure out whose responsibility it is to maintain common areas where developers have sold spaces to different individuals or companies. And maintenance is no laughing matter: if it is compromised, customers won’t get the desired experience and will just stop showing up. Besides upkeep, malls also need publicity and on-ground activities to draw in the crowds, arranging which becomes a common headache in case the developer has washed his hands off the project.
And Kanakia is not the only one to have made this error in judgement — DLF spent the first five years in this segment making pretty much the same mistakes, selling mall space in projects like Mega Mall and DT City Center. “We had our own steep learning curve. We learnt from our mistakes and started leasing out projects from 2006 onwards,” says Pushpa Bector, senior vice-president, DLF Promenade. And now that this formula is working for the company, DLF is upping the stakes with its next project, the Mall of India property in Noida that is spread over 2 million sq ft.
Now, while DLF is happy with its leasing model, there are developers like Omaxe who manage to strike a balance by selling space in smaller centres and leasing it out in large cities. Company president Avneet Soni thinks that the mall concept in its original form succeeds only in countries like Dubai, which are mostly driven by tourism. “That is not the case in India yet,” he says.
Fools Rush In
Though other players in the segment may not agree with Soni’s view, it is clear that it is the very nature and market background of these players that are responsible for their problems. Most tried to cash in on their accumulated land banks, lured by high sale prices for retail spaces. The low land prices and reasonable construction costs meant that most developers rushed in to set up projects, without putting much thought into the intent of the mall. Most had no knowledge about the basics of mall design and they didn’t make an effort to learn about it. “Developers and architects who had little experience in the mall business set up structures almost overnight. That is almost like an MBBS doctor performing an open-heart surgery. This business was doomed to fail,” says Susil Dungarwal, chief mall mechanic, Beyond Squarefeet.
Well-known architect Hafeez Contractor chips in with some key layout mistakes developers make when it comes to designing the mall. “We may profess adherence to global standards today but a decade ago, none of this mattered,” he says. For instance, many developers liked the idea of a corridor with a dead end in the mall. Contractor says developers believed this meant that shoppers would walk the same stretch of the mall twice and hence the builder could add two more shops there. Then, the store height was often limited to 3 metre (against the global average of 5 metre). Contractor — who has designed malls in Mumbai, Delhi, Nagpur and Indore — says the best layout would be one that featured large ground and first floors. “People do not like to go to the third or fourth floor. Some developers take our advice, while others don’t bother,” says Contractor, who admits to playing along with the naïve decision of the developers.
To be honest, till the turn of the century, when mall culture actually took off in a big way in India, the format of most retail space was more or less like shopping centres. Explains Dungarwal, “It is impossible to imagine a mall that doesn’t have service elevators but 90% of malls in India don’t have one. There are just a handful that have loading and unloading bays.” As a result, it is not uncommon for the main foyer of the mall to double up as a thoroughfare for goods to be delivered to shops. Most of this stems from the residential background of the developers, thanks to which they try to make the structure look good from the outside but ignore the layout inside.
Not all first-movers have ended up as losers, though. The developers behind High Street Phoenix, Palladium and Inorbit malls in Mumbai have created considerable entry barriers for rivals by getting their moorings right and fine-tuning their businesses along the way. The former two were the first malls to come up in Lower Parel in midtown Mumbai. The developer behind these malls had the advantage of being the first-mover in the area and inheriting the land, which meant it had to only take care of the construction cost. The developer got the design, leasing arrangements, tenants and demographics right, making it a huge hit. In comparison, Atria Mall — which opened in Worli in 2006 and is around the corner from Palladium — bombed completely, with tenants moving out and the owner deciding to take the part sale route.
The case of New Delhi’s MGF Metropolitan mall is peculiar. Even though it is part of the Saket mall trinity, located right next to the popular Select Citywalk, this property has failed. Harminder Sahni, MD, Wazir Advisors, says, “Even when the plot was sold, the promoters of Select Citywalk knew that three malls were going to come up here. So, from the outset, they have been very aggressive about getting all the key anchors to their mall (depriving MGF Metropolitan and DLF City Centre – the third mall in the cluster).” Sahni says, a key success factor is they have managed to churn their anchor tenants, which is where MGF has failed. There was not much left for it after Select Citywalk took all the great brands, and the developers were too late in waking up to the importance of managing a mall on daily basis. In comparison, Select Citywalk has been extremely proactive, organising regular events, engage visitors through discount schemes and resolving the retailers’ problems.
In fact, the catchment area analysis can also make or break a mall. Unitech’s Baldev credits their scientific catchment analysis for the success of Great India Place. “We found Noida to be the perfect B or B+ town. This market falls under the mid to lowest end of premium. So we chose our brands accordingly,” he says. For Unitech, the primary catchment is Noida and next come areas slightly away from Delhi. “Cities like Agra act as our tertiary catchment. We get good business from travel agents, who make it a stop for tourists,” says Baldev. Worlds of Wonder, an amusement park alongside the mall, has helped them become a destination, rather than just a mall.
Yet, the success ratio in the malls business is hopelessly lopsided on the side of failure. The turbulence has ultimately resulted in the birth of ghost malls, which could eventually be turned into residential projects or be completely flattened to the ground. But most Indian mall developers have tragically missed the bus. “Very little has been done by way of mall land acquisition and most of the projects gaining form today are those dating back to 2006-07. There’s hardly any fresh inventory for the 2016-21 period,” says Ruia. That’s actually good news given that there is no evidence to show that a finely executed project built on expensive land can be viable in a business that already has a high gestation period.
When it comes to the malls business, success only has one father — the viability mix of the project. Good infrastructure and design and the developer’s continued presence as owner are necessary but not sufficient for a mall’s success — that comes from getting the positioning right, and by understanding the science behind malls. And some developers have benefited from paying attention to detail. Three years after finishing his MBA from Northeastern University in the US, Subodh Runwal returned to Mumbai in 1988 to take charge of his eponymous real estate group. Runwal had both, the benefit of experience and the data to back his convictions. At that time, Mumbai had exactly one mall — Crossroads — in south Mumbai and the young man’s mind was working overtime about the concept. Runwal zeroed in on Mulund, a central suburb with a large middle-class population, and set up R Mall over 4 lakh sq ft of land in 2001. He got the tenant mix right according to the locality — Big Bazaar, Lifestyle and a bunch of other big names. Barring the fact that he sold space to Big Bazaar instead of leasing space out — a decision that ended up limiting his upside from rising lease rentals — he got the viability mix more or less right.
Though Runwal declined to share numbers, R City should have cost the group around Rs 500 crore at the rate of Rs 5,000 per sq ft for 1.3 million sq ft. Six years into the business, R City today is said to command a lease rate of Rs 350 per square foot. At an occupancy level of around 95%, Runwal is currently sitting pretty. Those living in the vicinity say the mall brings in a rental income of at least Rs 10 crore each month, with a hike of around 5% per annum. At a revenue of around Rs 120 crore each year, Runwal should have easily recovered his investment of Rs 500 crore (plus the cost of acquiring the land) over the past six years. After that, whatever comes his way by way of rent is a reward for not just holding on to the property but entering into smart leasing deals.
Another notable success has been the Prestige Group in the south. According to Suresh Singaravelu, the group’s executive director, it is important to approach this business from the customer’s — and not the developer’s — point of view. “The quality of the mall is determined not by its best occupants but by its worst,” he explains. That insight is being taken very seriously in smaller cities. Venkataramana Mavuri, managing director of Visakhapatnam’s largest mall CMR Central, says he decided against getting a departmental store like Big Bazaar as an anchor tenant since he did not want the mall to be a “general bazaar”. “People can buy their groceries outside, not from the mall. I wanted to house only brands with some aspirational value,” he says. It took some convincing for Mavuri to finally sign up KFC for the mall, followed by Nike, Lee and Inox. Mavuri says he keeps the excitement alive by conducting on-ground activities. “We do a number of events. For examples, we fly down celebrities when their releases are near.” Malls like Palladium in Mumbai and Select Citywalk in New Delhi have also been able to successfully position themselves as upmarket destination malls thanks to a selection of high-end stores.
For mall owners, this detail about the right tenants is crucial — and more important than even the customer experience. After all, it is the tenants that can turn the business profitable, depending on variables such as location. Case in point: if the mall is in an upmarket area with very high rentals, the developer can’t really afford to house low-margin businesses like grocery stores. Only luxury brands that have the potential to create big sales figures on a small piece of real estate are viable at such locations. Akshaya Kumar, founder & CEO, Park Lane Property Advisors, does the math for us. The commonly accepted metric from a retailer’s point of view in a mall is that no more than 10% of total sales should flow out as rent. For instance, for a late entrant at Select Citywalk who is paying Rs 800 per sq ft for a 300 sq ft store (or Rs 2.4 lakh), the total business generated needs to be at least 10 times its rent (or Rs 24 lakh). This math would work for retailers of high-value luxury products — expensive bags, suitcases, perfumes or premium chocolate — but not for mass stores like hypermarkets.
Even though they pocket the more lucrative deals, larger malls often house several anchor tenants; for instance, Big Bazaar pays a rent of Rs 70-80 per sq ft at some of Pune’s less popular malls, against the prevailing rate of Rs 150. Other advantages include a retailer loading factor (what is lost as common area) as low as 10% against the standard 50%. If the developer and tenant have struck a revenue-sharing deal instead of a rent agreement, a retailer like Big Bazaar or Hypercity would pay about 3-5% of revenue to the mall owner; F&B units would pay 14-20%, while QSRs like KFC would pay no more than 6-7%. The tenure of the leases also varies across clients so that the developer has the freedom to bring in new clients at regular intervals. As for the success of anchor tenants, experts say too many anchor tenants may also be a risky proposition for the developer; a 55:45 proportion seems to be the sweet spot. “About 70% of our occupants are anchor tenants and that is not very healthy. But we had very little choice given the size of the mall,” says Viviana’s Sheth. Given the large number of anchor tenants (160 of a total 230), the mall has tried to be innovative by getting retailers to not open an outlet within a 5-km radius. “So far, we have had an occupancy rate of 99%,” adds Sheth.
Within the framework of a viability mix, experts say that at most malls, food and beverages account for 15% of the mall area and entertainment (multiplexes and the kids’ section) another 10%, while segments such as fashion, department stores and electronics account for the rest. This proportion could vary, based on the catchment area. Then again, given how film-crazy folks in this part of the country are, Mavuri, owner of Visakhapatnam’s CMR Central mall, says that a multiplex was crucial. “The footfall drops by at least 35% when our Inox multiplex is shut. It also drives the food and beverage business,” he says. And it works both ways. “Given the high retail costs in India, malls are a good option for us,” says Sanjeev Bijli, joint managing director, PVR, 98% of whose properties are at malls.
Lumba of Lifestyle, too, emphasises the importance of the viability mix. “The viability mix is hugely important to us. A mall is good for five years if its infrastructure is right. But if its tenancy mix is right, it will get it right for 20 years,” he says.
On The Right Track?
If the malls business sounds like a whole bunch of hits and misses, that is pretty much what the scene looks like today. With developers learning a financial lesson the hard way, there are not many success stories to take inspiration from. But Runwal insists that the mall business can be very lucrative in the long run if you get your strategy right. He — and many others — believe that the rental returns in retail can outstrip return on residential projects in the long term. If in its initial years the mall manages to establish its brand with the help of good tenants, the developer can use the same brand equity to command a higher price in future. Case in point: a new tenant will have to pay Rs 800 per sq ft (if space is available in the first place) for an 800 sq ft ground floor shop at Select Citywalk, New Delhi, up 50% from five years ago.
However, according to Bhatija, rentals are not a function of real estate prices. “They are actually a function of retail, which has transformed greatly. Our customers have travelled extensively and they want the malls here to look like the ones in Dubai, which is an extremely difficult task for us,” he says. Inorbit’s first mall was set up in the western Mumbai suburb of Malad, followed by expansion to other cities. “It is expensive to open malls in tier 1 cities, which is why we moved to Vadodara in 2013. Now, we are witnessing an oversupply in smaller centres like Raipur as well,” he says, when asked how much the business has changed. Inorbit is up against big players like Phoenix in Whitefield in Bangalore, a place that has gained the reputation of being over-malled. While Bhatija agrees with that viewpoint, he is quick to say that there is a significant business upside. “This is a huge catchment area of consumers with a big per capita spend. One cannot ignore that,” he says.
For now, mall developers need to get used to a new way of working, which will hopefully result in more customers walk-ins. Some of them are already reinventing themselves. In fact, they are going as far as to not call their malls, malls. Omaxe Connaught Place was planned as a 1 million sq ft mall in Greater Noida, but has since been converted into India’s largest indoor theme park. “We don’t call ourselves a mall now. We are a theme park. The retail is only complementary,” says its president Soni. After a delay of two-three years, the project is slated to finally open up this year. Of the 1 million sq ft intended for the mall, 2.5 lakh sq ft has been allotted to the theme park. Inside, a chocolate factory, dinosaur park, Amazon jungle with robotic animals and a mini Taj Mahal (a fifth of the original in size) are coming up.
DLF is doing pretty much the same thing with its big boy, Mall of India (MoI). At 2 mn sq ft, it is going to be India’s largest mall. “We will be promoting it as a destination. It’s going to have six floors, and each one is going to be a mall in itself. Two levels, i.e., 6 lakh sq ft is reserved only for leisure. The activities include indoor cricket, bowling, and an abridged version of Dubai’s ski trail,” shares Pushpa Bector of DLF.
While tilting towards entertainment might be a good strategy, for malls to succeed as shopping destinations, they will need to take a leaf out of the success of experiments like the Dubai Mall, where the rent is nominal and the money is made through revenue-sharing. The problem with that model is that real estate prices in India are fairly high and that makes residential and commercial projects more appealing than the retail space — with all its ongoing challenges — for developers. If lack of experience contributed to the failure of developers, the exuberance around the India growth story contributed in no small measure to the disasters. When malls started coming up around the mid-2000s and people began to mill at these places just out of curiosity and to meet, developers and retailers simply assumed that crowds were guaranteed. And even if the crowds did not translate into sales, the high footfall would translate into spending sooner or later. That assumption has proved to be costly for them.
Retail is indeed a challenging business, what with its long gestation period, and things are only going to get trickier thanks to high land prices and the rise of e-commerce. Going forward, the only kind of malls that will succeed will be those that offer a great social experience — sheer shopping pleasure, movies, food and all-around entertainment. While retailers themselves are in a phase where they are discovering what kind of formats work for them, malls will have to work even harder to ensure future financial success.
By Krishna Gopalan, with additional reporting by Himanshu Kakkar
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