High street rentals a dampener for brands and retails

With rising high street rentals and delays in mall development in many cities, prominent apparel and fashion accessories brands and retailers are finding it difficult to sustain growth on high streets owing to low footfalls. The profit compared

to the rents they have to pay is low. For instance, Globus’ store in Mumbai’s upmarket Bandra area, which had been a landmark for the past 12 years, has now closed down because of high rentals. The company followed this up by shutting a store in New Delhi’s Saket area. The upmarket 30,000 square foot store would soon be leased by Marks & Spencers.

Rising rents a kill joy

During FY13, Tata’s retail arm Trent closed four Westside stores located in declining malls. “Lease rentals in many high-street locations have witnessed an increase in rates in recent quarters despite the economic headwinds, and might continue to remain at levels that make the locations unviable for new retail operations,” Trent said in its latest Annual Report. Trent’s cash and equivalent fell 43 percent to Rs 143 crores for 2013 fiscal from Rs 269 crores in the previous year.

Primarily a private-label chain, Globus entered the apparel market in 2001. In 2005, the company started downsizing the size of its stores to 10,000 square feet in anticipation of high rentals. Another reason, why major apparel retailers are feeling the pinch is because of the delay in mall projects, where stores were booked. For example, Globus is waiting for at least two places where the company had booked spaces, but has been delayed for over two years due to legal complications.

Smaller cities the new attraction

With real estate costs in Tier I cities putting pressure on retailers’ margins, they are finding Tier II, III towns more lucrative for retail expansion. Rentals in metros are three-four times higher than in smaller cities. Rents in India account for 9-15 percent of retailers’ revenue, higher than the global average of 4-10 percent, revealed a report by real estate consultant Jones Lang LaSalle.

Perhaps that is why retailers like Promart Retail believes that if it eyes expansion in a bigger city, it will earn a profit margin of only 2-5 percent, which is much lesser than the 12-15 percent that one can get in small towns. Promart, whose revenue stood at Rs 450 crores as on March, has 55 stores, mostly in smaller towns. Perhaps this explains why most big brands in India are slowly moving towards smaller towns, to get a bigger share or retail pie.