Mall developers, retailers warming up to revenue-sharing model

Mall developers and retailers in the country appear to be slowly warming up to the revenue-sharing model. Mumbai-based Entertainment World Developers Pvt Ltd (EWDPL) has just launched a mall-in-mall concept called Treasure Showcase, which allows non-mall brands to sell their merchandise without having to pay rent or common area maintenance charges. The company will, however, take a percentage of the retailer’s turnover as its share, EWDPL chairman and MD Manish Kalani said.

Hitherto, despite being touted as the best possible arrangement between a mall developer and a retailer, the adoption of the revenue-sharing model has been less than encouraging. The handful of success stories include Inorbit Mall in Mumbai, Select Citywalk in south Delhi and the soon-to-be-launched Palladium mall at High Street Phoenix, Mumbai.

The parties cite incorrect retailing format, opacity in recording sale transactions, hesitation in sharing books of accounts and lack of successful track record etc among the reasons for a slow adoption.

“A lot of retailers have problems with sharing sales/revenue numbers. It’s a real task for the mall developer because retailers are hesitant in doing so,” Dharmesh Jain, chairman and managing director of Nirmal Group of Companies, said at the recently concluded CII Real Estate Conference.

Revenue sharing generally involves the developer charging the retailer on the basis of a minimum guarantee or percentage of turnover, whichever is higher, or a combination of the two. The minimum guarantee figure is arrived at by taking into account the ongoing market lease rate that can be commanded for the space being occupied by the retailer. As for the percentage of sales, it ranges between 3% and 25% depending on the nature of business being conducted by the retailer.

Pranay Sinha, managing director of Star Centres, feels the key lies in being able to choose tenants who can generate enough business to cover the cost of housing their stores in the mall. “It’s a science,” he says. “Besides, once the retailer is assured that the mall developer/ management will channelise all their efforts in doing things that will eventually improve the retailers’ business, they have no issues sharing an X% of their revenues with the developer.”

The demand-supply imbalance in the retail real estate space has changed in favour of retailers in recent months. Over a year ago, they were chasing mall developers for space at unreasonable rates. However, today, with new properties coming up and retailers playing safe on expansion plans, lease rentals have taken a knock of 30-35% across the country.

However, few retailers favour revenue sharing over lease rentals. Many see it as a mere marketing ploy to lure retailers in. “It always is accompanied by a host of add-ons that eventually work to the disadvantage of the retailers. There is no clarity on what exactly is my per square foot cost,” says Jay Gupta, customer care associate and managing director of The Loot India Ltd.

On their part, developers feel most retailers are yet to establish themselves as professional outfits. Vishesh Rawat, senior manager — retail, Ansal Plaza, says, “Maintaining transparency in sales and accounting processes are crucial for building faith in the mall owners. Besides, most of them are new and don’t have long and successful track records of retailing profitably in Indian markets. Retailers make profits or losses primarily due to their business format and operations. Why should we have a stake in their profits or losses?” he asks.

B S Nagesh, vice-chairman, Shoppers Stop Ltd, sums up the situation. “People are still experimenting and sanity can be achieved only once both the businesses reach a certain level of maturity. Till then it will continue to be a highly debatable issue of choosing between fixed rentals and revenue sharing as a business model.”

Going by industry reports, barely 25 of the 250 odd malls in the country are malls in the real sense, though around 50-75 are slowly reaching that level.