Chains play hardball on lease rentals

With pressure mounting on retail chains to generate extra efficiencies, lease rental agreements are being renegotiated across the sector.

In fact, some of them also expressed their intention to walk out of deals if things couldn’t be worked out with realty partners.

Subhiksha, for example, is not only renegotiating rentals with property owners, but is considering relocating high-rental stores that see low sales volumes. R Subramanian, MD, also said, “Around 8-10% of the stores that are unviable will be closed down.”

Shoppers Stop intends to lower its rent-to-revenue ratio to around 8% from 11% now. According to Govind Shrikhande, CEO, rentals in the past three years have only kept climbing and it is only now that that they have started seeing them go south. “I think some reduction in rental costs should help easing the pressure. Yes, we are discussing with select landlords for a correction in rental rates and they are cooperating well. We will, however, continue with the same lease agreements with properties that are reasonably priced,” Shrikhande said.

Sharing his experience over a store in north India, Lalit Agarwal, MD and CEO, V Mart Retail, said rentals came down 38%: “Business was suffering at that location and we told the real estate owner that rentals will have to decrease for us to be in business. We eventually managed to get the rentals down from Rs 3,50,000 to Rs 2,15,000 per month.”

Also eying the opportunity is women’s wear retailer Biba Apparels, which is looking at a correction in rentals by 30-40% across their properties. The rental cost for their warehouse in Mumbai’s High Street Phoenix location has reduced 65%.
“Why should we pay more in a market where other retailers are getting a much better bargain,” asks Sanjay Bindra, director, Biba Apparels.

Future Group-promoted Indus League Clothing (ILC), which owns brands like Sculler and Indigo Nation, is also looking at shop-in-shop formats. CEO Rachna Aggarwal said the company aims to utilise existing space by bringing two brands under one roof.

ILC is also re-negotiating rentals. Since the past year, Aggarwal said, mall owners have been charging double of what they would deliver. “It is not viable for a single brand to pay 50% more than floor occupancy. If I have taken 1,000 sq ft, I get only 50% of the built-up area, but pay for 1,000 sq ft,” she said.

Echoing market sentiments are retail sector analysts, who confirm a significant reduction in rentals, be it residential or commercial space. “The extent of price correction however, varies from one location to another and is on a case-to-case basis... Malls and high street locations that are doing well will be least impacted and vice-versa,” said an expert on condition of anonymity.

As a result, locations that are not really bringing in footfalls are expected to feel a bigger impact. In fact, some retailers, such as Provogue are renegotiation solely on this factor.

“Malls that have not matched up to our business expectations are being aggressively pursued for lowering rentals significantly,” said Provogue director Nihkil Chaturvedi.
 
Among other ways to reduce cost of operations, V Mart’s Agarwal said the company’s employment costs have been rationalised 15-20%, and in some cases, around 50% at senior marketing/managerial positions. He said the value-for-money segment was doing brisk business despite the slowdown: “We wanted to close our Rajkot store, so decided to dispose off the inventory and announced a 50% discount stock clearance sale... We witnessed a ten-fold increase in sales.”