Revenue-share model backfires on malls

The revenue-share model introduced by malls during 2008 downturn to lure in retailers is becoming a millstone for them as fewer footfalls and tight consumer spending have reduced income under this head substantially.

With the downturn intensifying, the situation has turned so worse that Phoenix Marketcity in Kurla, the biggest mall in Mumbai, has still not been able to earn a single rupee in rent since it opened November last, industry sources said.

The mall has a total floor area of 1.5 million square feet and more than 300 stores. It has up to 85% occupancy rate with most shops leased out on revenue-share basis.

Sales have been so slow for retailers at Phoenix Marketcity that they have not been able to pay even the minimum fixed rentals, a people familiar with the development said.

“For instance, if a retailer is generating revenues of Rs2 lakh then after paying-staff salary, common area maintenance, store operating charges, service tax and the cost of goods, there is no money left even to pay the minimum guarantee, and therefore no money in terms of rent has started flowing in for the mall,” said a person privy to the development.

For the mall, the priority clearly seems to be high occupancy rate and, therefore, they have allowed retailers this relaxation, the person said.

Despite several attempts, the spokesperson of Phoenix Marketcity was unavailable for a comment.

Under revenue share, mall owners take a certain percentage of gross sales over and above the minimum guarantee rental, which is very low as compared to a fixed rent.

The win-win strategy gives malls incremental revenues and  allows the retailers to expand without worrying about high rentals.

“What has not worked for Phoenix Marketcity is that it is located in Kurla, which is not very accessible for most people. And on the other hand, it is not a very prosperous suburb where income levels are very high,” says Pranay Vakil, chairman, Knight Frank, a real estate consultant.

Another analyst said that even though footfalls have increased at the mall, they are necessarily not shoppers.

Owner of another mall located close to Kurla said retailers even in his mall have started asking for similar benefits. He said if revenue-share is allowed mall owners with only very deep pockets will be able to survive.

While Phoenix Marketcity might be in the wrong catchment area, other malls, too, are struggling and giving more sops to retailers.

On the other hand, despite rentals being down by up to 40% from the peak in 2008, retailers are not looking to scale up their plans.

As a result, mall owners which were earlier offering a rent-free period of up to six months to lure in retailers, haven even started incurring capital expenditure such as store fittings and interiors for retailers to keep stores full. This can cost the mall owner anywhere from Rs200-3,000 per square foot.

Another relaxation being offered is waiver of common area maintenance cost. “Few non-performing malls are not charging common area maintenance cost, which includes electricity, cleaning, air conditioning charges and so on,” said another developer.

Experts point that this is a real Catch-22 situation for mall owners and real estate developers.

Analysts are banking on foreign direct investment in retail to be a game-changer.

“What is to be seen is if it can actually ease the pain for mall owners or once again deals will be given out at throwaway prices to to lure big brands,” an analyst said.