Business - India;Revenue share,the new rental in malls

An idea mooted for what seems to be eternity is beginning to find some takers: revenue sharing between retailers and mall owners, for it made better financial sense than the conventional rentals.Most of the big retailers have already signed on a few such deals where they would pay a fixed charge and then share 5-15% of their revenues with the mall owner.Jay Gupta, managing director of value-retailer The Loot, said he recently signed agreements based on revenue sharing for 25-30 stores.“Within the next six months, this trend is going to catch up fast with one fourth of all the deals in the industry following this format,” Gupta said.Anchor retailers, especially value retailers, which have the capability of pulling in the footfalls for the mall are the first beneficiaries of this new format. In a typical deal, developers are charging Rs 25 to Rs 30 per square foot per month as the minimum guarantee money (fixed charge) that retailers have to pay, and also taking a 5% cut of the retailer’s revenues.Leasing property in malls, on the other hand, costs between Rs 150 and Rs 500 per square foot depending on location and city.Rajan Malhotra, president-strategy and convergence, Pantaloon Retail (India) Ltd, said the company has executed about 10 such deals so far.“Going forward, most of our agreements will be revenue-sharing based. Developers, who are looking at a long- term business, are open to this option. Those who want to make a quick buck by building a mall, selling the property and exiting want to stick to the rental system,” said MalhotraThere are some retailers who are looking to strike deals where they don’t have to pay any fixed charges and simply give 5 to 15% of their revenues to the mall owner.But this hasn’t gone down too well with big developers.Pradeep Jain, chairman, Parsvnath Developers Ltd, said the model where builders charge retailers a minimum guarantee and then get a share of their revenues can work out.“But these days they want us to build the malls, do the interiors, not give any minimum guarantee, not charge anything for common area maintenance and then share the revenues. That won’t get us any return with the current high real estate prices,” Jain said.Dharmesh Jain, chairman and managing director, Nirmal Lifestyle Ltd, doesn’t believe the revenue-sharing model can work in India since that will ensure that it takes longer for developers to get their returns and if the retailer decides to exit early, then the developer will be at a loss.Yet, the trend is catching on.For value retailers who have the lowest margins, even a slight breather in term of property cost is a huge welcome.“Moreover, this option makes business a little more insured against ups and downs of the market,” said The Loot’s Gupta.Since the time retail boom kicked off in India, the battle between the retailers and the developers regarding rentals has been raging on.In a young industry where no one claims to be making money —- retailers are struggling for margins and developers are taking five to eight years to recover their investments —- fixed rentals have never worked out, according to analysts.Also, it’s a function of the economy: rentals rise only when retailers do well.Nevertheless —- and slowly at that —- realisation is dawning on both facilitators of the retail story that it’s time to go flexible.s_tanvi@dnaindia.net