Flight to quality – a present trend in Indian retail sector

June 25, 2012 / By

For approximately two to three years, we have seen the demand of India’s organised retail sector become polarised. This means that selected malls, which are strategically located with good connectivity and catchment, are attracting more retailers and performing well, while the malls with poor locations and management are operating with high vacancies. This trend can be attributed to the following:

1. Economic Slowdown: During the boom of 2005-07, there were few malls operating in the country and everyone, including retailers and consumers were bullish. This is possibly the reason that all malls, irrespective of their locations, were performing well. With the economic slowdown in 2008, retail sales declined, and retailers became cautious about their expansion plans, causing the demand to become polarised in favour of quality malls.

2. Effective Mall Management Practices in Newer Malls: The adoption of superior mall management practices in most of the recently completed malls has attracted increased retailer interest compared to the older malls with poor or no mall management practices.

3. New Design/Structure: Recently built malls look elegant compared to many old malls in the major metropolitan cities of India. The new malls are provided with all the modern amenities with sufficient car parks along with an appropriate distribution of anchor versus small format stores.

4. Optimal Tenant Mix: Modern malls have an optimal tenant mix from various categories, which attracts more retailers.

5. Lack of sufficient quality malls: There is not enough quality supply in the cities, causing the polarisation in demand as select retailers are forced to operate out of poorer malls.

All of the above-mentioned factors have contributed to the concentration of retailers’ demand for quality malls, despite the retailers needing to pay a premium. Retailers feel there is more risk in operating out of a poor mall than paying a premium and operating out of a high quality mall. The trend of polarisation of retail demand, primarily in Mumbai and NCR-Delhi, is likely to persist in the current market as there are not many quality completions expected in the near to medium term. Rather, it is largely felt that at some point some of these poorly performing malls will be converted to office space, while a select few of them are expected to be redeveloped into better malls or residential towers.

As a result of the limited supply of superior-grade retail malls in the mature cities of India, retailers have begun exploring for quality space in high streets and even in stand-alone commercial properties and mixed-use developments in established locations.

Retailers today have learned from their past mistakes stemming from unplanned growth and are now focused on expanding only through malls that are backed by desirable attributes such as good locations, lease-only models, experienced developer profiles, professional mall management teams and active tenant-mix management, which all lead to healthy foot falls as well as decent conversion ratios. While the demand for a superior shopping experience is evident in the established metropolitan cities, the sector will see long-term growth in Tier II and Tier III cities, which offer immense untapped potential.

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