Urbanization rate is on the increase – and while there had been a few setbacks over the past few years, the Indian luxury retail market is firmly back now. The economy once again supports the rationale for spending on luxury goods, and it will continue to do so. Today, India’s upper social strata are once again aspiring to participate in the luxury shopping experience.
That said, the luxury retail market itself is not as attractive right now as it should be. Real estate is often mentioned as a major problem for many luxury players who are hoping to do business in India. This is a genuine concern.
Lack of suitable spaces
Luxury retailing implies high profile, strategic locations near high income catchments. If we take the example of Mumbai, nothing less than locations such as Breach Candy, Colaba or Linking Road really make much sense for luxury retail. It is an unfortunate fact that in these very locations, there is really no existing or future scope for organized retail play. In most cases, we are talking about small residential buildings or old tenanted commercial buildings where luxury retail is being created.
In the process, the format of luxury retail gets compromised, and therefore there are rather limited opportunities for retailers to do meaningful business in such locations. The overall atmosphere that they would ideally wish to embellish their stores with can simply not be created. The customer does not get the feel and ambiance of luxury shopping, even if he or she has access to the brands.
The scenario is really not very different in Delhi – the other metropolis that holds the greatest potential for luxury retailing in India. While it does have locations such as Connaught Place and Khan Market, the opportunities for luxury retailing are also limited. The same holds true for Bangalore’s MG Road. The point is, luxury retailers need to create the appropriate infrastructure for luxury retail in most cases, since it simply does not exist in the very locations that make most sense for luxury retail.
The cost of Real Estate
Real estate cost is obviously a problem. Strategic high street locations in the right catchments are in limited supply in our primary cities, which makes them very expensive. Also, there are many other businesses that are equally attractive for organized investors, and they have the option of giving out their spaces to high profit margin businesses such as jewelers. The returns from such a business as compared to those that a Burberry, Armani, Fendi or Gucci store would fetch either on a pure rental or a profit-sharing basis are much higher.
Transparency, quality of infrastructure and legality are other concerns. In cities like Mumbai, many of the locations that would be seen as prime from a luxury retailer’s point of view have serious tenancy issues. They are privately leased, and sub-leasing is not permitted in these locations. If the original lease-holders do sub-lease these properties, the tenancy is not legally sacrosanct and therefore unprotected. We often see that the sub-leasing tenant becomes a franchisee of the retail format on paper, while it is the master franchisee who conducts the actual business on-site. These complications tend to become deterrents for international luxury retailers, who find themselves unable to sort them out and do secure, profitable business.
Another question in a luxury retailer’s mind is – will the footfalls his store generates justify the high rentals? This is where the constraints of infrastructure come into sharp focus. Luxury retail consumers expect the right kind of convenience while visiting such a store. They expect accessible parking, which the location often cannot supply.
The footfall versus rental cost is therefore a concern. Rentals vary from Rs. 450-550/sq.ft. for a strategic high street location and in the case of organized luxury retail – in other words, luxury malls – they tend to range from Rs. 350-450/sq.ft. Prime locations such as Khan Market in Delhi or Breach Candy, Kala Ghoda and Colaba in Mumbai have very few spaces left for luxury retailers, and the cost is consummately steep.
It is doubtful that these rates will come down in the future, except when the Government comes up with clarity on the redevelopment of these properties. This will eventually happen, leading to more supply on the market and some relief in the situation – but there are no prospects of it in the short term.
Luxury Malls
The format of luxury retail is still not understood very well in India. To a large extent, developers of luxury malls in this country come from a residential or commercial real estate background. While they have invested in educating themselves and bringing in the best architects, the principles of running an organized luxury retail development are ignored. It is important to create an atmosphere for a luxury retailer in which he can attract footfalls and then convert these footfalls to revenue. This entails a finely-tuned combination of promotion, ambience, catchment-specific discounts and schemes, the right merchandise, a fail-proof supply chain and well-trained staff. Only when such a formula exists will luxury retail work in a mall.
To be fair, this disconnect is now being identified by many developers, investors and retailers as an opportunity, and in markets like Delhi, Mumbai and Bangalore and Pune, the right formats with the right formula in place are now coming into being.
The cost of building a Luxury Mall
It begins with the right location. In a city like Mumbai, the cost of FSI alone in South Mumbai would be between Rs. 20,000-30,000/sq.ft. Conservatively speaking, and not considering any kind of fanciness, the cost of construction would come to between Rs. 4000-5000/sq.ft. The fee of a world-renowned architect would come to Rs. 2000-3000/sq.ft. All in all, building a strategically located luxury retail mall would cost around Rs. 40,000/sq.ft. In rental terms, this would translate into nothing less than Rs. 500/sq.ft.. Factoring in a profit margin, the rent shoots up to around Rs. 800/sq.ft.
In Delhi, land is controlled by the DDA, which auctions it only among the few that are entitled to bid for it. Moreover, the development that takes place on the purchased land has to conform to the DDA’s master-plan for that particular location. The cost of land would be less than in Mumbai, but the cost of construction remains the same. Even so, no organized luxury retail format in Delhi would be viable at rentals below Rs. 400-500/sq.ft on carpet area.
Sanjay Dutt is CEO – Business, Jones Lang LaSalle India
