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In times of slow sales, retailers turn innovative

business Updated: Mar 18, 2009 21:20 IST
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Retailers are taking a long hard look at their cost equations, pushing landlords to cut rentals sharply by upto 50 per cent to stay afloat amid falling footfalls, low credit availability and a sustained cash-flow crunch.

In some cases, retail chains are relocating to cheaper destinations, while others have offered property owners an innovative blend of fixed rentals bundled with a variable revenue sharing option.

With fresh rent lease enquiries coming down to a trickle in wake of the economic slowdown, real estate developers are also working out new arrangements to ease tight cash flows.

Smaller developers have already started reworking their deals with retailers. For instance, some have suspended the minimum payment a retailer is supposed to pay as lease and have also got into a revenue sharing arrangement.

Large players like DLF and Unitech, however, have maintained that they have no plans to reduce rentals.

ITC, which owns the popular Wills Lifestyle chain of stores, is re-evaluating its high cost retail outlets, according to a senior executive. The company is renegotiating rentals with landlords and moving to low cost outlets.

“We have been able to achieve rent re-negotiation with at least 40 landlords at an average of approximately 20 per cent,” said Ambeek Khemka, group president of Vishal Retail Ltd. “In certain cases it has been as high as 50 per cent.”

RPG Group-owned Spencer’s recently closed 60 of its stores and is moving

these to more “viable” locations across India. “We are aggressively renegotiating rentals with landlords. For all upcoming properties we are asking for a revenue share,” a Spencer’s spokesperson told Hindustan Times.

“Earlier, developers and landlords were unwilling to even discuss revenue sharing model but now they are more than willing to bend backwards to lease out their empty spaces,” Khemka said.

Aditya Birla group, which runs the ‘More’ chain of mlti-product retail stores, has also renegotiated deals with some property owners. “The rents are still very high and exorbitant for many properties,” said Thomas Varghese, CEO, More.

“In the last six months, rentals have come down by 40 per cent but this is on specific locations,” Balwinder Singh Ahluwalia, president at Koutons Retail India told HT. “We expect another 15-20 per cent drop across locations to happen.”

Kishore Biyani led Future Group has also in recent past gone for revenue-sharing agreements.

Industry experts expected further correction in rental costs. “Given the high rentals that retailers are locked into, in many cases, a 10-20 per cent drop in rental will not be enough to correct the skewed rent-to-revenue ratio,” said Pankaj Gupta, practice head (consumer & retail), Tata Strategic Management Group.

“This ratio is more than 10 per cent in case of many properties signed at a time of retail expansion, when companies were in a mad rush to acquire sites.”