Customer is the 'King' in retail and 'Location', 'Location' and 'Location' is of prime importance for retailers than to any other industry. In developing markets of Asia, real-estate is getting expensive and turning out to be unviable for retailers to set up shops. Recently I was interacting with couple of retailers in the region and was discussing on the engagement models being adopted by retailers and realtor for a win- win situation. Real estate in the region is poised to change and mature as organized retailing grows.
Brick and mortar retailing, today is the most important channel for retail sales though other channels are fast picking up. Real-estate is one of the greatest costs and causes the biggest environmental impact for retailers. Organized retailing is picking up fast in Asia pacific; these growing economies in the region are pressing the need for growth in real-estate. Unlike the developed economies of the world where retail growth over a YOY has been either flat or have shown very minimal positive growth, Asia Pacific is witnessing a lot of positive growth.
Luxury brands in the likes of Gap, Banana Republic, S.Oliver, Abercrombie & Fitch, Gucci, Prada to name a few, have aggressive plans to enter the region. Apart from these brands, multi-brand retailers like Tesco, Wal-Mart, Marks & Spencer's are all eager to enter the growing markets of Asia and establish their stores thus creating a huge need for retail space. Markets in this part of the world are growing and not to be surprised, luxury segment has shown a tremendous growth. Every passing day brings in new brands establishing their shops in the prime location. Leaving behind luxury retailers, food retailing, mass merchandisers have all been having trouble in making their presence at prime location. All Major cities have witnessed a considerable increase in rentals in the last five years. One of the important factors for the viability of retail business is availability of real estate at affordable prices in right locations.
Immense competition, emergence of Omni-channel retailing, increasing operational and real estate prices are effecting the brick and mortar business. Profitability is taking a downward dip; innovative models are slowly evolving and hybrid models are being developed and customized for retail-real estate.
Models being adopted;
- New profit sharing model between realtor and retailers; rentals fixed on a monthly or yearly time frame or profit/revenue sharing models are being accepted. Profit sharing models are getting adopted by all since it is a motivator for retailers and realtors, bringing in more footfall and extra revenue.
- Retailers are out-rightly buying properties and building malls. Retailers are setting their shops spread across floors and renting out other shop floor to non competitive brands/retailers to drive in customers and creating alternative revenue channels.
- Many of them are following a model where the leases provide for an annual step-up in the base rent and for rent to be payable on the basis of the higher of either base rent or a percentage of tenants' gross sales turnover. This model provides stability as well as throws up a big potential for increase of rental income.
- Joint venture or joint-developments are a new breed of hybrid models with developers or land owners being equal parties to the business. This model helps to negate the effect of rising rentals and thus creating retail assets at prime locations suiting all parties.
Growth of malls and retail specific real-estate has led to an increase in number of vacant shops in both prime and secondary locations due to higher rentals. Tesco, the UK based retailer has been extremely successful in region due to its real estate strategy of building malls. As the markets of Asia open up we would see more mature models being adopted in real estate.