The Future Real Estate Scenario and Modern Retail

India is the last frontier for modern retail development. Our consumer is emerging from decades of minimal choice, restrictive legislation and stifling cultural concerns. A consumer who has always held high aspirations is now freely able to exercise his or her right to a comfortable lifestyle without guilt or judgment. Emerging modern retail formats are offering exciting customer interaction, pleasing ambience and a connection with previously unseen product. New retail formats that have taken several decades to evolve in the West are available to us overnight here. Such is the exciting scenario that our real estate industry faces.

With this scenario come certain factors unique to India and not previously seen in the world. Few of these factors are covered by any western experience or learning.

The rush to exploit the seemingly endless opportunity of modern retail sees just about anybody from any background or experience either launching new retail business's themselves or becoming shopping mall developers. Of the many new entrants into the retail business at least a third will fail dramatically in the coming years. Short term success though is almost guaranteed with little competition (only 5% of retail is currently ‘organised' hence there is currently room for many new players as market share is too easily available) As competition intensifies rapidly over the next few years the amateurs will face challenges to re-capture market share from the subsequent new entrants.

Shopping in modern formats is a mainstream leisure activity for our consumer and the novelty effect is still prevalent. As more and more choice becomes available this novelty factor will wane and the massive footfall enjoyed by the few today will be hard won by the many in years to come. The current impulsive shopper character of the Indian browser will metamorphose into a shopper who shops because she needs something specific and she will be more considerate about her choice of venue amongst the many more available.

The amateur developer may find the going tough when he realizes his multi floor mall with no credible anchor, poor upward traffic flow, low budget maintenance and insufficient parking for a more affluent consumer has left him losing the race.

Our current building and zoning legislation makes it tough for any developer to provide adequately for an attractive retail destination that will sustain the 25 year life cycle that is ordinarily necessary to gain decent returns in the shopping mall business. Firstly, our apparent lack of any effective town planning legislation permits too many malls to be built in the same zone with the ridiculous extreme being Gurgaon highway eight. A reported 23 malls being built in a 3 kilometer stretch. We needn't bother speculating if they will all survive. For a developer to confidently invest substantial amounts of money into a significant shopping destination he needs to know with a high degree of certainty what the future infrastructure plans are for the area and when they are going to happen. He also needs to know that his 1 million square foot mall will be the only one permitted in the immediate catchment. The current doubt around these factors is one of the reasons for the greedy rush that is taking place. Our landowners and developers can't wait 25 years for good returns as the future is completely uncertain. Hence they acquire, design and build as quickly as possible.

The letting of many malls is a haphazard process carried out at the same greedy pace. Little or no thought is given to winning an anchor tenant who will last the distance with an aspirant consumer over the next 25 years. Careful and professional consideration of the rest of the tenant mix and their adjacencies in the mall will sustain the development against weaker competing venues. Increasing affluence will require much more parking than is currently allocated today. Our developers are unable to adequately provide for this as our legislation includes parking in the floor space index restrictions. Quick returns are critical before competition and increased consumer selectiveness leads to failure of some.

These are just some of the reasons for the chaotic frenzy of current retail real estate development. In some cases this frenzy has lead to bizarre schemes where a developer ‘sells' his mall to the retailers. Sustenance of a shopping mall requires professional management of maintenance, security, marketing and tenant mix management. This cannot be done in the long term by the equivalent of a housing society cobbled together by the individual retail owners of such malls.

With the above in mind, our developers have lost sight of the complex pricing mechanism that is an essential part of a successful mall. The current insatiable demand of modern retail is grossly outpacing the available mall space. This has led to some rental prices that would out do malls in the US. Some of our retailers are fueling these prices in their rush to acquire space in order to ‘block' competition. In some cases mere words of intent for massive demand from a new retail entrant is enough to double asking prices.

A profitable shopping mall is a careful arrangement of retail offering. The most important part of this arrangement is the anchor tenant.

It is the anchor who is the ultimate footfall driver. Without an anchor who is in the game for the long run with a format that is a destination in itself the mall will succumb to competitors with stronger anchors. Signing the very best anchor is a strong driver of subsequent retail tenant demand. Smaller players will pay for the guaranteed footfall that the right anchor will bring. With much greater destination choice available to the consumer in the future, the anchor will also determine the malls' customer profile. An up market anchor will attract up market customers and consequently up market retail tenants will demand space. Conversely if the requirement is for a lower end customer profile because of the catchment demographics then the best discount operator will attract tenants of the same ilk.

Q: What parameters are to be considered while developing retail formats -- brand positioning/power, customer experience and expectation, competition?

SSP: There are a number of factors that we take into account while deciding on retail formats, including consumer experience and competition. However, it all begins with consumer segmentation -- one formula does not fit all. For example, you cannot expect a customer from Motinagar to come to your flagship store at Connaught Place ( Delhi ) and look for Reebok. You will have to take Reebok to him, and in a format that is less intimidating to him. In fact, after studying various SEC classifications, we realized there was an amazing amount of overlap and a lack of coherence in traditional consumer profiling. For a consumer brand like us, we were up against mindsets and not purchasing power.
Reebok
Moving forward from that point, we evolved two broad parameters: the “emerging” India mindset and the “traditional” Indian mindset. This segmentation has very little bearing in their purchasing power, but more towards their propensity to spend and consume an experience. For the emerging Indian mindset, we pitched our Arena and flagship stores offering a global shopping format. We have put in live DJs, “Create Your Own Shoe” sections, designer shoes by Manish Arora, and so one. For the traditional Indian category, we have what we call Focus stores where the emphasis is more on the functionality of the shopping experience.

HF: adidas is no different from other leading retailers, in that we consider a whole host of criteria when we develop global retail concepts. Our stores in India use the latest global retail concept, which is continuously evolving. The most important considerations are brand positioning (our stores being such a powerful means of positioning the brand) and customer experience. Customers expect much, much more than just a nice place where a brand displays products. Today, the customer expects a great shopping experience. While we are monitoring what competitors are doing, adidas focuses on developing unique stores that reflect the adidas brand, and the need of adidas customers. We are following a global segmentation model based on seven psychographic customer segments. There is no one segment driving the market.

Q: How much of the strategy is influenced by the maturity of the retail sector in India , particularly in the context of the perceived saturation of the Western/developed markets?

SSP: I agree that the retail sector is yet to mature in India , and there is a perceived saturation in the Western/developed world. However, the strategies that we are implementing in India have been designed for the Indian market. To use an old adage, “Think global… act local.” We are doing what we feel is best for the brand and the consumer in India , rather than mindlessly hoisting an international point of view. From that perspective, I think the Indian market is quite matured. At the same time, we would not like the consumer to be deprived of the global experience in terms of product offerings or retail experience. It is the mix of local understanding and multinational marketing prowess which has contributed towards Reebok's success in India , where we command 50 per cent of the market share.

HF: India is an important market for adidas, in particular because mono-branded stores are such an important channel here (more so than in developed markets). However, the needs of many countries are taken into consideration when developing global store formats. That being said, we acknowledge that market conditions in India and other Asian markets are distinct, and therefore we localize global retail concept together with our Asia Pacific retail team. We have developed a system locally that allows us to categorize stores according to well-defined tiers. The exact design of the store then depends on the tier that the store belongs to.
adidas
Q: What is your opinion about the present experimentation of a few brands with super-sized retail stores? Is it going to be a long-term and more widespread strategy for your company? Also, what location appears to be better for such stores -- high street, mall, or any other? What is “super size” in the Reebok/adidas book?

SSP: We have set up our Arena stores in Lansdowne Road (Kolkata), Residency Road ( Bangalore ) and Jubilee Hills ( Hyderabad ). But to be true, in retailing it is not always about size -- more often, it is what you choose to do about it. The large-format store allows us to interact with the consumer and offer her/him an enriching experience. We want consumers to feel and profess that Reebok is “The brand that fits me”. To that extent, the super-size store is an integral part of our strategy and you will see more of them in the months to come.

HF: Naturally, there is a limit to the number of mega stores that we can profitably run in India . In principle, a 29,500-square-foot store model (size of the New York Sport Performance Store) can be replicated in India . However, we need the market and our business to develop further, before the time is right.

We will continue to be very selective in the rollout of our stores in India . The right properties for the large-store size (cannot be less than 7,000-8,000 square feet) is typically in high streets, not in malls.

Q: How many retail outlets does the company presently have in India , and what is the total retail space? Of these, how many are multi-brand outlets (MBO) and how many are exclusive-brand outlets (EBO)? How many outlets can be termed as “benchmark” stores, whether in terms of size, product portfolio, customer segmentation, or total experience offered?

SSP: We have 400 EBOs, 1,500 MBOs and 200 shop-in-shops. The EBOs are spread across 155 towns/cities and cover 5.2 lakh square feet. The number of benchmark stores in India is 55.

HF: We have approximately 220 mono-branded stores. In addition, adidas products are available in approximately 1,300 MBOs. As for flagship outlets in India , we have no more than a handful.

Q: How does the retail aspect plan to reflect the recent merger of Reebok and Adidas?

SSP: As such, there are no ramifications on the retail aspect. We will continue to compete as separate brands and retail through our own stores. Going forward, if we find synergies to collaborate, we will. We are talking about the possibility of opening joint factory outlets. Hence, we will definitely get together where it would make sense to collaborate depending on the consumer segment. Having said that, we are two separate brands having our own heritage and drawing on our individual brand inspirations, and that is the way the consumer will continue to see us.

HF: The market will continue to see Reebok and adidas as two distinctive brands, with distinctive positioning and with separate retail presence. However, we are one company, and therefore, both brands now work closely together to optimize the business results of the overall adidas group.

Q: What percentage of the company's total global sales is accounted for by the Indian market? What has been the sales growth in India , year on year?

SSP: In the last two years, we have more than doubled our sales volume and have grown by over 50 per cent YOY.

HF: We do not disclose market-specific information; however, the growth of adidas in India continues to be in the high double-digit territory.