Revenue sharing model: Sharing the costs

The Indian retail industry is valued at $330 billion and is expected to grow to $427 billion in 2010 and $637 billion in 2015. Currently, organised retail is just about two to three per cent (about $7.5-8 billion). With many domestic and international retail players trying to create a space for them in this competitive sector, an increasing need has been felt for more retail space. This calls for the coming up of a large number of malls in the country. Further non-availability of space and suitable location on high streets and city centres has also given rise to mall construction in the country, which provides enough retail space to retailers for there expansion.

However, due to high input of construction costs, the rental costs in malls have witnessed a steep rise.

A model concept

The mall developers are left with no other option but to share the burden with retailers. As a result, rising rentals are playing spoilsport, forcing thinktanks of both parties to come out with a formula which works well for both. Revenue sharing is an innovative idea wherein mall developers rather than charging a specific rent from retailers or leasing the property, share a certain amount of revenues generated by the retailer occupying space in their mall, thus, bringing down the rental costs of retailers.

Says Deepak Aggarwal, Chief Operating Officer, Era Landmarks, ERA Group, “A revenue sharing model is an arrangement between a retailer and a developer to share the sales proceeds of the retailers from a particular outlet in lieu of a fixed rent. Under the arrangement, the developer shares the revenues and thus becomes partner in the prosperity of the retailer.”

This model has separate advantages for retailers and developers. For retailers, the rental burden gets reduced, developers make extra efforts to increase footfalls and maximise the conversion ratio. As far as developers are concerned, they are able to fill vacant spaces in malls and get more footfalls, thus, proving beneficial for mall developers and retailers in the long run.

Harmit Chawla, Vice-President-Sales, Uppal Group, says, “The whole business is about mutual co-existence. Here, revenue sharing provides a win-win option to both the developer as well as the retailer. Revenue sharing model certainly improves occupancy in the mall. Retailers and the developers get to share both risks and reward.”

Built on trust, understanding

Revenue sharing model works on trust and mutual understanding between mall developers and retailers. It’s easy for mall owners to practice this model with company-owned and operated outlets rather than franchise outlets, as there is now a particular system through which they can track the revenues generated by the retailer on a regular basis and no retailer would allow others to look into there respective data on regular basis.

Aggarwal opines, “In the present scenario, all organised retailers are using the latest accounting software and normally, the developer trusts the declarations made by the retailers in this behalf. However, there is always an audit clause, which empowers the developer to check the accounting records, if felt necessary.”

Though there is the provision of software through which the actual number of sales taking place and revenues generated can be checked, but still this format banks entirely on trust.

Tushar Harduley, Principal Consultant, Retail and Consumer Products, Technopak, says, “The mall developer can keep a track of the sales if they use a centralised system of billing. When the retailer bills an amount, it is stored in a database, which can be viewed by the mall developer at any time. Another way for the mall developer to keep a track of sales is by looking at the audited results of the retailers.”

Tire-II cities mushrooming

Burgeoning increase in construction and maintenance costs and unwanted delay caused in projects by government machinery has put mall developers in a fix. Around two years back, the construction cost stood at Rs 1,800 per sq.ft, which has now moved up to Rs 2,800 and Rs 3,200 per sq.ft. Hence, mall developers have increased the rental costs which have witnessed a rise of more than 40 per cent in metros and adjoining areas. Even the non-availability of space at city centres and high streets has given developers the chance to increase rental costs. With this much high rental costs, it becomes difficult for the retailers to break-even in a stipulated time frame. Therefore, retailers are looking towards tier-11 cities where operating costs are low.

Flaws in model

This trend in India is still at a nascent stage and evolves around understanding and final agreement between the developer and retailer.

Chawla feels, “In the long run, there is nothing called a better model. A lot depends on the developer's business proposition and the size of the project. In India, the risk is much greater for the developer.”

With a number of malls coming up in the country, it is not possible for all the malls to be successful and unwanted delays in the operation and maintenance of malls makes retailer more adverse to this format.

Harduley highlights, “The retailers usually dictate the revenue sharing model unless the mall enjoys unique location advantages. The mall developer would actually prefer leasing or selling the property rather than committing to a revenue sharing model due to the high risks involved.