Out-Of-Town Retail - The Viability Of Value

 

 Bappaditya Basu, Senior Vice President - Retail and Leisure Advisory, Jones Lang LaSalle India.

Selling off the damaged or out-dated products has always been a nerve-wrecking task for retailers. However, they can liquefy their obsolete products on discounts to consumers who want to get branded stuff at reasonable rates. Retail companies can offload factory surplus stock at discreet stores located on highways and city outskirts.

Big hypermarkets, cash-and-carry outlets, furniture dealers and designer wear stores often cannot find sufficiently large retail spaces within the city. Such stores tend to look for out-of-town properties in locations which are in line for anticipated growth as indicated by the directions in which the city is expanding.

This trend has given rise to some popular out-of-town weekend shopping destinations. Some of these are:

• Mehrauli-Gurgaon Road and Mahipalpur in Delhi
• Kharkhana and Trimulgiri in Hyderabad
• Marathahalli in Bangalore
• Parel in Mumbai
• Kundli in NCR
• Manesar in Gurgaon
• SG Highway in Ahmedabad

Out-of-town retail outlets tend to be located in areas close to operational factory outlets and are targeted by customers who are looking for a bigger bang for their buck.

Retailers That Seek Out-Of-Town Properties

The size of India’s retail industry is estimated at Rs 20 trillion in sales. Of this, 40-48% comes from sales of branded products, which are part of the organised retail segment. 45% of such products are sold during discount sales or through factory outlets which offer a 15-40% discount throughout the year - and almost 70% discount twice a year - to unburden 'out of season' stocks from their shelves. As old merchandise in retail stores continuously gives way to new stock at the end of every season, off-loading out-dated goods from retail stores is an on-going struggle for retailers and 'factory outlets' come to their rescue.

In fact, almost all of the leading domestic (and even some global) brands are active at out-of-town properties. Brands such as Mega store, Promart, Brand Factory, Loot Mart, Loot, Brands R Us and all branded factory outlet stores look for such kind of properties where they can sell at a discounted price throughout the year. Cash-and-carry outlets such as Best Price, Metro and Bookers are some of the international brands that specifically look for such spaces.

They typically look for properties with low rents, large floor spaces and ceiling height, power back-up and sufficient parking. Easy approachability is important - such locations need to be connected to a national highway and immune to traffic snarls.

Once they locate such a property, retailers require their spaces to be built to suit their requirements. The entire premise of this business model is that if all these factors are met, customer will be willing to 'go the extra mile' to shop at discounted or wholesale prices.

Challenges

Opening a factory outlet is not that easy as opening an exclusive brand Outlet or a multi-brand store. This is because EBOs and MBOs represent the regular and fresh stocks of the brand, whereas the product line which is sold in factory outlets is either damaged or out-of-date. For instance, the footwear industry business is all about sizes and colours. As not all fresh arrivals are necessarily sold in a single season, the company has a constant need to off-load surplus stock. Similarly, the Indian apparel industry is witnessing rapid changes in seasonal styles and colours that need to be sold off one way or the other once they are 'obsolete'.

Changing Landscape

As in all other segments of retail, customer preferences for out-of-town retail complexes are changing too. Despite their focus on savings, these are nonetheless aspirational people - college students, freshly-recruited executives, executives with family liabilities - and, of course, value shoppers who want branded, trendy products but cannot afford them at the regular prices.

While the Indian upper-middle-class shopper is definitely the profile of a typical department store customer, he or she is now seeking more value through cross-shopping at factory outlets. Given that the India growth story remains strong with the international business community, the attractive footfall rates and sales statistics of factory outlets ensure that even top-notch brands cannot afford to ignore them. This has fuelled the emergence of malls dedicated to such stores.

Today, discount malls have cropping up rapidly on outskirts of Faridabad, Mathura, Kundli, Pinjor, Manesar, Bhandup, Bangalore, Vishakapatnam and Ludhiana. And it isn’t just discounts that attract customers to factory outlets, although these are a big draw. The fact is that one is assured of discounted rates at such malls at any time of the year.

Thanks to these discount malls, retailers were able to continue with their expansion plans despite the significant dip in prime retail space supply across key cities last year. This positive sentiment is indicative of retailers taking a long-term view of the Indian economy despite the short-term challenges. The Government’s bold and welcome move of allowing FDI in retail has further contributed to this positive sentiment.

Most Popular Store Sizes For Out-Of-Town Retail

• Cash-and-carry outlets - 52500-60000 square feet.
• Factory outlets - 1500-2500 square feet per store

Rentals

Factory outlets are situated in out-of-the-way locations, along the highways, and in areas with low penetration of branded outlets. Sales depend on location and also vary from city to city. A factory outlet usually earns anywhere between Rs 35-40/sq.ft. per day. The maximum that they tend to be willing to  pay is Rs 70-90.sq.ft. per month. Cash-and-carry outlets can afford to pay between Rs 36-48/sq.ft., depending on the city and location. The approximate rental difference between in-city and out-of-town retail spaces would be nearly 40%.

Lease Arrangements

The lease agreement for out-of-town retail stores is similar to those for inner-city agreement and are governed by  applicable bye laws, municipality rules and the specifics introduced by the retail property's legal consultant. It can take the form of a basic agreement for conducting business, a leave and licence agreement, franchisee agreement, lease agreement or a simple rent agreement.