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Low occupancy spaces along with the anticipated store closures makes the malls under pressure to deliver its promises to the investors. More specifically, it may lead to increased vacancy, lower NOI, higher capex needs and other releasing expenses in the near term.

How concerned should you be?

It depends. Over the short run, it adds to the uncertainty to all mall REITs. However, there are several risk-mitigating factors for REITs owning superior properties:

• Portfolio quality: The best malls in the nation are strong and replacement tenants should not be that challenging.

• Timing: Their malls are currently producing record high levels of sales and so the timing is perfect for releasing space.

• Low occupancy cost: The rents at many properties are currently below market – as evidenced by its historically low occupancy cost for many malls.

• Negotiation techniques: Whenever retailers file for store closure, they always go after the landlords for rent concessions. They scare them off with big plans of store closure, but this may or may not really be genuine in the end.

As of right now, we really do not know what the exact impact will be – but it’s fair to say that there will be a short-term hiccup. This hiccup is not however expected to be very significant with all things considered.

What’s more interesting to explore is what are the long-term implications of all these retail bankruptcies? The market is quick to jump to conclusions:

Retail bankruptcy = malls are dying…

We are much more optimistic than that. Malls offer many virtues that other retail channels are missing, and most importantly, malls have become “mixed use” destinations which assures long-term sustainability.

The Practicality of Malls

Something that we rarely discuss is why most shoppers still choose brick and mortar stores over e-commerce. In 2019, everybody knows about Amazon, Flipcart and others dominating the e-commerce for the youth. Yet, online sales remain only a small percentage of total retail sales.

Why is that? Well, think about it yourself. Why do you buy goods and services at malls? Most likely, it’s because of one of the following reasons:

• Immediate possession: You do not have to wait for shipping. You do not have to pay for it either.

• Physical inspection: You can touch, smell, try the product before making a decision.

• Advice and guidance: You are not on your own. You can ask questions to associates to guide you in your decision making.

• Social interactions: No one wants to sit at home in front of a computer to shop online after already working the whole day at the office.

• Showrooms: Whether it’s a Tesla, Apple, or even Amazon store, you get to see it before you buy it.

Put simply, there are a lot of reasons to shop at malls. We don’t do it because we have to. We do it because we prefer to. It’s the same reason why consumer spending on movie theaters and concerts keeps on growing – despite the rapid expansion of Netflix and Spotify :

Mixed-Use Destinations

Still to this day, when investors think of mall real-estate, they immediately think retail, high risk, store closures, and e-commerce. Even bulls like us are subconsciously affected by the constant flow of negative headlines.

In reality, there are no such thing as a “mall REIT” anymore. At least not in the sense that we used to know them in the past. Malls are not pure retail centers anymore. Malls have become “mixed use” destinations with a wide range of:

• Services (fitness, co-working, Amazon lockers, barber shops, repair shops, dry cleaning, hospital…)
• Entertainment (restaurants, bars, movie theaters, bowling, casinos,…)
• And Other Uses (Office space, apartments, hotels, storage,…)

What formerly used to be shopping destinations are now becoming much more versatile. Dying retailers are being replaced by other uses and properties are being densified with the addition of apartments, office and hotels on top of the mall and/or adjacent to it.

Is it working? You can be the judge…

Sales per square foot have nearly doubled at many properties over the past 10 years – which is the same time period in which Amazon experienced enormous growth.

Clearly the mall transformation from “shopping” into “mixed use” is bearing its fruits. This is not debatable anymore at this point. It works so well because adding different uses benefits the entire mall economics. It brings greater and more consistent traffic. Think of a remote worker who visits a co-working spot at a mall, but then also ends up eating at a restaurant nearby and occasionally shops for clothes when he/she takes a break. Or someone who goes to the gym inside the mall, and then grabs a protein shake at the coffee shop and buys his sports gear next door. There are a lot of synergies in mixing the uses.

It also allows the mall to really focus on the stronger retailers – without any undue competition which would only cannibalize the total sales.

The above chart is the ultimate proof that the mixed use transformation is working. Will Amazon continue to grow? It sure will. But this does not mean much to a mall that has become a mixed use destination.

Retail Bankruptcies: Old News

Finally, I want to remind everyone that retail bankruptcies are nothing new. The market is connecting retail bankruptcies exclusively to the growth of e-commerce – when in reality, retail bankruptcies always have been a common occurrence. It’s simply part of business in an intensely competitive marketplace.

Retailers come and go…

R. Paul Drake posted an interesting report on the chat of High Yield Landlord recently that highlighted that too much debt and rapid over-expansion are the two main reasons for store closures over the past 2 years. In other words, e-commerce may have added fuel to the fire, but the real reason for these store closures is not purely e-commerce. The report adds that:

Lack of innovation and short-sighted private equity has also played a significant role. Retailers without these characteristics have continued to thrive, the report said, noting that when a retailer closes a lot of stores, it is more of an indictment on the individual retailer rather than an overall retail industry problem as has often been reported.

R. Paul Drake added on the chat that:

It looks to me like this wave of closings is more the usual story of a cycle of stupidity and greed than an apocalyptic societal change. I’ve wondered out loud before whether the slow growth of the present expansion might give time for waves of needed liquidation that delay the need for a next overall recession. That might perhaps be what is going on here.

Finally, while a lot of store closures are happening, it’s important to remember that for every retailer closing stores, there are more than five retail chains opening new ones – up from 3.7 in 2018.

Kanisht Agarwal and Shreyash Trivedi from Raymond receiving the award.

Jumping into finding franchise opportunities can be a daunting task. Take a step back, and ask yourself what you are trying to accomplish by buying a new business. If you don’t get real with yourself and truly understand your overall goal, you will begin this journey already on a path that already does not bring out the best in you.

Creating a roadmap so that you are aware and certain to ask all of the right questions is crucial. Just like with any other research project, you want to make sure that you get good information from your research so that you are making the right informed decisions.

As you are researching, the 3 major areas you want to focus on for finding franchise opportunities are:

1. Yourself

Knowing yourself is the beginning of this entire process. If you don’t know yourself, the success of your business will most likely fail. You need to ask yourself the following questions:

• What do you want out of your franchise business?
• Are you in a position financially to invest in a franchise?
• How much money do you have to invest?
• Does your family support franchise ownership?
• Can you multi-task and manage many projects at once?
• Are you willing and able to follow a proven franchise system?
• Do you have an exit strategy?

After you have answered these questions and you are ready to continue on finding franchise opportunities, you need to think about what skills you possess that have made you successful in your previous career. If you understand your skills, that is key. You most likely don’t want to get into selling and marketing if you were once an accountant. You will want to stay away from franchise opportunities that require skills you don’t have.

2. The Market

Knowing the market where you will be operating your franchise business is another major area of focus. You will want to know if the concept will work or currently does work in your area. When determining whether or not a franchise will work in a particular market, as these questions:

• Will you be the first franchise system in the area? Or is there already one of this kind operating?
• Will your franchise be the last on in the market? Is that good or bad?
• Do you have an understanding of the competitive landscape?
• In the market that you need to succeed, is there prime real estate available?

After thinking about the questions around the market and location your franchise business, you may want to request to speak with franchise owners from similar markets. In addition to franchise owners from similar markets, you can speak to those with occupational backgrounds and even husband and wife partnerships. You may also reach out to franchisees that may be absentee owners if that’s the investment route you are seeking.

3. Profitable Franchises

As you are doing your due diligence and finding franchise opportunities, you need to determine who the top franchisees are and why they have become successful. Think about the process of becoming a franchisee much like the process of joining a gym. When we are working with people who are like ourselves, we tend to be the most comfortable and do our best.

In order to bring out the very best in you, really think about these three things when finding franchise opportunities. It is important for your success that you can say that you are passionate about the business you choose. Knowing yourself, the market and profitable franchises will all work together to make you successful and have the passion to be the best.

The Indian retail industry has emerged as one of the most dynamic and fast-paced industries due to the entry of several new players. It accounts for over 10 percent of the country’s Gross Domestic Product (GDP) and around 8 percent of the employment. India is the world’s fifth-largest global destination in the retail space. Indian Retail Industry has immense potential as India has the second largest population with affluent middle class, rapid urbanisation and solid growth of internet.

Market Size

India’s retail market is expected to increase by 60 per cent to reach US$ 1.1 trillion by 2020, on the back of factors like rising incomes and lifestyle changes by middle class and increased digital connectivity. While the overall retail market is expected to grow at 12 per cent per annum, modern trade would expand twice as fast at 20 per cent per annum and traditional trade at 10 per cent# . Indian retail market is divided into “Organized Retail Market contributes 93 per cent of the total sector and “Unorganised Retail Market contributes the rest 7 percent of the sector.
India’s Business to Business (B2B) e-commerce market is expected to reach US$ 700 billion by 2020##. Online retail is expected to be at par with the physical stores in the next five years and has grown 23 per cent to $17.8 billion in 2017. India’s total potential of Business to Consumer (B2C) is estimated to be US$ 26 billion, of which $3 billion can be achieved in the next three years from 16 product categories, according to a study by Federation of Indian Chambers of Commerce and Industry (FICCI) and Indian Institute of Foreign Trade (IIFT). India is expected to become the world’s fastest growing e-commerce market, driven by robust investment in the sector and rapid increase in the number of internet users. Various agencies have high expectations about growth of Indian e-commerce markets. Indian e-commerce sales are expected to reach US$ 120 billion! by 2020 from US$ 30 billion in FY2016. Further, India’s e-commerce market is expected to reach US$ 220 billion in terms of gross merchandise value (GMV) and 530 million shoppers by 2025, led by faster speeds on reliable telecom networks, faster adoption of online services and better variety as well as convenience. India’s direct selling industry is expected to reach Rs 159.3 billion (US$ 2.5 billion) by 2021, if provided with a conducive environment through reforms and regulation.

India is expected to become the world’s third-largest consumer economy, reaching US$ 400 billion in consumption by 2025.
Luxury market of India is expected to grow to US$ 30 billion by the end of 2018 from US$ 23.8 billion 2017 supported by growing exposure of international brands amongst Indian youth and higher purchasing power of the upper class in tier 2 and 3 cities, according to Assocham.
The size of modern retail in India is expected to reach US$ 11.25 billion in 2019 from US$ 70.45 billion in 2016.

• India has occupied a remarkable position in global retail rankings; the country has high market potential, low economic risk and moderate political risk
• India is expected to become the world’s third-largest consumer economy, reaching US$ 400 billion in consumption by 2025, according to a study by Boston Consulting Group
• India is ranked first in the Global Retail Development Index 2017, backed by rising middle class and rapidly growing consumer spending
• India’s retail market witnessed investments worth US$800 million by Private Equity (PE) firms and wealth funds in 2017.
• Department of Industrial Policy and Promotion (DIPP) approved three foreign direct investments (FDI), Mountain Trail Food, Kohler India Corporation, and Merlin Entertainments India in the single brand retail sector.

Note: FDI – Foreign Direct Investment
Source: AT Kearney 2017 FDI Confidence Index

Investment Scenario

The Indian retail trading has received Foreign Direct Investment (FDI) equity inflows totalling US$ 1.14 billion during April 2000–December 2017, according to the Department of Industrial Policies and Promotion (DIPP). With the rising need for consumer goods in different sectors including consumer electronics and home appliances, many companies have invested in the Indian retail space in the past few months.

• Department of Industrial Policy and Promotion (DIPP) approved three foreign direct investments (FDI), Mountain Trail Food, Kohler India Corporation, and Merlin Entertainments India in the single brand retail sector and two FDI proposals of over Rs 400 crore (US$ 62.45 million) within the retail sector.
• With 2017 being a successful year for herbal-ayurvedic brands, new Indian organic labels in hair care, cosmetics, food and apparel are belting up to carve an organic niche in the growing herbal segment.
• Investments by private equity firms and wealth firms in Indian retail sector reached US$ 800 million in 2017
• India’s retail sector attracted Rs 9.5 billion (US$ 147.40 million) investments in FY18, at a growth rate of 35 per cent year-on-year from Rs 7 billion (US$ 104.34 million) in FY17.

Government Initiatives

The Government of India has taken various initiatives to improve the retail industry in India. Some of them are listed below:

• The Government of India may change the Foreign Direct Investment (FDI) rules in food processing, in a bid to permit e-commerce companies and foreign retailers to sell Made in India consumer products.
• Government of India has allowed 100 per cent Foreign Direct Investment (FDI) in online retail of goods and services through the automatic route, thereby providing clarity on the existing businesses of e-commerce companies operating in India.

Road Ahead

E-commerce is expanding steadily in the country. Customers have the ever increasing choice of products at the lowest rates. E-commerce is probably creating the biggest revolution in the retail industry, and this trend would continue in the years to come. Retailers should leverage the digital retail channels (e-commerce), which would enable them to spend less money on real estate while reaching out to more customers in tier-2 and tier-3 cities.
Both organised and unorganised retail companies have to work together to ensure better prospects for the overall retail industry, while generating new benefits for their customers. Nevertheless, the long-term outlook for the industry is positive, supported by rising incomes, favourable demographics, entry of foreign players, and increasing urbanisation.

Exchange Rate Used: INR 1 = US$ 0.016 as on FY2018.

Note: FMCG – Fast Moving Consumer Goods
Source: Aranca Research

References: Media Reports, Press Releases, Deloitte report, Department of Industrial Policy and Promotion website, Union Budget 2017–18
Note:- according to a joint ASSOCHAM-Forrester study paper,@ – as per Bank of America Merrill Lynch (BofA-ML) report., # – as per a report titled ‘Retail 2020: Retrospect, Reinvent, Rewrite’ by The Boston Consulting Group and Retailers Association of India,## – as per Confederation of Indian Industry (CII) and Deloitte Touche Tohmatsu India LLP

Disclaimer: This information has been collected through secondary research and BrandFace is not responsible for any errors in the same