India’s Retail story is one of long-term growth. According to a report by India Brand Equity Foundation, the Indian retail sector had an estimated total market size of USD 330 billion in 2007, which is expected to grow to USD 427 billion by 2010. This growth has been manifested not only in the growth of the organized retail trade, but also in the large scale construction of new retail environments – shopping centers. The growth of shopping center development in the country is visible from the significant increase in its volume.

While there were only a couple of built shopping centers covering around half a million sq ft in 1999, it has been projected that as of end-2009, more than 50 million sq ft of shopping centers would be operational throughout the country. The ownership of these shopping centres is distributed amongst 100s of local developers scattered through out the country. There are very very few developers who can claim to be pan India shopping centre players. Meanwhile, big shopping centers become even larger. One of the motivations of the expansion activities is that the inclusion of more entertainment and food courts should give shopping centers more retail traffic and increase the sales of other retail stores, though its effects are doubted by some researchers that consumers who are drawn by entertainments are less likely to visit shops rather than food courts.

However, by end-2008, shopping centres and their owners came face to face with increasing vacancy and falling footfalls. Getting the retailers to sign the dotted line, pushing them to start the fitouts and then chasing them for unpaid rents have since become a part of daily life for shopping centre owners. The harsh realities of global recession affected everyone in the Indian economy, including the retail sector and its physical construct – shopping centers.

Given this background, does it make sense for shopping centre owners to consolidate? For the shopping centre industry, does it make sense to have a few large national players rather than many many small local players? Lets examine the benefits of consolidation:

Organized retail industry in India is largely an oligopsonic market. (An oligopsony is a market form in which the number of buyers is small while the number of sellers in theory could be large. It contrasts with an oligopoly, where there are many buyers but just a few sellers. An oligopsony is a form of imperfect competition. One example of an oligopsony in the world economy is cocoa, where three firms (Cargill, Archer Daniels Midland, and Callebaut) buy the vast majority of world cocoa bean production, mostly from small farmers in third-world countries.)

Shopping centres in India have well defined product categories. These including the multiplex, the food court, the hypermarkets, the departmental stores (loosely referred to as anchors) and then the vanilla stores. In each of the anchor product categories, there are virtually 4-5 established players that all the retailers have to go to. This gives rise to an oligopsonic market with the retailers having the relationship power balance tilted in their favour. Also, with shopping centres being capital intensive (with large amount of debts) and the retailers working on negative working capital, the cash flow pressures are that much more on the shopping centre owners than the retailers. It gives retailers much more time to play hardball in their negotiations with the shopping centre owners.

If shopping centres in India could consolidate into 4-5 pan India players (rather than the 100 local players), the power balance could be restored and would provide shopping centre owners with a good amount of bargaining power vis a vis retailers. With a few buyers (shopping centre owners) and few sellers (retailers), one can expect a fair power balance in the industry.

So, how is this consolidation possible? REITs seem to be the only solution.

Reference:
Economies of Scale in Shopping Center Industry, Qiong Wang
Retail Asset Management – Empowering Indian Shopping Centres, JLLM

Original Article posted in www.therainbowinvestor.com