Mall developers take to revenue-sharing to woo retailers

November 14, 2013

(Any opinions expressed here are those of the author and not of Thomson Reuters)

Over the last five to seven years, the retail segment in India has evolved towards a more organized pricing structure. After the real estate boom of 2005-06, when property prices increased to as much as 40 percent of a retailer’s operating costs, developers seemed more willing to share the business risk. They moved from a per-square-foot rental model to versions of the minimum guarantee and/or the revenue share model. Most investment-grade properties in major cities now follow this model, unlike shopping centres in smaller cities.

In the original model, rentals varied depending on the store and location. But with increased brand awareness and rising vacancies, developers saw the need for a customized tenancy mix, adopting efficient mall management techniques while protecting retailer interests to maximize their own earnings.

This practice of revenue-sharing evolved with brands usually paying a minimum guarantee or a certain share of generated revenues each month. The adopted model varies according to individual developers or brand strength. Fashion apparel brands, for instance, often operate on a pure revenue-share model. For some apparel brands, revenue-share percentage across top Indian cities is between 10 and 14 percent; the range for footwear retail is between 12 and 14 percent while fashion accessories command around 8 percent.

The supermarket segment shares between 3 and 6 percent of revenues as rent, while the typical range for vanilla retailers is 1-3 percent. As far as location is concerned, the Saket retail district in New Delhi, for instance, takes in minimum guarantee monthly rentals in the range of 350 rupees to 450 rupees per square foot. In Gurgaon, it’s between 200 and 250 rupees while central Mumbai mall rentals are in the range of 475 to 600 rupees.

In some cases, developers have begun to charge staggered rentals, where new entrants are offered rental discounts in the initial year, to be eventually made up by a certain time period. Revenue-share percentages can also increase on the basis of projected revenues on an annual basis. Another practice adopted recently involves the developer choosing to enter into a joint venture or franchisee route with brands — ensuring an increase in revenues and a win-win situation for both parties. But these are just variations of the revenue-share model.

Although this model has been welcomed by retailers and developers alike, the practice cannot be adopted blindly. Luxury retailers, for instance, have long been perceived as coveted brands in investment-grade shopping centres, as they bring in more footfalls and higher revenues overall. In reality, large capital expenditure along with inadequate revenue flows due to inherent price inelasticity has led to luxury brands shelling out minimum guarantee rentals as opposed to high revenue-share percentages.

Several factors such as store location, brand positioning and mall management should be evaluated to maximize revenues. As for the smaller cities, the flat rental model is being followed for now but the revenue-share or minimum guarantee model will be slowly but surely catching on.

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