South Indian cities ride high on new mall supply
In what is widely considered the annus horribilis (horrible year) for the Indian economy, various sectors were negatively impacted in 2019. While the Index of Industrial Production (IIP) or factory output contracted by 4.3 percent in September – the lowest in almost eight years – the consumption-driven retail sector also took a hit. As per ANAROCK data, retail leasing activity across top 7 cities dropped by 35 percent in 2019 as against the previous year – from 5.5 million sq. ft. in 2018 to 3.6 million sq. ft. in 2019.
However, despite this decline, India is set to see a generous supply of new malls over the next three years. This is largely backed by the confidence of private equity investors who have shown increasing interest in the Indian retail market. As is, the share of organised retail market is extremely low in India at around just 9 percent (compared to western world markets like US where the share is more than 85 percent) so there is ample scope for growth.
South Indian Cities Buck Mall Supply Trend
As per ANAROCK research:
> As many as 98 new malls (sprawling over 48 million sq. ft. area) are to enter Indian cities and towns by 2022-end
> Interestingly, out of this total supply, south Indian cities will host at least 34 new malls spread over more than 16 million sq. ft. area
> South Indian cities’ new mall supply is close behind the supply in their western counterparts, where at least 37 new malls covering 17 million sq. ft. area are slated to come up during the same period
> The southern region is far ahead of North India, where 21 new malls spread over approx. 11 million sq. ft. area is slated to come up by 2022-end.
Among the south Indian cities where this new mall supply will enter, Hyderabad tops the list. At least 12 new malls spread over 4 million sq. ft. area are set to enter the ‘City of Nawabs’ by 2022-end. Bengaluru and Chennai will see 9 malls each spread over more than 10 million sq. ft. area in the same period. Other prominent southern cities such as Kochi, Thrissur, Trivandrum and Wayanad will add one mall each.
Tackling Retail’s Troubles
Towards the end of 2019 and the start of a new year, the Indian retail sector’s troubles persist as consumer spends remain muted, impacting retail leasing activity. Sectors such as automobiles, fashion and telecom have been the worst hit and are seeing reduced leasing of retail spaces across the country.
These troubled times have forced retail players to reduce spends by realigning their operational strategy. The government is also taking steps to improve demand through policy changes. It will take time, sizeable funding, and smart strategising on the part of retailers – but there is hope on the horizon for the retail sector’s revival in 2020.
> Policy Support to Spur FDI in Retail: Proactive steps and policy decisions by the government to push consumption and consumer demand are vital to revive the retail sector.Thanks to the relaxation in FDI norms in single-brand retail, foreign majors such as Ikea and Apple are bullish about expanding and investing in India. The government has also expanded the definition of mandatory 30 percent domestic sourcing norms, paving the way for many retail majors to tap the Indian market. Retail revival also hinges on the upcoming Union Budget as only measures to increase spending power of the people can push consumption.
> Institutional Funding to Support Expansion: Despite the current slowdown, retail players are optimistic that India’s retail sector will reach the level of $1.3 trillion by this year. Policy support from the government is not enough to meet this target – what the sector needs is sizeable funding to support expansion. Institutional investors have already pumped in over US$ 2.8 billion funding in India’s retail sector between 2015 and 2019 (of this, South Indian cities have seen total inflows of more than US$ 500 million). More institutional funds need to fl ow in to keep the retail industry afloat in 2020.
> Consolidation & Innovation to Reduce Costs: The biggest challenge faced by retailers in a slow market the need to survive by reducing costs. Tough times have compelled industry stakeholders to think out of the box and look at new ways to cut fl ab and realign their operational structure. One way to do this is by consolidation and reducing capital-intensive ventures and putting expansion on hold. The other methods involve adopting technology to boost productivity. More and more retailers are looking at reducing dependence on manpower by choosing automation, artificial intelligence, and data analytics. In the present scenario, it is imperative to retain and strengthen customer loyalty and retailers are working renewing their focus on consumer-centric strategies.
> Revival in Auto, Apparel Sectors: Factors such as new safety and emission standards and increased taxes kept car sales muted in 2019. Consequently. the auto sector witnessed a sharp fall in showroom leasing and witnessed consolidation through most of 2019. However, recent steps such as increased depreciation rate for cars (from 15 percent per annum to 30 percent) will help spur demand. 2019 ended on a good note as domestic passenger vehicle sales increased by 0.28 percent during the festive month of October. 2019 also saw global auto manufacturers setting up shop in many major cities, a trend that is likely to keep up in 2020. Apparel sales that have been tepid throughout the year usually improve during the festival season starting October and continue through the wedding season. While the festive and wedding seasons of 2019 did not do much to push apparel sales, a strong winter is driving consumption in North India, which is experiencing its bitterest winter in decades. Across malls and high streets, shoppers poured in to shop for winter wear during the last two weekends of 2019. This seasonal momentum at the end of 2019 must sustain through 2020 on other factors, as well.
> Tier II & III cities to Expand Retail Consumption: The next chapter of India’s retail story will unravel in Tier II & III cities. With high disposable income and spending power and relatively lower cost of living, there’s a high consumption of retail in all its formats in cities like Kochi, Trivandrum, Thrissur, Wayanad, Chandigarh, Jaipur, Indore and Nagpur. The service industry, including the IT/ITeS sector, is also expanding in these cities creating more job opportunities and paving the way for retail expansion. 2020 is likely to see more malls and retail spaces coming up in smaller cities and town that will contribute to the revival of retail sector as a whole.