In the past six months, the retail rents have come down between 30 and 40 percent. Yet, this figure is high. Many retailers across the country are asking for further reduction in rent as sales fall and the amount of rents as a portion of sales remain high.
In the international market, rents for retail space account for 4-5 percent of sales. But the picture in India defies logic. The rents have spiraled in the past couple of years to as much as 20-40 percent of total sales. It has been observed that if the figure goes beyond 28 percent, it becomes difficult for a small-format store to garner operational profit.
The stores in the international market break even in one-two years. In India, this can take as long as three-four years and sometimes even longer. Reebok with more than 720 stores in India paid about 10 per cent of sales as rent three years ago.
The rent is a strategic tool for a retailer to garner profit. In early 2004, the hype of organized retail made many of the brand owners blind. In their quest to have first mover advantage in geography they paid whatever they were asked to pay. No one at that time bargained or raised any concern. There are instances, when the rent per square ft went up even in a day. The serious thought of weighing pros and cons were never practiced. As a result, the demand outpaced supply.
Things might change as the biggies in the game are asserting reduction of rents. They are closing existing stores and opening new ones at places where the rent is affordable.
