Indian retailers and realty firms are increasingly resorting to the idea of revenue sharing to tide over the crippling effect of COVID-19. In fact, a large number of modern retailers and restaurant chains have requested the mall owners and landlords to shift to revenue-sharing model for the next few months.
Along with other industries, the outbreak of novel Coronavirus and the resultant lockdown have impacted Indian retail real estate as well. The impact has been such that it had prompted the States to shut down the malls even before the announcement of nationwide lockdown on March 25, 2020. While consumers have been forced to defer their discretionary spending, the revenue and profitability of the Indian retail industry have taken a massive hit in the short-term. High fixed costs, skyrocketing rentals, and salaries have collectively led to a crisis-like situation for the retailers.
Moreover, with the uncertainty around employment prospects, consumer sentiments are likely to remain muted up to several weeks post the end of the lockdown. ICRA, in its recent report, has specified that the discretionary expenditures are likely to remain meek even after the malls become operational. The consumers, as a means of caution, are expected to stay away from the crowded places in the near term. As predicted by the Retailers Association of India (RAI), it would take near about 9-12 months for the industry to recover from the impact of the COVID-19 pandemic.
In such a scenario where retailers are grappling with mandated shutdowns except the ones dealing in essentials, commercial tenants have requested the landlords to enter into a partnership to make the retail industry survive. The retailers have appealed the mall owners to shift to revenue-sharing model for the next nine months. In addition to this, they have also demanded from the Central Government a one-year moratorium on loans, concession on electricity tariffs, and waiver of property tax from their respective State governments.
What is a revenue-sharing model?
While the majority of the retailers have scaled down their expansion plans due to uncertain economic conditions, scepticism around the revival of business looms large. Besides, high rentals have made properties unviable for the tenants. Amid the gloomy conditions, retailers and real estate players have no other option but to resort to revenue sharing.
A revenue-sharing model is an arrangement, wherein, the retailers agree to share with the developers, a percentage of their sale proceeds from a particular outlet in return for a fixed rent. By sharing revenues, the developer becomes a partner in the prosperity of the retailer. In short, the entire concept revolves around mutual co-existence of the parties, and therefore, the model requires trust and understanding between mall developers and the retailers. It is especially useful for maintaining outlets where the level of profit and footfall is below average.
Speaking about the model and the need to adopt it, Milan Thakkar, CEO, Walplast, avers, “The revenue-sharing model is an innovative model and a win-win situation for the retailers, as well as, for the developers. It helps reduce the rental pressure on the retailers and simultaneously provides a thrust to the developers to make an additional effort towards increasing the footfall and the conversion ratio. As far as the developers are concerned, they are able to fill the empty spaces and garner increased footfall. The concept provides long-term value to retailers. The best part about the model is that both the retailer and the developer can contribute towards the gain. At the same time, it helps shield the retailer from higher costs if the sales are lesser than expected.”
While revenue sharing is considered to be an ideal way to mitigate the loss faced by the retailers at large, the concept can be administratively burdensome in comparison to the traditional wholesale price-only contract. If profits are increasing to a bare minimum, it may not be worth the extra administrative efforts. However, given the present fluid situation, the model might help the retailers in keeping their heads above the water.