Disruption in the Real Estate World - Part 1 (Retail)

When the moon is in the Seventh Heaven
And Earth aligns with Mars
Then disruption will guide the planets
And the e-age will steer the stars

No, I have not turned to astrology as a profession; though God knows I would probably make more money professing speculative information that can be never be tested and the listener lapping it up as words from God. Having attended a conference called "What's new: Predictions for the future - Trends shaping Indian Real estate" I am perhaps in a crystal ball gazing mood.

One of the arguments I heard concerned the retail industry. The big question being would e-tailing kill shopping malls. Until a few years back; e-tailing in India was the David and malls the Goliath. Suddenly, the roles seemed to have reversed with e-tailers that were gasping for breath for survival were suddenly valued as billion dollar properties and malls that were demanding billion dollar valuations yesterday are struggling to survive. There are some 500+ malls in India of which only 25% have earned the title of success. Rest are being titled monstrosities ill conceived by egoistic developers and crazy architects who have no idea of where or what they were building or designing, and to what end except for one blinkered thought that India will someday allow FDI in retail and the nation will become the shopping destination of the world.

e-Tailing extracted laughter from these great builders. "People trust only what they can see or touch and will deal only with people they can talk to. After all what fun is shopping if you cannot bargain? Everyone does not have access to the net and those who have don't trust it. This is India my friend not America or Europe" is what I often heard. But, that was before the cheap smartphone wave and suddenly everyone had the net in their palms. Regulation made it compulsory for credit and debit cards to go for higher levels of security and today India has one of the best encryption and secured systems for e-transactions. e-tailers took the feel and touch bit quite seriously and introduced Cash on Delivery, return if not satisfied policies, compare and shop policies. Soon, local retailers suffering from low marketing reach, thin margins and high rents started cutting deals with e-tailers to push their wares.

Air conditioned fancy malls realizing that they had become nothing more than picnic spots for window shoppers started losing tenancies. After all the cost of the high rent is buried in the product you buy. Over the years the smart mall owners learnt to switch from high fixed rents to variable plus thin fixed or no fixed formats to keep good names inside. For many malls, even this was not an alternative. A mall developer today must be thinking that had he invested that same USD 25+ million in developing an e-selling platform rather than the concrete structure he would probably be valued at 10X his investment instead of current land value (that has not changed much) minus 10% (for demolition it) -  which is what I heard a large ticket investor say when asked how much he would pay to acquire a distressed mall.

In this David and Goliath war; the new David seems to be making the same mistake - but on the other extreme. Selling goods below cost with an eye on customer acquisition. Sustainable? I don't know. I still feel e-tailing cannot offer the smell of printed books of a bookstore or the smell of bakes and coffee at a coffee shop or any of the sensory and social experiences of a mall. Malls are and will be the place for E(xperience)-tailing. The way they are built may change over time as well as the way business is transacted. Maybe each of the e-tailers will end up owning its own mall in every City or town or maybe they will be defined by a product range they sell. But they will survive and even flourish. India cannot keep FDI in retail out for long and global pressures will force it to happen.

It is very clear however that Real Estate is no longer immune to disruption. Its happened in retail and its happening in office spaces too (Part 2). It's time for developers to open their eyes and realize that they have to change the way they build and do business.