As the shift towards online shopping gains momentum, retailers are facing increasing competition from online delivery platforms, resulting in a decline in the revenue that they are generating from brick-and-mortar sales.
This is making it difficult for them to meet operating expenses such as rent, particularly in the large shopping malls and as a result, many retailers are now opting to move into smaller outlets that are more affordable.
“Since the pandemic started accelerating the shift towards online shopping, a lot of retailers have been struggling with keeping a profit at the end of the day,” says Natalie Mwedekeli, Co-founder of Mama Rocks Burger Kitchen.
Ideally, for a business to operate sustainably, occupancy costs should not exceed 10 percent of gross revenue.
However, according to Natalie, up to 20 percent of retailers' turnovers are going into rent in some of the big malls. “We need some element of flexibility from the malls when it comes to leases, otherwise we will invest less in physical spaces and move to delivery business models to reduce our overheads,” posits Ms Mwedekeli.
Additionally, albeit with good reason, large shopping mall operators tend to have initial move-in requirements which are a bit stringent to some of the retailers, especially startups.
“When you are small, conditions are very tough, for instance you may be asked for three months’ rent in advance, high initial deposit, only as you grow bigger will the landlords start listening to you,” says Rupen Shah, CEO of Victoria Courts.
These barriers to entry into large shopping malls have seen many retailers turn to smaller retail outlets such as strip malls, convenience stores and neighbourhood malls, which are quickly gaining traction in Kenya.
“As tenants shift away from large shopping malls, developers are beginning to put up smaller shopping centres of a quality that mid to high-end clients can still feel comfortable purchasing from,” says Willy Kimani, founder of Jaza Retail.
Compared to large malls, these projects are relatively easy to build as they require less logistical infrastructure including parking, storage, loading and distribution areas, thus enabling quick turnaround times.
At an average of 5,000 square feet compared to more than 50, 000 square feet for the large malls, these establishments also tend to fill up faster, thus generating a quicker return on investment for developers.
It is also easier to navigate the regulatory environment with convenience retail projects, which further reduces the overall construction costs for developers.
However, with prices of land having risen significantly recently, these projects tend to over the long term, be less economically viable than larger malls.
In Nairobi, land accounts for up to 60 percent of total building costs whereas the ideal threshold should be 10 percent, according to housing finance institution Shelter Afrique.
“Still, strip malls are one of the only forms of development that can generate a profit that will enable you to meet your bank loan obligations on time, which has been a big issue for developers,” says James Hoddell, Director of Safari Centres.
Despite the changes in the retail landscape, Hooman Ehsani, CEO of Greenhills Investment and Village Market, says that larger shopping malls still have a lot of relevance in the market due to the benefits they offer over smaller malls.
These benefits include more security, particularly for businesses looking for 24-hour operability, as well as the presence of other traders in the large malls, which increase the daily footfall.
As competition from e-commerce intensifies, however, he says that the time has come for retailers to start thinking about how to transform from simply being providers of goods and services, to being connectors of people. This will maintain their relevance and enable them to get better terms from landlords, who are finding tenants that make it possible for people to spend more time at the mall, as more attractive.
“The physical space is all about human connections and interaction, thus the tenants that allow for connectivity between customers such as gyms and entertainment are becoming interesting, but if it is a stand-alone, ultimately that does not become very valuable,” posits Ehsani.
Ultimately, regardless of the type of mall offering, Debby Kippen, who is the Head of Leasing Africa at Grit, says that to drive sustainable growth in the country’s retail real estate industry, a more collaborative approach between retailers and landlords will be needed.
“We need to step back and say look, this is a relationship, we don’t want a tenant to leave after a short while, rather, we want to make this partnership sustainable, let us be cognizant of everyone’s different difficulties and work together to find a solution,” says Ms Kippen.
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