Money Growing: Multiplication of Brands

Chains of shopping centers and shopping and entertainment complexes first came to Russia from abroad in the form of Ramstore, IKEA, Mega and Auchan and it didn't take long for Russian developers to catch on to the foreign example. The first chains to appear on the market were large supermarkets focused on the sale of foodstuff, such as Kopeika, Perekrestok, Seventh Continent, Pyaterochka, etc, with chains of shopping and entertainment complexes springing up not only in Moscow and the Moscow region but also in the regions a short time later. Well known chains include Shokolad, Karusel, Park House, Torgoviy Kvartal, Metromarket, etc.

"A number of developers are currently planning the development of shopping and entertainment complexes in the regions," Roman Cheptsov, development director at Prime City Properties, said. "As a rule, shopping centers that belong to a chain are built according to a single concept and, in relation to demand." According to Irina Kirsanova, head of the marketing and consulting company Astera Oncor Moscow, the market is not yet saturated and developers can therefore choose the most optimal way to build. For example Torgoviy Kvartal has put into operation two Torgoviy Kvartal complexes in Krasnoyarsk and Naberezhnye Chelny and the second stage of a project in Naberezhnye Chelny is also under way as well as projects in Domodedovo in the Moscow region, Omsk and Vladimir.

Shopping and entertainment complex Kalinka-Malinka in Rostov-on-Don, ADM Group's first project, has already been completed. According to German Krasheninnikov, general director of ADM Group, the construction of a second complex will begin in Krasnodar in the near future, meanwhile in Volgograd, Samara and Nizhny Novgorod the company is currently looking for suitable sites. "We are also considering developments in other large cities not only in Russia but also in CIS countries." Krasheninnikov said.

According to Alexei Vanchugov, general director of Mall Marketing, the marketing representative for the Park House chain, Mall Management (previously GK Time - Vedomosti) has built 5 Park House shopping and entertainment complexes in Samara, Volgograd, Yekaterinburg, Tolyatti and Kazan. In the near future Park House plans to build malls in Rostov-on-Don, Perm, Ufa, Chelyabinsk, Saratov and Nizhny Novgorod. This will bring the total number of malls in the chain to 12.

Alexei Belousov, commercial director at Capital Group holding says that the holding is currently developing the trend for commercial real estate in the form of the Metromarket shopping center chain, which already includes four shopping centers located at Sokol, Proletarskaya, Timyazevskaya and Shabolovskaya metro stations. The total area of the shopping centers currently stands at 30,000 sq. m and is expected to treble by the end of 2008, he added.

Olga Yasko, head of the analytical department at Colliers, explained that the cloning of shopping centers may be attributed to developers' desire to make maximum use of already gained knowledge, experience and contacts with operators, to cut expenses on development and save time on the realization of the project. Furthermore "cloning" can speed up the process of selecting tenants and strengthen the appeal of the shopping center in the eyes of the shoppers due to the use of a central brand.

"In this situation strategic partnerships with large retail chains have serious advantages: the anchor tenant has already been chosen and therefore the property is constructed with the specific requirements of the anchor in mind. Furthermore, cooperation between retailers and developers is stable and well established," says Roman Cheptsov. "In some situations large commercial operators can act as co-investors in realizing projects," Anatoly Vasilev, vice president of Torgoviy Kvartal, added.

According to German Krasheninnikov, chains increase investment appeal for the development portfolio of companies, and for consumers they are a recognized symbol of quality, making it easier for retailers to enter a new region together with an already familiar brand.

Andrei Bushin, managing director of commercial real estate and development holding Miele Real Estate thinks that a strong reason to undertake a project of chains is the already prepared concept of the functioning of the centers. "Understanding that a concept successfully works, a developer will carry out similar projects in other regions," he said.

Tatiana Skok, a leading analyst at consulting company Russian Research Group also says that shopping center chains represent very interesting subjects from an investment point of view. A formed pool of tenants is a certain guarantee for investors, it is a working and proven business model in itself, and makes the attraction of funds and further development of the chain easier.

Laws of Reproduction

The guarantee of a successful chain project lies in a correctly developed concept, a successful brand and company style, thorough market analysis and professional management. For example ADM Group, currently developing its first chain of large-scale shopping and entertainment complexes "Kalinka-Malinka," has a select group of specialists in various fields taking part in the process.

The architectural concept was developed by international company RTKL, which has great experience in shopping and entertainment complexes all over the world (for example, Churchill Centre, England, Victoria Retail centre, Spain, etc). International company colliers International has been involved in carrying out market research and developing the concept of the shopping center. The brand, under which the project entered the market, and the company style, was developed by London's leading design firm Fortune Street, which incidentally created the brand for well-known Western retailer, Marks & Spencers, which recently entered the Russian market.

Torgoviy Kvartal on the other hand, carries out a large share of the work on its projects itself, including market research, development of the trade concept, realization of the project and also brokering and the complex management activities of the project.

"During the development of the project, it is necessary to pay special attention to the development of the concept and the strength of the brand," commented German Krasheninnikov. These parameters should be unique and recognized and be clear and attractive to the consumer. Investments in developing a chain is incomparable to investing in an individual project, therefore risks are sometimes increased. To carry out the reconception of a single complex is much easier than to change the concept of a whole chain," he said.

The department of commercial real estate and development at Miele say there are two ways to create a concept. The first starts from an existing land plot from which the concept is developed based on its most effective use. The second starts from an already existing concept from which a land plot is chosen that meets the set criteria of the concept. In this case the developed concept can be adjusted taking two factors into account: the configuration of a plot and the market research results of the region. On the basis of the results received it is possible to ascertain, for example, the level of returns in a given region and how much they may differ to the original city.

"The concept should be adapted to the conditions of the specific region," emphasizes Andrei Bushin. "The concept of a shopping center is defined above all by its location, and any project, including chains, should be adapted to specific cities, areas and levels of competition," agrees Tatiana Skok.

According to Alla Glazkoza, head of commercial real estate at Blackwood, the concept of a chain of shopping centers should meet market demand as much possible. It is recommended to adhere to the principles of adequacy. For example if a chain project will be developed in both the capital and in the regions, it is not necessary to include in the infrastructure of the regional centers expensive facilities such as skating rinks, go-carting and swimming pools, etc. There is a great risk that in the regions where the population has a lower income, entertainment elements will not be in demand.

To limit errors when working on a chain project, the developed concept should be as universal as possible. Anatoly Vasilev says that consultants use the so-called working concept when necessary. In accordance with this, a hypermarket with a galleria is located on the first floor, bringing maximum returns, the second floor is occupied by large clothing, sports and home appliance retailers and the third floor is home to a cinema, entertainment zone, food court and restaurants and often children's shops. It is this concept exactly that is considered successful and leads shoppers throughout the whole complex.

"An extremely universal project can be effective only under perfect conditions: on a similar land plot with identical local levels of competition, infrastructure, etc." Olga Yasko points out. In reality it is often required to adapt a standard project to the specific situation, taking into account the restrictions imposed by the quality of the land plot and the characteristics of the local market including competition. As a consequence, developers prefer to develop individual projects for each city under a unified brand.

For example, the Torgoviy Kvartal projects are realized under a single brand, but the architecture and size of the buildings and the number and structure of the tenants differs. The first Torgoviy Kvartal complex in Naberezhnye Chelny has three floors, covers 40,000 sq. m and has an estimated 40 retailers with the anchors being Perekrestok, Sportmaster, Cinemapark, Snezhnaya Korolyova, M.Video and Game Zone. The second project of the chain, a two-storey building measuring 26,000 sq. m is expected to house 40 retailers, with the anchor being a DIY hypermarket. The Torgoviy Kvartal at Domodedovo will have three storeys, will measure 25,000 sq. m and the anchor tenants will be a supermarket, a home appliances store and a cinema. The complex in Vladimir will have four storeys, will measure 20,000 sq.m and have a supermarket, multi-screen cinema, panoramic restaurant, sports shop and food court as anchors.

From the point of view of strategic marketing the name of the chain is very important. According to Anatoly Vasilev, for advertising and PR it is more favorable to promote a chain under an umbellate brand than projects under different names. The name makes the developer and its product noticeable on the national market. A clear name is important in attracting shoppers. The name should be memorable and thus as neutral as possible, fitting in with the culture of the whole country. Successful examples include Kalinka-Malinka and June.

At the same time experts believe that it can be dangerous for the brand of the chain of shopping centers to be too familiar. As Tatiana Skok explains having an already successful project may make it a hostage in the development of other projects.

Retailers and Regions

A balanced pool of tenants is one of the conditions for fulfilling a chain project. "Professional retailers are interested in expanding the borders of their business and in our projects we only attract professionals," says German Krasheninnikov. According to Alexander Timofeyev, general director at MT development, you should firstly select tenants who already have premises in the cities where you pan to open the complex, then franchises and then finally those that plan to expand their business.

However, there will not be a unified group of tenants in every single shopping center of the chain, as each tenant defines the development of its own business and entering a particular regional market may not be in its plans," says general director of elite real estate company New Quality, Vyacheslav Limonov. For example in the Mega malls in Moscow, hypermarket Auchan is the anchor tenant. However, having created a clone in Kazan the developer has altered the project by placing hypermarket ramstore as the anchor. The reason for this was that Auchan refused to be located in this city.

According to Irina Kirsanova, as a rule, any shopping center chain concept is developed from the anchor tenants. The anchor can be either a national or local chain. For example the Fiesta shopping center in Chelyabinsk will have Lightening hypermarket as its anchor tenant. Anchors attract other tenants. The question of logistics - the delivery of goods - remains open. Not all tenants expand to the regions. "Even in such cities as Chelyabinsk and Krasnoyarsk, where the population exceeds one million, a lot of tenants are franchises, as it is not convenient for all tenants to transport goods a long distance," Irina Kirsanova added.

Roman Cheptsov considers the reason not all trading operators are ready to expand to the regions is due to the difference in the standard of living. It would be necessary for operators representing well-known trademarks in the capital to partially change their range of goods to suit local demand in the regions. "For this reason trade operators of gallerias in regional shopping centers are more significantly represented by local players," he said.

However Alla Glazkova considers that with the present active development of the warehousing real estate market the question of logistics is not as significant as it once was and tenants do not face big problems concerning the delivery of goods. "Besides this the market in Moscow is almost saturated and therefore it is necessary for retailers to expand into the regions in order to develop," she said.

As far as rental rates are concerned, there is not a big difference in the rates of chains and individual projects, says Andrei Bushin. In the regions rental rates are less, however in certain segments the difference s insignificant. Rental rates in the largest shopping and entertainment complexes in moscow city centre are 15-20% more than those in the third ring-MKAD are, irrespective of whether the project is part of a chain or not.

In different cities, rental rates for shopping centers that are part of a chain, usually differ depending on the location, the competitive environment and other factors that define the level of rental rates for non-chain shopping centers," says Olga Yasko. In forming the rental policy of every shopping center it is necessary to not only consider the general pricing policy of the chain but also the current market situation in the specific city," German Krasheninnikov says.

How to manage?

If there are problems in managing a project it is unlikely the project will be profitable for the chain. According to Alexander Timofeyev, there are 3 management models for shopping center chains. Either the head company manages the complex, the proprietor forms a management company or the management of the project is outsourced.

An obstacle in the development of outsourcing in the management of commercial real estate is the small offering on the market. Currently only the industry as a whole is developing and there will come a time when developers will understand that each sector needs to focus on its own development; developers on construction, consultants on developing concepts, and management on increasing profitability.

Currently in Russia the first two of the above mentioned models are the most widely used. According to Alla Glazkova, more often the company that developed the chain engages in its management. "We created a management company due to the experience we gained in realizing our first project, fashion mall A'stor Plaza in Rostov-on-Don," says German Krasheninnikov. "The management company we created is already taking part in our the projects of the Kalinka-Malinka chain. Our company develops services for the management of real estate as an independent business."

The management of shopping centers under a management company has a number of advantages. It allows the optimum organization of logistics, the use of tried methods and also provides unity of the image of the brand in different cities," says Roman Cheptsov.

According to Tatiana Skok, a management company regulates mutual relations with tenants in all the shopping centers of the chain, giving legal and administrative support and joint promotion on the regional market. "It is convenient for both the proprietor of the shopping center and for the tenants in so far as communication and solving any problems that may arise.

Is it profitable?

Carrying out a chain project is an effective move for developers. In Andrei Bushin's opinion, the main advantage of participating in development projects of chains is the lower costs in developing the concept, brand and company style and a reduction in time on the designing of the shopping center. The presence of an already existent chain makes it easier to obtain credit and in attracting a general contractor and therefore discounts on all areas of work carried out.

"The savings for a developer can be quite significant, as it is necessary to make only a few adjustments from project to project," says Alla Glazkova. According to Krasheninnikov, the savings a developer can make depend on the level of individuality of each shopping center in the chain. It is possible to save not only on the development of the brand and general concept but also through prepared architectural blueprints for each center and at the brokering level through chain agreements with tenants.

According to Alexei Belousov the promotion of several projects of a chain make it easier for the developer to optimize expenses on advertising and the buyer is offered more choice.

However Vyacheslav Limonov thinks differently. According to him, there are no savings to be made in a unified concept of a chain of shopping centers as each shopping center has its own floor space specifics. Anatoly Vasilev also agrees. Before entering a new it is always studied, only then are specific features defined. The conditions of a project differ; therefore to transfer a project from one region and make its twin in another is impossible.

On the other hand developers can gain experience in developing projects and can transfer operational and IT technology from one project in a chain to another. Time can also be saved on designing the premises and its facade. Development of the brand is an expensive part of carrying out a project and developers using a single brand for a number of projects will not have to budget for this in each separate project.

The most significant advantage of chain projects according to Vasilyev is that they are more profitable to sell. The value of 10 separate projects is considerably less than the value of a chain consisting of 10 shopping centers, says Alexei Belousov.