Market Know-how: A Game for Team Classification

Until recently the primary goal of developers was to get a site for the construction of a shopping center and to realize the conceived project. The deficit of shopping premises on the market automatically provided the proprietor of the center with the necessary number of tenants. And also buyers, who are actively involved in the whirlpool of civilized shopping, and refuse to go to markets.

"Many shopping centers open when there is a deficit of quality projects, and therefore for the majority of Russian cities the opening of a modern shopping center is already a serious event," says Ilya Shuravin, a partner at S.A. Ricci/King Sturge. But the speed at which developers are building shopping, in order to make money from the deficit, has increased competition between existing and new shopping premises. "The bigger the competition, the more advertising a shopping center needs," notes Nikolai Volchkov, the general director of Torgovy Kvartal. In the new conditions, according to Igor Mankov, the head analyst at investment group AG Capital, the competent professional promotion of shopping centers, including by methods approved in the western market, are important.

That’s how it’s done in Europe

The promotion of shopping centers in Europe is carried out by distributing the marketing budget between the tenants. According to Olga Shirokova, head of the consulting, analytics and research department at Blackwood, the financing of all events is carried out exclusively by the tenants, but the management and organization of promotion are incurred either by the operating company or by an organizational society consisting of representatives of the tenants. For example, that’s how operating company Larry Smith in Megalo Chieti Los Santa Filomena shopping and entertainment center (Italy) works. The system of joint promotion allows the proprietor to compensate the marketing expenses of the center.

Volchkov explains the western technology: an operating company develops and submits for approval to tenants an annual marketing plan and a budget for the promotion of a shopping center. The approved program is fully financed at their expense. The contribution of each tenant is calculated as ratio of the premises rented by them to the total rented premises of a shopping center. This share is fixed in the marketing contract, which allows the tenant to precisely understand the expenses of the annual marketing budget under this clause.

All functions of the promotion of a shopping center, according to the approved plan and within the limits of the budget, are incurred by the operating company. It presents a quarterly and annual report to the tenants on events carried out, their efficiency and the development of the budget.

As the managing company acts as an agent operating in the interests of all the tenants of the center, a clause for the payment of the agency is included in the annual marketing budget. According to Shuravin, the nature of the system of joint promotion lays in the main principle of forming rental financial streams proceeding from actual commodity circulation generated by a shopping center for the tenant. This commodity circulation is connected to not only the success of the architectural decision, structure of tenants and other indirect factors of success of a shopping center, but also to actual consumer streams, which can only be stimulated by an effective marketing strategy.

That’s how Russian developers did it

In Russia, the conceptual model of construction of shopping centers was borrowed from the West. But after opening them they prefer to manage the premises themselves, without involving operating companies. Proprietors believe that only them as the owners of the real estate can correctly organize the business, and that the presence of an operating company is an additional expense. Therefore, even in those shopping centers where operating companies have been hired or created, their functions are reduced to solving problems connected with the operation and maintenance of the buildings, collecting rent, etc. All questions connected with the optimization of income, the promotion of the shopping center, etc, are controlled by the proprietor.

According to Volchkov, tenants have their own advertising budgets and either participate or don’t in the promotion of the shopping center. "Although by advertising the shop, the tenant simultaneously advertises the shopping center where it is located," he notes.

The commercial real estate market in Russia initially focused on fixed rental rates. According to Mankov, expenditures on the promotion of a center are currently included in the rental rate. Therefore the proprietor allocates the budget for these purposes and defines the strategy of the advertising campaign at their own discretion. According to Evgeniya Vlasova, a managing partner and director of Svatski, "as a rule, a big advertising campaign for a shopping center is carried out when the premises is opened to position the center on the market and attract buyers." When it is an existing shopping center with an established stream of visitors and tenants are comfortable in terms of sales volumes, the proprietor, as a rule, holds periodic advertising events on holidays. As for the promotion of shops, tenants do this themselves or within the limits of the brand’s advertising campaign.

However Vlasova provides the Midland Plaza shopping center as an example of where the advertising events of a shopping center have been consolidated, where the proprietor and tenants have formed a joint advertising company and by joint investment in the budget, promote the center with advertising events on holidays or by days of special discounts. But Vadim Prikhodko, deputy director of marketing and rent at RTM Development, explains, since the proprietor itself or on behalf of an operating company, usually does not take any separate payment from tenants for the center’s promotion, accordingly, it does not approve any advertising campaigns with them. For example, for operating company RTM Management, the main criteria of estimating the efficiency of a promotional program are the results of visitor counters that are placed in every shopping center. The counters are serviced by independent companies, and it is possible to take readings from them in real time. "We provide good attendance to a shopping center, but attracting visitors to a shop is the problem of the tenant," he says. But Mall Marketing considers that in the last few years under the orders of shopping center proprietors, operating companies have simply raised rental rates by 15, 20, 25 per cent, and retailers, limited in choice of places to open stores, are forced to pay. Therefore there is no necessity to accept additional marketing programs. As a result, tenants are wary of any undertakings connected with advertising, perceiving them as another "swindle" by an operating company. And prefer to carry out their own advertising campaigns.

Prikhodko agrees that currently shopping centers and independent trademarks have absolutely different advertising programs. Tenants still don’t understand the difference and consider a promotion plan of a center only from the point of view of its own benefits. "The purpose of an operating company is to maintain consumer attendance to the whole shopping center, the purpose of the tenant is to direct a stream of those visitors to its own shop," he notes.

Schemes and expenditures

According to Shirokova, several schemes of interaction between tenants and developers (on behalf of an operating company), aimed at the promotion of a shopping center are now being used. The least civilized form is when landlord simply collects money (in unstable volumes) for specific advertising events. This practice is not very efficient as the majority of tenants evade payments. "It is characteristic for non-conceptual shopping centers where in the structure of the tenants there are many individual businessmen, and management is inefficient," specifies Shirokova.

A more prospective scheme is the formation of a uniform marketing budget, maintained through obligatory payments stipulated in the rental contract in advance. The planning and organization of events is carried out by an operating company, which partially finances advertising programs. The share of each tenant - similarly to the European system - depends on the occupied area.

Alexander Dyachenko, director of the development department at elite real estate agency Welhome, adds: the tenant of a shopping center is offered a contract in which he has to pay a certain percentage from the annual rental rate for the formation of a marketing budget to an operating company or other structure created by a developer. The proprietor or operating company reports to the tenants the results marketing events that are carried out.

"But the budget for the promotion of a shopping center is formed not only from the payments of tenants as is accepted in the European model. It is also financed by the proprietor of the shopping center," emphasizes Dyachenko. Alexander Osipov, head of the consulting department at Astera, has told about another practice that has arisen: in conceptual shopping centers at the conclusion of a rental contract, a fixed payment (up to $30 per sq.m a year) or 3-7 per cent from of the rental rate is defined for marketing expenses. The operating company forms an annual budget and is completely responsible for the realization of the marketing strategy of the shopping center. Also a separate fixed "opening" fee is payable - its size depends on the prospective grandeur of the opening ceremony and is shared between the tenants. For example, according to Astera, a performance by Dima Bilan at the opening of a shopping center costs approximately $25,000.

If the level of expenses for marketing does not suit the tenant then it can discuss the rate and try to lower it by $3 on each sq.m. "If the tenant has signed a contract, it means it is completely satisfied with this system of forming a marketing budget," Osipov emphasizes.

According to Mikhail Gets, managing partner at Novoye Kachestvo, in Russia the following scheme is also used: tenants give products and services instead of money to a PR program. For example, when a PR program is held on the Child Protection Day, Detsky Mir provides toys. "For tenants, to take part in a PR program by providing goods and gifts is easier than going through a long process of approving a budget within the company," he says.

Everyone for itself

In the opinion of experts, the interaction of tenants and operating companies in the promotion of shopping centers, as in Europe, is not quite suitable for the Russian market. Mankov notes that this model was partially attempted to be introduced in Atrium and before the sale of the Global City shopping center, but was subsequently rejected. Russian tenants are not ready to incur additional financial burden, preferring to build their own promotion strategies.

One of the main reasons for such individualism Prikhodko attributes to the fact that many Russian companies have semi-transparent financial documentation. "Between the tenant and operating company there is no trust, therefore tenants think that they are used to make profit, and start to repeatedly check offered plans and budgets," he explains. "Russian operating companies differ by opacity of business dealing, the absence of reporting on the realization of the marketing budget, and sometimes there are no promotional events of the shopping center at all,” says Osipov.

In Prikhodko’s opinion, according to western principles an operating company should offer tenants a marketing plan for approval, which it will realize within a year, and a corresponding budget, according to which the tenant should contribute specified funds each month for the realization of the promotional program and operation of the building. Tenants may not be completely satisfied with the offered plan on the whole or with some details of it. The estimation of efficiency of the planned events can cause questions, in fact everyone estimates the efficiency of promotion, proceeding only from its own interests. Tenants also might not be satisfied with the contractors who will directly be engaged in the advertising of the premises, both in price and quality. The share of everyone in a jointly financed marketing plan is always a contentious issue. "All these questions demand from the operating company persistent negotiations, literally with each tenant, and makes the process of approving the annual plan and reporting on it not only long and labor-consuming, but also very expensive," emphasizes Prikhodko.

In practice far from all proprietors soberly value the necessity of using marketing payments from tenants as a practical way of maintaining the marketing budget of a shopping center. Some of them have successfully added this clause of charges to the contract, but it does not effectively increase the quality of advertising. "Marketing payments frequently only veil part of a base rental rate," says Shuravin. According to him, when signing a contract, tenants consider each payment not separately, but all together, in view of all the privileges and expenses. And irrespective of the existence of marketing deductions expects the proprietor to hold promotional events of the shopping center.

Maxim Brusov, director of the investment department at MIEL - Commercial Real Estate, considers that the western scheme will become effective when rent is paid in the form of a percentage of the turnover of the tenant. "Such conditions promote interests in promoting the premises for both the proprietor and the tenants while fixed payments, as a rule, already include the costs of marketing promotion, and it’s not always possible to charge the tenant for additional expenses," he emphasizes. Although Shuravin assumes that shopping centers in Russia will gradually reach Western standards in terms of the calculation of the rental rate, where there is fixed rent and a percentage of turnover (as a rule, 7-11 per cent, depending on the brand and segment), and in this situation the proprietor will be much more interested in the effective marketing of the project.

According to Volchkov, in Moscow’s Mega, Evropeisky, and Lotte Plaza shopping centers, where progressive methods of work between tenants and an operating company have been constructed, there is a bright marketing program of promotion. "In the regions, the promotional marketing of a shopping center is much poorly developed," he adds. Dyachenko agrees that in Moscow the western scheme of work can be used only in new shopping centers, which are more liquid, have a good concept and high status.

" In such objects there are waiting lists, therefore many companies compelled to go on the conditions offered by the proprietor even if at times perceive them as enslaving ", - he marks.

Advantages, disadvantages and doubts

In tribute to the European model of promoting a shopping center, Shuravin nevertheless says, that the system might not suit anchor tenants who have their own marketing budget, but also always hold PR events when they open new stores. "In some cases anchor tenants accept marketing expenses at a rather high rental rate, however they demand detailed reporting on marketing expenses," he says. Between the operating company and tenants there can be disagreements both on the strategy of promotion of a shopping center, and on separate clauses of a marketing budget," says Mankov.

"In a shopping center tenants of various structures are presented, some will have similar methods of promotion and advertising, but others may be irrelevant," he emphasizes. With the western system all tenant partially control the marketing policy. In Russia at the moment the majority of non-anchor tenants poorly understand marketing, advertising and PR, and this will lead to operating companies, during the approval of the marketing plan, colliding with a huge amount of nonprofessional advice, requirements and opinions, say analysts at Mall Marketing.

Gets sees the advantage of joint promotion in a coordinated organization and carrying out events in which tenants accept feasible participation. "For tenants the advantage is in the fact that it can reduce its own advertising budget," he says. In Osipov's opinion, there is also a prize for the proprietors of shopping centers: they will not have to spend extra money on marketing purposes. "For a proprietor the consequence of successfully realizing a marketing program and therefore increasing consumer attendance is a way of fixing the loyalty of tenants and buyers and backing up any scheduled increases in rental rates," notes Gets.

The expert considers the numerous approvals required as a disadvantage of the western system. Also, for each tenant, the promotion of its own brand is first of all important and only then the shopping center in which it is located. The promotion of a shopping center may also be directed on one target audience, while the tenant is guided by another. For example, a shopping center may positions itself for a youth audience, but this might not satisfy some tenants so they will carry out their own event.

But if an operating company can prove the efficiency of such a control system and tenants will see real results, they will go with an increase in expenditures, as eventually it will economize their own marketing budgets. "Although an operating company will have to work hard to substantiate the necessity of transferring to such a system," summarizes Mankov.