Guiding Lines: Local Scale Shopping

Garant-Invest is also building corner shops. Its chain of Moi Magazin stores totals 15. There are no major differences in these projects. Of course, local shopping centers work round the clock, their area is larger than the area of corner shops, they are in detached buildings and are occupied by recognized tenants. But in general both projects are similar, like twin brothers.

Nevertheless, the company’s management gathered journalists for a press-lunch in the spring, and announced among other achievements, the corporation’s success with its local shopping centers project. President of Garant-Invest, Alexei Panfilov, emphasized that the project makes good profit and effectively makes returns. According to him, it is a new, dynamically developing format. People visit these local scale shopping centers on a daily basis.

A minimum set of necessary services is proposed by them: a dry-cleaners, a chemist, a supermarket, a household appliance store, etc. Panfilov explains that it is easier to find attractive sites for such projects, and that they can even be bought on the secondary market. And the financial indicators are higher than in large shopping complexes, the president of Garant-Invest is assured. And a completely new trend abroad is corner shops built in large buildings.

However, answering a question from Vedomosti, Panfilov remarked that one problem with the realization of such plans may nevertheless arise. While the cost of engineering works in constructing a large premises can make up to 40 per cent of the budget, they can reach as much as 200-300 per cent of the budget in constructing small shopping centers, if there are problems with engineering connections. In this case the recoupment of the premises can take four years.

Nevertheless, according to representatives of Garant-Invest, there are four such shopping centers already successfully functioning (on the company’s website two are named: at 62A Shipilovskaya ulitsa one opened in July 2005 and at 2A Proletarsky prospekt one opened in March 2005), four more are at the construction stage, another two will be bought on the secondary market and a few more are at the design stage. Representatives of the company have said that there is already a program for the realization of such shopping centers for next year - to bring their total to 10.

Panfilov also explained that the construction of these shopping centers is within a program being carried out together with the government of Moscow. A tender for the realization of the program was won by the company several years ago. Investments in each premises with an area of 1,500-2,000 sq.m, according to Panfilov, total $4-5 million.

However some market experts call these shopping complexes corner shops. The differences between the two formats are rather indistinct. However, they say that all the same, local shopping centers are needed and will be popular once successfully realized.

Evgeny Obolentsev, a leading consultant in the department for retail real estate at Cushman & Wakefield/Stiles & Riabokobylko, says that already more than two years ago there was a company which set out to construct about 30 shops of the new chain Shagmag in Moscow. But the project was not realized fully. And as a result some shops were not constructed all.

The expert thinks that the issue is in filling the shopping centers. To make maximum returns from a local scale shopping center, the first floor should be completely occupied by a supermarket. On the second floor it is possible to place companies that provide services, a minimum set of chain operators and a small food court.

Such a project will not bring special economic gain, considers Obolentsev, as land in Moscow is expensive. And with such a state of affairs "you will not squeeze out" much from the project. It is possible to use a small spot much more effectively. In the regions it is even worse - in such shopping centers it is local players who are drawn by the excessive rental rates who will most likely go. He considers Garant-Invest’s project on Proletarsky prospekt more like a corner shop than a high-grade local shopping center.

Corner shops are more effective from the point of view of a business project than local shopping centers, considers Alexander Osipov, head of the consulting department at Astera. In his opinion, developers are not lining up to build such shopping centers because it is much more difficult to sell these premises to strategic investors. Direct investment funds specializing in construction and the purchase of shopping complexes are oriented to large scale.

There are several reasons for this. For example, the size of investments. There is only one choice here - it is in the cost of construction because of smaller volumes and the use of building materials of an “easier” level, rather than for large projects. All other investments, such as the cost of planning permission documents, the fee of the contractor, etc., will be equivalent in size to that of a large complex. Only from its sale you will make more profit.

And the consumer usually goes where there is more choice. Someone without transport is hardly likely to buy the only product or brand offered in a local shopping complex. It is possible to interest potential buyers initially of course, but how do you maintain a continual consumer stream? Although, of course, such projects are necessary. It is always more convenient to buy a certain number of necessary food products by your home, to drop your things off at the dry-cleaners or to go the chemist to get some medicine. But the most important factor in the success of such projects will be their location. In fact if you are “in the right place at the right time" tenants of such areas may become quite decent operators.

Polina Zhilkina, director of the analytics department at ADG Group, thinks that a serious problem for the development of regional shopping centers is the land plot for construction. The cost of large land plots outside the MKAD (or by the MKAD) is frequently comparable to the cost of small land plots within the limits of the city center.

On the other hand, it is possible to understand the positive position of Garant-Invest. In fact in local shopping centers, there are not so many large anchor tenants so they cannot dictate conditions. What follows is simple: those who want to rent such areas will pay the proprietor the maximum rental rate. But this opens up another question: will small operators afford these rates? Service providers, dry-cleaners, chemists, hairdressers, etc, are not capable of making huge profits for owners. And so rent may become a real issue for them.

Now in Moscow, according to Magazin Magazinov, the share of local shopping centers (by quantity) compared to larger formats is about 35 per cent. But if we consider premises at the stage of construction and planning, their share is 20 per cent, considers Vyacheslav Katsegorov, head of a research department. This is connected with the fact that developers prefer larger formats.

All the same, demand for retail space remains high. This is forcing developers to construct large scale projects. As a rule, it is easier to supervise a large project where shopping centers are concerned. For this reason this direction is considered more of a priority. But this will only continue while 100 per cent of rental space in large-scale shopping centers is demanded. As soon as the consumer market of Moscow will be saturated, large shopping centers may lose some tenants and, as a consequence, reputation, let alone income, the expert is sure.

It is possible to say that local scale shopping centers in Moscow are demanded. Moscow can make money from these shopping centers because there are practically no good places for the construction of large premises in Moscow. But for these too there are no good places, considers Magazin Magazinov. This is caused by the fact that on such places old retail formats (small markets, retail-exhibition complexes, soviet-style shops) continue to exist.

Any consumer will be happy, when in it has modern shopping facilities in its area rather than old style shops and local markets. During saturation of the market it is also less risky to develop smaller formats, taking into account the fact that corner shops have once again started to become popular.