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The Economics of Shopping Malls

Posted on May 07, 2019 by Saumya Omer  | Academics | Blog

Classification, Effect of E-commerce, and the Growth of Malls

I spent my childhood in a small town, one that almost always lagged behind when it came to catching up with the latest developments. To give you some idea of what I mean, while the first Pizza Hut opened in India in Bangalore in 1996, my city witnessed the arrival of the restaurant chain in the year 2012.

Another huge fad during my growing-up years was shopping malls. I remember reading in the newspapers about mall openings in cities like Mumbai and Bangalore and wondering when I would experience the same thrill of visiting such a dazzling place in my city.

My wish was fulfilled in 2002 when the first shopping mall launched in Kanpur. I can clearly recall being utterly fascinated by the sheer variety of outlets one single place could accommodate, and as a 10-year old, I realized then that shopping will never be the same again. As a kid, though, I was oblivious to the economic phenomenon that these centres represented.

One of the most popular haunts for people of all age brackets, shopping malls have been a boon for consumers and producers alike. For the former, by providing an aggregated platform to browse through their favourite brands and for the latter, by providing a large audience which is attracted by the multiplicity of shopping and other entertainment options. The concept alone makes it a highly interesting arena to analyze.

After taking up economics as an elective in school and gaining a basic understanding of the subject, I could finally wonder, what constitutes the economic foundation of your preferred shopping mall? What laws of economics govern them, and what defines their growth in the overall economy? How did they come to be vis-a-vis our local kirana and retail stores?

Let's take a look at and answer some of these questions.

Classification of Shopping Centres
There seems to be some agreement, in literature, about the three classifications of shopping centres – district, local and convenience. There is also some inevitable overlap among them, but the classification broadly holds good.

The district shopping centre is one that services more than 20,000 families. The local shopping centre serves between 1,000 and 4,000 families in an area which is approximately one kilometre in diameter. And the third type, the convenience shopping centre, encompasses small groups of stores placed in locations that are less than five minutes' walk from the residential area which they serve.

Analysis of Shopping Malls
Proposed in 1931, long before the modern shopping malls came to life, Reilly’s Law is a relevant tool to generally analyse the economics of shopping malls. According to the heuristic developed by William J. Reilly, “customers are willing to travel long distances to larger retail centres given the higher attraction they present to customers.” Like in all laws governing areas which deal with human behaviour, this law too is based on certain assumptions; principally, The law presumes the geography of the area is flat without any topographical undulations to alter a consumer's decision of where to travel to buy goods. It also assumes consumers are indifferent between the actual cities.

Mathematically, the law is depicted as
Break Point Formula
where BP is the distance from the city A to the break-point. To understand what a break-point implies, let’s take an example. Consider that you were shopping from a store (let’s call it store A) but forgot to buy a particular item before leaving and remembered about it while travelling towards another store, say, store B. Now, the break-point will be the point at which you decide to opt for store B instead of store A due to its notional gravity, which could anything from the size of the store to the number of options available there.

The Law of Retail Gravitation primarily allows for trade area analysis and mapping using the distance between the cities and the size of the population of each city. Two cities of equal size have a trade area boundary midway between the two cities. When cities are of unequal size, the boundary lies closer to the smaller city, giving the larger city a larger trade area.

Like all theories though, Reilly’s Law has its limitations, but it did pave the way for more advanced theories like Huff’s Model of Trade Area Attraction (1964) and others which acknowledged the role of factors like market and customer heterogeneity, store ambience, service quality, and brand equity.

Will Shopping Malls Replace Kirana Stores?
The subject of economics tell us that India is a price sensitive market, and in such a scenario the question that often comes to mind is whether the ambience and shopping experience of malls beat that of 'kirana' stores? 'Kirana' stores target the masses whereas organized retail services cater to higher-income strata of society. In other words, kirana stores depict a convenience store in the classification of shopping centres.

While kirana stores have a more personalized touch, as your friendly neighbourhood kirana shop owner might know you personally, shopping malls offer an experience that remains unmatched by these small stores. A person visits the mall to take pleasure in and explore the grandeur of options available to him, spending quite some time before exiting

Kirana stores, however, are meant for short shopping trips, usually for daily household items. However, here too, with ‘grocery malls’ like Big Bazaar and Reliance Fresh offering a far superior experience with a lot more variety, kirana stores are fast losing their recall in customers’ minds.

Kirana stores, however, are meant for short shopping trips, usually for daily household items. However, here too, with ‘grocery malls’ like Big Bazaar and Reliance Fresh offering a far superior experience with a lot more variety, kirana stores are fast losing their recall in customers’ minds.

How E-Commerce Affected Shopping Malls
The advent of e-commerce in India once seemed to pose a threat to physical retail, thus raising the doubt that ‘shopping malls’ would soon go out of business. Not only has that not happened in our country, but it has also seen a significant revival with giants like Amazon and Alibaba investing in offline retail.

The primary reason for the resurgence of shopping malls is similar to why they initially became a hit with consumers - a holistic shopping experience. While e-commerce sites offer heavy discounts and the convenience of shopping from your couch, malls offer consumers a ‘look and feel’ of products, and also serve as entertainment hubs. A middle-class family considers going to the mall as a day expedition - they get to spend time exploring an array of retail outlets, kids enjoy their time in the gaming zone, and the day ends with a dinner at one of the restaurants within the mall. With more big brands entering into the retail segment, the time that people spend in the malls is only going to increase.

Growth of Shopping Malls
The Indian Shopping Mall industry has seen a significant rise since the turn of the millennium, with the number of malls shooting up exponentially to more than 500 in 2017 from a meagre 5 in 2001-02. The retail industry saw an influx of over $700 million in the period Q1-Q3 in 2017, contradicting the initial premonitions that online retail would render offline retail obsolete. The Indian retail sector, in fact, is projected to grow from US$ 672 billion in 2017 to US$ 1.3 trillion in 2020, on the back of factors like rising incomes and lifestyle changes by the middle class and increased digital connectivity.

The shopping mall industry in on the rise again, owing to high demand for a superior customer experience, penetration of big brands into Tier 2 and Tier 3 cities, increase in ease of doing business due to liberalized government policies for the retail sector, along with the growth in organized retail due to entry of global players.

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