. Last Updated: 07/27/2016

Mega Mall Managers Blast IKEA on Way Out

VedomostiRetailers at the Mega Mall spend as much as 40 percent of their sales revenue on rent, while the industry standard is 12 percent.
Mega Mall has lost two of its top managers, who warned that the IKEA-owned complex risks losing a number of its 250 tenants if it alienates them through stifling rents and prickly management policies.

Jeff Kershaw, former manager of the shopping center, fired a few parting shots Thursday after he and Tom Lange, the project's marketing director, left under a mutual agreement with the Swedish furniture retail giant. The two U.S. executives had spent only nine months at the helm of the mall, which is the largest in Eastern Europe and cost more than $250 million to build.

"It was made clear to us that we needed to leave," Kershaw said.

Kershaw said he and Lange were hired to help get the mall up and running as a result of their decades-long careers in shopping center management. Their contracts had been for three years.

But as soon as the project got on its feet, IKEA no longer wanted to pay their premium salaries, Kershaw said.

Lennart Dahlgren, head of IKEA in Russia explained the managers' departure in terms of the company's corporate culture. "IKEA has a very special culture that is for very many people difficult to accept because it takes a lot out of you," he said.

Mega Mall was trumpeted as a shopping mecca when it opened in December. Retailers were quick to rent space and anticipated large returns.

But business has been disappointing for many of them. While weekend sales are healthy, tenants see only a trickle of shoppers on weekdays. Many expected that IKEA would lower rents, Kershaw said, but IKEA refused to do so.

Tenants' experience at Mega ranges dramatically, with some claiming that their outlet there is their most profitable in Moscow while others say they struggle to make ends meet.

Kershaw said the strategies that make IKEA a successful retailer are not necessarily suited to making it a good landlord.

IKEA's policy is to sell goods at the lowest possible price and to make up for small margins with high volumes, which is inapplicable for small retailers, he said. He said IKEA makes a mistake in not taking other business models into account.

Some tenants, wanting to leave but unable to escape their tenancy agreements, are seeking to sublease some of their space. Retail rents in Mega range from $350 per square meter per year to $3,200 per square meter per year, depending on size and location.

Alexei Zhekharev, manager of Mega's Starik Khottabych home improvement store, said his store had reduced its occupancy from 1,800 square meters to 1,000 square meters. Even though it has scaled back its presence, it is still bound by contract with IKEA to rent the whole space and is therefore hoping to sublet the area it vacated.

Kershaw said that while the rent paid by large tenants, like Sportmaster and Tekhnosila, is calculated in proportion to their sales, those of smaller tenants are fixed and in some cases amount to 30 percent to 40 percent of sales revenues.

This leaves many small shops starved of cash. Market analysts say viable retailers spend about 12 percent of their sales income on rent.

Many of the tenants lining the mall's 2-kilometer stretch of storefronts "can't pay their employees and can't buy merchandise," Kershaw said, which is a problem because smaller retailers often sell fashion items that quickly go out of style and inventories must be refreshed.

Still, Spanish fashion house Zara, which is operated at the mall as a franchise by Finland's Kalinka Stockmann, is thriving.

"We are doing better than in Helsinki," said Kati Varhee, manager of Zara, which opened in late February. "We are selling more than we expected."

More than 60 percent of Zara's sales come Friday night and on weekends, she added.

Since shopping malls are a relatively new phenomenon in the country, not all of Mega's tenants are accustomed to managing stores where there is no steady stream of customers.

Varhee said she thought this could be at the root of many tenants' dissatisfaction.

Dahlgren said Mega Mall got off to a rocky start, partly because the parking lot south of the mall was not ready in time for the opening and that caused major traffic congestion.

"It was chaos," he said. "We didn't dare to do marketing that would have brought more people in."

Dahlgren said he expected that as other kinks are worked out and more stores open, greater numbers of shoppers and tenants will be drawn to the mall.

A connecting road between the mall and the Moscow Ring Road, along which it is located, is expected to open shortly to give motorists better access to the complex. In August, the 3,500 seat, 11-screen Kinostar cinema and a Detsky Mir department store will open. OBI, a German chain of do-it-yourself stores, will open a franchise in September.

Yulia Nikulicheva, senior research analyst at Jones Lang LaSalle, said it often takes six to nine months for a new shopping center to establish its business and solidify relations with tenants.

The Atrium shopping center at the Kurskaya metro station also had to adjust some of its leasing strategies after opening a year ago, she said.