Tesco turns property developer to transform existing store locations with brands and estate agents

Tesco turns property developer to work with brands and estate agents to transform existing store locations.

Real-estate could be the next core pillar of Tesco’s resurgence plans after it outlined its vision to sell ‘air rights’ to the space above and around its stores to property developers and other ‘complimentary’ brands.

This is arguably nothing new. In 2013, Tesco was behind the development of 250 apartments that sat above a new superstore in Streatham, South London. And it has been entering brand-partnerships with the likes of Arcadia and Holland and Barrett over the past few years.

However, what was clear during a presentation to journalists today (17 November) was that this strategy will be ramped up. Finance boss Allan Stewart explained that it wants to release the value locked into its existing property portfolio to the tune of nearly half a billion pounds, something it hopes will edge it closer to delivering a group margin of between 3.5% and 4%

The redevelopment of its larger superstores would come in two forms. Firstly, the knocking down of an existing car park which it would rebuild alongside residential property developers with the view of creating a block of flats around a new car park.

“We would have a store which is still trading, a number of flats, and parking,” said Stewart.

On a larger scale, it will look to completely overhaul the locations of existing stores. In practice, this would see it block off a significant portion of a store’s carpark and build a new Tesco with residential property above it. Once the new store is operational it would then knock down the old one and transform that into a car park with yet more flats above it.

“It’s called ‘air rights’ – it’s the air above the building that we own – and it’s complex and will take time,” said Stewart.

It has, however, already identified 15 stores ripe for development in urban areas like London.

The retailer is also in talks with third-party brands to let them build on its estate. Tesco gave the example of McDonald’s as one potential tie-up, which could open up a restaurant within the car park of a larger store.

“New retail space serves to attract new customers and creates an environment that’s more engaging,” added Stewart. “This is simplistically shown and planning permission takes time but key elements of this are now happening.”

Stewart expects around to see around 13 of these car-park developments in the coming year, and around 15 the year after.

Crucial to this plan, Tesco stressed, is that it does not require capital expenditure. The supermarket will simply sell the ‘air rights’ and take a portion of the profit.

But beyond simply unlocking the value from its existing stores, this strategy could potentially deliver a pool of new shoppers directly to its front door.

The supermarket has been enjoying a resurgence of late. According to Kantar Worldpanel, it noted a 2.2% jump in sales in the 12 weeks to 6 November.

Chief executive Dave Clarke said it's been on a mission to create a "differentiated brand", and its property development strategy plays into his belief that at the heart of what a customer wants from a shopping trip is the ability to have everything under one roof.

Its also perhaps an attempt to maintain its edge over rival Sainsbury's, which has massively grown its store estate since the purchase of Argos earlier this year.

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