Imaginative property development strategies are increasingly important to the multiples as they seek to squeeze more revenue from their considerable real estate assets says Sarah Cunningham The supermarket groups have got millions tied up in bricks and mortar, and as the competition continues to intensify, they are all trying to make those assets really sweat. Whether it's elaborate store extension programmes, complicated sale and leaseback arrangements, or head office relocations, the bosses of these property rich groups are looking at ever more ingenious ways of getting more out of their portfolios. Unlike their non food counterparts, the grocery multiples have traditionally sought to buy property freeholds to build in long-term security and avoid the sort of rent standoffs that hit the high street on a regular basis. When the major supermarket groups have in the past talked about making their assets work harder, the holy grail has tended to be increasing sales at existing stores. Safeway is one multiple that has embarked on just such a crusade. It has the lowest sales per square foot of the top four supermarkets, at £15.66, and chief executive Carlos Criado-Perez has quickly concluded that rather than adding revenues by building new stores, the existing stores simply have to work harder to add the £5-£6/sq ft of sales to take the company to the industry average. Capital expenditure has been cut from nearly £300m last year to £200m, and most of that will go on improving the current store line up. Only two new outlets will be opened ­ an 18,000 sq ft relocation in Wimbledon and a 33,000 sq ft new store in Woking ­ and just three extensions are to be built. New property chief Martin Baker says Safeway still owns a valuable landbank with consents in place for building and for some extensions. But while plans to develop the landbank have been shelved, Safeway is unlikely to sell the sites because of the difficulty of obtaining permission to build from scratch. Baker does not see any need for Safeway's relatively small average size of store (22,000 sq ft) to be increased in the near future. "We just need to get our core offering right," he says. Safeway, Baker argues, is at a different stage in its development to Tesco and Asda. "There is an inevitability that as you become mature you have to look to other areas. In the case of Tesco and Asda, that is non food," he says. And that requires larger stores. The newly revamped Asda Wal-Mart Supercentre in Bristol, opening at the end of July, is a classic example. Take a big store, make it a bit bigger, change the layout, add more non food, change the name, and (you hope), bingo. There are plenty of novel variations on this theme. Look at Sainsbury. It is opening larger food stores to satisfy customer demand for a huge range of goods by beginning to convert its Savacentres into larger than normal supermarket branches. In some cases, space at the Savacentre site has been sold off, consequently raising cash, keeping costs down and increasing the variety of services on offer, but nonetheless creating a much larger food dominated store than the company would be able to manage if it were building from scratch. Sainsbury has been at the forefront of much of the property rethink under way in the sector, with the announcement in February that it was raising £340m through a sale and leaseback of 16 food stores that will give it far more flexibility than previous such deals. As part of its new arrangement, the group will be allowed to redevelop properties without seeking permission from its landlords and substitute other stores within its portfolio. It has also fixed its costs, with rents set to rise 1% per year through the 23 year lease. Sainsbury sold the stores to two special purpose vehicles formed by its adviser Morgan Stanley Dean Witter, one of which will purchase the freeholds, while the other will buy the leaseholds. The supermarket chain already had a joint venture arrangement with British Land under which it had taken a number of its stores off its balance sheet. However, the group said this structure proved unsatisfactory because it remained hostage to upwards-only rent reviews which were unpredictable and would be much higher than the rate of inflation. The British Land arrangement has also inhibited Sainsbury's ability to refurbish stores to keep up with customers' changing needs. At a stroke, the multiple appears to have solved this Catch 22 situation. It has avoided the traps of upward only rent reviews and other traditions of retail property management that favour landlords. But at the same time it has freed up assets that would otherwise be tied up in the business as bricks and mortar, unavailable for investing in other developments, and so unrecognised by the stock market. And, unlike the sale and leaseback deals undertaken in the past by other retailers, Sainsbury will not be highly vulnerable should sales dip, leaving it with relatively high fixed costs. The new deal is part of a wider effort by Sainsbury to revise its way of dealing with its £5bn worth of property assets. The property side of Sainsbury is being moved into a separate business unit with its own strategies, cashflow and profits. "If you look at Kingfisher, Shell, Marks and Spencer, the BBC, it is the route everyone is going along," says property spokeswoman Jane Blower. The aim is to make the most of each property, either through more of its novel sale and leaseback arrangements, or through forming partnerships to develop office, residential or leisure facilities at sites. The new approach has allowed Sainsbury to think what was previously the unthinkable ­ selling the Stamford Street hq on the South Bank of the Thames, its greatest single asset, and moving everything under one leased roof. Sainsbury's decision to develop a separate property division mirrors action taken by Marks and Spencer last autumn when property became one of five individual profit centres and the business began a review of its whole £3bn portfolio. It has hired a new property asset manager, Stuart Anderson, from Legal and General. So far M&S has sold its Gyle shopping centre in Edinburgh and some non-trading space in Newcastle. All other options, including sales and leaseback and securitisation, remain under review. Other options could include selling or redeveloping its Baker Street headquarters, but no decisions have yet been taken, says a spokesman. It makes sense that the two retail players who struggling most are also among the most imaginative when it comes to rethinking how a massive asset base should best be utilised. Over at Tesco, the country's top retailer, you'll find plenty of action, although on the face of it, none as extreme as that under way at Sainsbury and M&S. Store extensions to create more Extra hypermarkets forms an important part of Tesco's overall strategy, as does its launch of home shopping. What's that? Home shopping is suddenly a property thang? Yup. By choosing to fulfil orders from stores rather than from pick centres, Tesco has found another clever way of making its stores work harder rather than investing in expensive new bricks and mortar assets. As more grocery shopping goes online, all of the store groups will need to rethink the contribution their property portfolios can make in this area. Nevertheless, the possible impact of a dotcom future is still way down the list of worries for the property folk at the multiples. And their biggest concern is not, it seems, lack of new sites. Sure, planning restraints mean prime food retail sites, particularly for large stores on freehold land, remain at a premium. But the amount of new build is still considerable: Tesco is storming ahead with a 1 million sq ft opening programme this year, and Sainsbury and Asda are opening just over half as much each. At the same time, large stores come up for sale with surprising regularity ­ witness the Somerfield auction, and the store disposal programme announced only last month by CWS. No, the really big worry for the sector is whether the Department of Trade and Industry will, on the back of the Competition Commission's imminent report, force chains into making some property disposals. It has long been thought one of the very few ways the DTI could create more local competition would be to go down this route. Some industry insiders believe it is more likely the government will decide new sites have to be divided up more evenly among competitors, leaving old sites as they are. And if they are let off the hook and are not forced to restructure their property assets? You can expect more novel thinking in the sector about how to make the most of those millions of square feet of space. {{COVER FEATURE }}