This article first appeared in The Edge Malaysia Weekly on October 29, 2018 - November 4, 2018

IN an effort to cushion the impact of muted retail sales growth amid a challenging economic environment, one retailer — UK-based Tesco Stores (M) Sdn Bhd — is seeking an alternative source of revenue. The well-established hypermarket operator plans to venture into property development.

This move, involving the redevelopment of one of its larger stores — Tesco Extra Ampang — could signal the first of several similar projects.

Asked by The Edge if it was venturing into property development, Tesco Malaysia CEO Paul Ritchie says, “We are always exploring ways to utilise our assets and this includes exploring opportunities to transform our stores. It is early days for us to comment further.  However, we can confirm that we will continue to serve our customers in Ampang.”

Sources tell The Edge that the retailer, which opened the country’s first hypermarket in Puchong in 2002 via a 70:30 partnership with Sime Darby Bhd, wants to maximise the value of the land it owns and is seeking a property developer to partner and jointly develop the sites. Moreover, domestic retail trends point to a consumer preference for smaller stores.

While this may be the first time a hypermarket operator is doing this in Malaysia, Tesco has taken this path before elsewhere. In September last year, Bangkok-listed property and retail developer Central Pattana Plc, which is part of the Central Group, set up a 50:50 joint venture called Synergistic Property Development Co Ltd with Tesco to co-develop property.

In November 2016, it was reported that Tesco in the UK plans to exploit “air rights” above stores and in its car parks to release value from its property portfolio for new housing developments.

The Edge understands that in Malaysia, one location that has been identified for development is Tesco Extra Ampang, in Jalan Pandan Prima, Dataran Pandan Indah, in Selangor. The building sits on roughly 13 acres or 566,280 sq ft. Industry experts place the value of the land at RM158 million to RM170 million.

So, what will Tesco build and what will happen to the store?

A source points out that just because Tesco plans to redevelop the site, it does not mean that the store will be shut down. “The land is big enough to allow the existing store to operate, while development is taking place around it,” a source says.

It is learnt that the development is likely to be condominiums. The existing Tesco store may be cordoned off so it continues to operate while a new store and condominium are built. Once this site is ready, the store can be relocated to the new site while the old store is demolished for redevelopment.

As to whether it is a good time to build, an industry expert says, “The location is better for affordable homes, which is the sort of property people need, and not luxury condominiums.” He adds that the property market is likely to have recovered by the time a deal is finalised and the building is ready.

As for the gross development value of the planned development, based on the land size of 566,280 sq ft, a plot ratio of around four and a selling price of RM700 psf for the condominiums, a back-of-the envelope GDV is RM1 billion to RM1.2 billion.

According to a source, documents inviting expressions of interest (EOI) have been sent out to property developers to submit their proposals. It is learnt that the closing date for the EOI is mid-December.

Which store could be the next to be redeveloped? A source says it is likely to be one located in the Klang Valley. Tesco has a total of 56 hypermarkets, nine Tesco Express stores and seven grocery home shopping centres. The retailer owns the majority of the hypermarkets it operates, including the stores in Puchong, Selayang, Ara Damansara, Mutiara Damansara and Kepong.

Tesco enjoyed seven straight years of profitability in Malaysia before slipping into the red in the financial year ended Feb 28, 2015, due to a tougher market and impairment losses. As depressed consumer sentiments and fierce competition ate into the revenues of large format retailers, the retailer continued to post losses in FY2016 and FY2017.

In 2016, Tesco kicked off its three-year transformation plan to help narrow losses. This included the introduction of its New Generation Store concept to strengthen its business in the fast-changing retail industry, encompassing all areas that will improve the customer experience, ranging from business structure and operation to people and stores.

Tesco Plc, in its 2017 annual report, said top-line sales growth in Malaysia was held back by weak consumer spending across the market and a trend away from large stores towards convenience shopping, where it is currently under-represented.

This was reflected in its performance. A search of Tesco’s filings with the Companies Commission of Malaysia shows that in FY2017, it posted a net loss of RM136.71 million on the back of RM4.45 billion in revenue. Three years of continued losses brought accumulated losses as at the end-FY2017 to RM545.47 million. Tesco’s total liability as at February last year was RM3.92 billion, of which RM2.7 billion was current. The retailer has yet to file its results for FY2018.

Tesco Plc’s interim report states that for the six months ended Aug 31, 2018, Tesco Malaysia’s revenue in the first half was RM2.067 billion. 

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