How the O2 plans to conquer leisure with retail

As the O2 prepares to unveil the first phase of its 210,000 sq ft Icon Outlet retail extension on 20 October, senior executives from AEG Europe and Crosstree Real Estate Partners take EG on a preview tour. For years, the O2, in Greenwich, SE10, has thrived on evening trading, but its owner, AEG, has long sought ways to diversify the 1.2m sq ft complex to bring in more daytime footfall.  In the years after the arena’s 2007 conversion from the Millennium Dome, AEG considered several options for its unused space, ranging from super-casinos to theatres, before drawing up plans for retail in 2011. More than a decade after re-opening – during which it formed a jv with Crosstree Real Estate Partners on the scheme in 2015 and secured a £185m debt facility with Lloyds Bank – the partnership is finally opening the doors on 20 October to a 210,000 sq ft extension, called Icon Outlet. The first phase of the two-storey retail and food and beverage expansion, comprising 53 aspirational, lifestyle and fashion outlets on the upper level, will debut on 20 October; the lower level, which houses the remaining 32 of its 85 units and will offer primarily F&B and sportswear, will open in March 2019. When the second phase launches, the new extension will complete a “doughnut” of space surrounding the core 600,000 sq ft arena – accounting for around 40% of the complex – and merge its existing 370,000 sq ft leisure space with 210,000 sq ft of new retail. Nearly three quarters (73%) of the entire complex including the arena will be leisure-focused, and will include the UK debut of an immersive Mamma Mia dining experience, a trampolining park and an extended Cineworld. Meanwhile, 14% of the space will be for food and beverage outlets, and 13% is dedicated to retail. [gallery type="slideshow" size="full" ids="949852,949851,949850,949849,949854"] Choosing outlets So far, the retail tenant line-up includes the likes of Levi’s, Calvin Klein, Jack Wills, Karen Millen and Hackett. Marion Dillon, leasing director for Icon, hails designer outlets as the sole retail category to record “double-digit growth, consistently and year-on-year”. Supplementing the site’s core leisure offer with retail, rather than relying on it, is also a key strategy.  “Urban outlets exist, but not in this guise. A lot of other developers are looking at bolting leisure on to very successful retail schemes. We’re the opposite,” says Dillon. “It is complementary, not the number-one driver.” When it opens, the upper floor of the extension will feature UK outlet launches from four brands: Moleskine, Aspinal of London, footwear label Cheaney and designer jewellery brand Tateossian. Even with the new entrants, the upper level will fall short of full occupancy on its debut. The floor will be circa 80% let by the end of November, hinting that the outlet sector has not entirely escaped the ongoing retail crisis.  However, the team has shrugged off any potential burdens from the sector. Nick Lyle, co-founding partner at Crosstree, notes: “There have been some very successful outlets that have opened at 25-50% let, so being 80% prelet is quite a successful result. “We have a lot of tenant interest, which will take us close to 100% let, but we will never be completely full because we will always strive to improve the tenant mix.” Resisting casual dining sector woes Faith in casual dining has not been shaken either, despite the spate of closures in the sector.  Dillon says that on the F&B-heavy lower level, operators for all of the dining units are in legals, as are a handful of sports brands for the retail units. “We expect the restaurants will exchange imminently,” she adds. “There are a number of groups trading in the O2 right now, like Gaucho and Byron, who have had wider troubles. But their trading at the O2 has been unaffected by their CVAs, because the brands perform well at places with strong footfall,” says Sean Arnold, co-founding partner at Crosstree. To minimise exposure to potential occupier problems, the partnership is banking on “proactive” asset management, aided by a turnover-led leasing model.  The majority have agreed five-year initial terms, some on 10 years, with a break clause at the five-year mark. By deliberately choosing to build smaller stores – the average unit size in Icon is 2,500 sq ft – the strain on occupier overheads is also eased. At leisure The partnership will capitalise on footfall from its 1m cinemagoers, a number it hopes will grow to 1.5m when it expands its Cineworld venue from 11 screens to 19. This, according to Alistair Wood, executive vice-president of real estate and development at AEG Europe, will create the “biggest cinema south of Birmingham”. “Cineworld is keen to host more premieres here. We’ve had a few already, but having a bigger cinema will allow them to bring more of that aspect over,” he adds. The jv also aims to make the most of the interaction between the extension and the venue, which records 9m visitors per year. At present, 75% of the O2’s visitors arrive from within a 60-minute travel time radius and above; 39% take more than 90 minutes to travel in. According to CACI, people living within Icon’s 60- to 90-minute catchment have a 12% higher propensity to use outlets than the UK average; CACI also found that there is 80% more disposable income and 44% more residents within Icon’s 60-minute catchment than surround the average UK outlet. To attract these travellers to the outlets, it will offer services including a concierge luggage drop, hands-free shopping and event shopping packages. “The business plan is about having, say, 60% of trade coming from new people visiting the O2, and the rest as conversion from existing visitors,” says Dillon. “It is not about converting every single person coming to a show. At one level that is a great advertising opportunity but we also know there are particular shows that attract a more shopping-oriented crowd.” To take advantage of performance times, trading hours will run to 8pm between Monday and Wednesday and to 10pm from Thursday to Saturday. Although the O2 maintains standard Sunday trading hours, Dillon hopes to shift the opening time to midday to facilitate a “crossover of retail into shows on Sundays too”. It will additionally benefit from the marketing around the scheme. The O2 has around 9m active users on its Priority membership scheme; AEG records around 600,000 users per month on its website. Over time AEG plans to encourage linked visits to its sites through different marketing channels, including the Priority scheme and social media, to expand the retail offer.  A ‘jigsaw’ strategy Since 2015 net lettable space under the tent has “nearly doubled”, according to Arnold, reflecting the “beginning of a significant transformation of the asset”. The Icon launch forms part of an overarching strategy to turn the O2 into a destination that caters to multiple consumer profiles.  Supplementing the existing InterContinental hotel, jointly owned by AEG and Arora Group, will be a 36-storey residential development next to the centre, which has recently been granted planning permission by Greenwich Council. For Wood, “retail really completes the jigsaw”. “It is this composition of uses, and growing footfall base, that allows you to get tenants like Mamma Mia, which had been looking for a central London location for a while,” he says. “[Now,] we have massive credibility as an alternative to central London; this allows us to keep bolting on additional uses.” Beyond the extension, AEG has spotted further asset management opportunities. “We want to open it up to the riverside and bring more visitor attractions to the space,” says Wood. “This isn’t us saying the O2 is finished, but the extension is a big step for us in developing the O2.” Fact sheet: The Icon F&B 25,700 sq ft Retail 163,900 sq ft Total units: 85 Average unit size: 2,500 sq ft Extension coverage: 210,000 sq ft Percentage prelet: 80% on upper floor Owner: AEG/Crosstree jv Architect: CallisonRTKL To send feedback, e-mail pui-guan.man@egi.co.uk or tweet @PuiGuanM or @estatesgazette