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Supermarket contractors renew optimism but supply chain squeeze continues

Supermarkets have continued to expand their stores footprint during the downturn, but over the past 18 months they have begun to rein in their capital expenditure and some, including Tesco and Sainsbury’s, have scaled back their expansion plans. What will this mean for retail contractors looking ahead to the next year and a half?

Building in the supermarkets sector is changing due to consumers’ evolving shopping habits. “All retailers are working on coping in the world we’re living in – that’s the ‘omnichannel’ world,” says Waitrose head of construction engineering & environment Tony Jacob.

Changing consumer approach

He describes a “hummingbird effect” where, instead of the familiar weekly shop, customers dip in and out of supermarkets by ordering shopping online, collecting groceries from a supermarket and topping up their shop at smaller convenience stores throughout the week.

“The food retail market has probably contracted by about 20 per cent over the past 18 months but, in doing so, it has also changed”

Chris Miles, Longcross Construction

As a result, the major supermarkets are moving away from the vast, out-of-town hypermarkets that began springing up two decades ago. For contractors, this means the volume of new-build work coming to market is smaller.

Chris Miles, operations director at Longcross Construction, which works with all the major supermarkets, says: “The food retail market has probably contracted by about 20 per cent over the past 18 months but, in doing so, it has also changed. We’re building large format new space on a much smaller scale now.”

But there is positivity among contractors who work in the sector. ISG retail and hospitality managing director Darren Hill says he is now “very optimistic” about work in food retail, despite the firm’s revenue from the sector declining 9 per cent last year to £199m from £218m in 2011, reflecting a fall in new-build project activity.

“We’ve been through the downturn,” Mr Hill says. “I’m more optimistic about the sector because I think retailers have now adjusted.”

In January 2012 ISG issued a £3m profit warning, saying a number of its retail clients had been forced to cancel projects.

“What was in the public domain was very relevant at the time,” Mr Hill explains. “We had to reinvent our work for food retailers who have moved away from massive new builds and moved to a new business model.”

Convenience stores expand

Most supermarkets are continuing to increase their square footage in what is still a challenging trading climate. But with their new customer in mind, the major grocery retailers are concentrating their growth on convenience stores of around 3,000 to 6,000 sq ft.

Mr Jacob says “confidence is high” at Waitrose – the UK’s sixth-largest supermarket by market share aims to open 10 new ‘core’ supermarkets and 10 new Little Waitrose convenience stores in 2013. “The construction industry can be expecting continuing growth and investment,” he adds.

Sainsbury’s director of store development Dean Clegg has announced the number of Sainsbury’s convenience stores will overtake its main stores by November 2013, and Morrisons construction director David Wade tells Construction News it is on track to deliver 100 M Local convenience stores before the end of its financial year in February 2014.

Contractors question BIM for retail

Contractors and construction directors have disagreed over the extent to which building information modelling brings benefits to supermarkets construction.

Speaking at a supermarkets conference last week, ISG pre-construction director for retail Andy Taylor said BIM was not yet advanced enough to deliver benefits in retail construction.

“I can’t see that it can work quickly enough for us at the moment. The technology will get bigger and faster, but I don’t think it is there yet,” he said.

But Interserve Construction head of retail UK Robert Boyd said the firm has already identified ways to reduce waste by using BIM and said the technology is a “saviour” to sustainable construction.

Morgan Sindall managing director north Dave Smith added BIM will deliver benefits in facilities management when the technology becomes more advanced.

Directors from Asda and Waitrose, which are both members of the BIM4Retail task group, said BIM is “the only way” for their businesses.

Asda’s head of highways, utilities & civil engineering David Sibbitt said the benefits of BIM are to “digitally oversee and manage construction” and make “improvements in cost, value and carbon reduction”.

He added: “If they [contractors] have sat on their backsides waiting for us to come to them [with BIM] we are not working with the right team.”

But ISG Retail executive chairman Darren Hill told Construction News: “BIM is customer-led at the moment because the whole customer team has to be united around its implementation.”

Conversely, Tesco is scaling back its plans for expansion and is considering options for land disposal with local authorities on 100 sites it no longer plans to develop.

The UK’s largest supermarket opened 40 per cent less space in 2012/13 than in the year before – but this still amounts to 1.4m sq ft of new space and it intends to open a similar amount this year.

For contractors, the result of this shift in emphasis towards city and town-centre convenience stores is that the majority of work coming to market is smaller-sized refurbishment and fit-out projects, rather than large design-and-build schemes.

“Some of the contractors that were traditionally building 40,000 sq ft stores are now building convenience stores and turning their hand to fit-out”

Dean Clegg, Sainsbury’s

New build is still happening, but on a smaller scale than it was a five years ago. Mr Miles says Longcross will deliver around 75 convenience stores this year, some of which will be new builds.

Many of these will be in areas where the market is less saturated. “Most convenience stores are concentrated in conurbations, but regional smaller towns and villages are becoming an attractive market for convenience stores operated by the major supermarkets,” he says.

Not only that, the demand for online distribution centres and ‘dark stores’ – used for online shopping orders – will present new-build opportunities for contractors, though fewer are likely to be needed to service internet shopping needs due to supermarkets’ existing main store estate.

Broader range of work available

Contractors already active in retail are likely to have an advantage over new entrants to the sector, but supermarkets are moving away from frameworks and broadening their supply chain as they offer a wider range of work to the construction industry and look for the best price.

“We have, over the years, broadened the suppliers we have used,” Mr Jacob says. “But if you’re good enough and do a good job, you can expect more work. We’re pretty loyal in that way.”

He adds that with the regional expansion of Waitrose across the country, the retailer has “reasonable breadth to spread work around”. For small convenience stores, Waitrose aims to use “local, smaller-sized contractors”, whereas on larger, core stores the retailer looks for “people with the capability and skillset to do that”.

All supermarkets say the key to winning work in an increasingly competitive environment is adaptability. Speaking at a supermarkets conference, Mr Clegg says Sainsbury’s is “seeing a bit more of a mix” in the types of contractors it works with on smaller projects.

“Some of the contractors that were traditionally building 40,000 sq ft stores are now building convenience stores and turning their hand to fit-out,” he says.

New stores pipelines 2013

  • Asda: 12 new supermarkets in 2013, down from 25 in 2012
  • Morrisons: 20 supermarkets with a focus on the South of England and 100 M Local convenience stores
  • Sainsbury’s: 10 supermarkets and over 100 Sainsbury’s Local stores
  • Tesco: 1.4m sq ft of new space including 160 Tesco Express convenience stores
  • Waitrose: 10 supermarkets nationwide and 10 Little Waitrose stores within the M25

Last July, ISG combined its bank branch roll-out programmes, high street retail fit-out and food retail fit-out businesses, which were previously managed separately.

Mr Hill says that by merging them together, ISG is “well-placed” to deliver larger new-build schemes when they come up, but the firm can also better focus on the fit-out of smaller convenience stores.

Ongoing performance keeps contractors on supermarkets’ frameworks and panels of preferred firms. But Mr Jacob says it is not just about the work that contractors deliver that is important, but their financial stability and how they work with their supply chain as well.

Supply chain stability

Picking financially stable partners is “keeping me awake at night”, Mr Jacob says. “We’ve had a few people that have gone into receivership, so we need to be vigilant.” He adds that contractors should manage their supply chains with skill and a light touch.

These concerns are shared by contractors, who say they are being squeezed by supermarkets that are “still looking at lowest price as the best price and ignoring best value”, according to Morgan Sindall managing director north Dave Smith.

“All we can do as contractors is treat the supply chain with the respect they deserve”

Dave Smith, Morgan Sindall

He adds that contractors and their clients need to focus on upskilling their supply chain and treating their partners with respect to achieve best practice.

“We are all commercial animals,” he says. “We’re here for one thing – to make a profit.”

Speaking at a supermarkets conference, he adds that if retailers continue to reduce the price they pay for work, contractors “will look to recover that through the supply chain”.

He calls for co-operation from supermarkets: “All we can do as contractors is treat them [the supply chain] with the respect they deserve. We all need to pay them on time and to their entitlement.”

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