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Supermarket pipeline set for sweeping changes

Tesco recently announcing it would scrap 49 larger supermarkets is the latest in a series of retail capital expenditure cutbacks, and reflects a fundamental shift in supermarket construction.

Tesco recently confirmed it has scrapped plans to build 49 larger stores across the country, amounting to 1.8m sq ft of floor space, and the retailer will cut its capital expenditure in half to £1bn during 2015 and 2016.

The retailer also said that it will close 43 existing stores that were unprofitable.

Similarly, Sainsbury’s announced in November it was cutting back on new developments, saying it will open 500,000 sq ft of new space in each of the next two years, a reduction from the 1m sq ft previously planned for 2014/15.

Morrisons has also confirmed it has cut 10 stores from its development pipeline.

Superstore cutbacks

Given the respective retailers’ recent fortunes, it is not surprising that they want to sweep these supermarkets under the rug.

But these trends point to more than just poor profit performance; they are indicative of changing consumer attitudes and the rise of discounters Aldi and Lidl, as well as the ever-increasing demand for online shopping.

These factors will have a major knock-on effect on the overall retail pipeline and change the nature of the sector’s construction.

The traditional out-of-town superstore format has become a problem area for many major retailers, argues Mintel director of retail research Richard Perks.

“There’s no doubt that superstores are losing market share”

Richard Perks, Mintel

“My impression is that Tesco has said, ‘No more superstores’ – and the same is true of Morrisons,” he says.

“There’s no doubt that superstores are losing market share, which is being driven by a fundamental change in the way consumers shop.”

Grocery outlets development pipeline town vs out of town sq ft_CBRE

Source: CBRE

Data from CBRE shows that the development pipeline for out-of-town shops has dipped to 12.3m sq ft as of September 2014, down from a high of 15.4m sq ft in September 2011.

“Capital expenditure was the big driver in market share over the past decade, particularly for large store formats favoured by Asda and Tesco,” says George Scott, senior consultant at analysts Conlumino.

Mr Scott argues that a shift towards convenience and online shopping has undermined demand at larger superstores.

Floorspace declines

But although the larger out-of-town superstores are feeling the pinch, CBRE data suggests that town centre shops are also being cut back.

As of September 2014, the proposed pipeline for town centre grocery stores stood at 2.13m sq ft – its lowest point since 2003 and significantly lower than the pipeline of 3.66m sq ft recorded in September 2010.

“The fall in available floorspace for town centre shops is part of a drive for more ‘considered’ space – convenience space is becoming more contested,” Mr Scott says.

“Some big players have rushed into the convenience market without examining local factors, and need to adapt if store closures are to be avoided.”

Retail starts underlying value 2012-14_Glenigan

Source: Glenigan

Despite this, retailers will still focus on the construction of new convenience stores to shore up their market share, according to Andrew Stevens, senior analyst at retail expert Verdict.

“Although Tesco has announced it is closing stores, we are still forecasting a net increase of 100 stores next year – Sainsbury’s is showing similar numbers,” he says.

“We are still forecasting a net increase in stores next year”

Andrew Stevens, Verdict

“These are primarily smaller stores, and average sq ft per store is lower than it has been in previous years.

“Even Asda, which does not have a dedicated convenience offering, is still investing in smaller sites – service station forecourts, for example.

“Generally, it’s often easier to get planning permission for these smaller projects.”

Focus on convenience

Although the focus on convenience and a shift to online might seem to suggest the death of the large out-of-town superstore as a format for the future, Mr Perks believes this is simply not the case.

“Statistics show that 4.8 per cent of groceries are sold through online channels, which is enough to take volume away from sensitive superstores,” he says.

“But overall, the small percentage of sales lost is not enough to say that large supermarkets are no longer viable; there are always marginal superstores and trends in market share that will tip some of these over the edge.”

Recent cutbacks might suggest a drop in store numbers, but data from Verdict shows this is not the case.

Forecasts show that both Tesco and Sainsbury’s are set to open 305 new stores each between 2015 and 2019, while discounters Aldi and Lidl will open 190 and 185 stores respectively as part of their expansion drive in the UK.

Forecast new stores 2015-19_Verdict

Source: Verdict

Last year, Sainsbury’s was the top grocery client in terms of the value of projects starting on site, according to Glenigan.

The retailer awarded 15 contracts in 2014 to the value of £126.5m, while Tesco saw 13 deals awarded, worth £109.4m.

Perhaps tellingly, Aldi led the way for the number of contract awards last year, handing out a total of 32 deals during 2014 with a total value of £43.9m.

This volume represents a huge increase compared with 2013, when the retailer awarded just 10 contracts.

Clearly, activity in the retail sector is going to persist – but what format it takes will be the key difference over the next four years.

Grocery outlets development pipeline total sq ft_CBRE

Source: CBRE

The consensus is that much of the capital expenditure by the ‘big four’ of Tesco, Sainsbury’s, Asda and Morrisons will now be shifted towards R&M and refurbishment, rather than on major expansion of store numbers.

“Capital expenditure will now be focused on right-sizing and repurposing space, particularly at larger stores,” Mr Stevens says.

“Subletting and repurposing space will be used at existing stores and new stores, particularly at out-of-town locations.”

Mr Scott agrees that supermarkets are “looking at ways to repurpose their space”, but does not believe this includes new stores, arguing that subletting of space will focus on existing stores and “may not be factored in as part of new builds.”

Mr Perks says this move towards R&M will lead to “a drop in capital expenditure”, which has already been seen with Tesco slashing its expenditure budget in half and Sainsbury’s now targeting expenditure of £500m over the next three years.

The ‘dark store’ rises

Outside of convenience retail and store conversion, one other area is expected to see growth: ‘dark stores’, which are used as distribution centres for online shopping orders.

As demand for online groceries picks up, more space will be required for dark stores, so it’s a big growth area for the big four going forward,” Mr Scott says.

“Dark stores are a big growth area going forwards”

George Scott, Conlumino

But Mr Stevens believes there will not be a “big influx” of dark stores because retailers need “a combination of both dark stores and superstores for online shopping to work”.

“Big retailers simply don’t need the capacity,” he argues.

“What we could see is the conversion of unprofitable superstores into dark stores to meet demand, but dark stores aren’t a huge growth area.”

What is clear is that supermarket retailers are facing a huge challenge to maintain their market shares while managing their expansion plans and expenditure.

The shift towards convenience and online shopping is unlikely to be temporary.

Consequently, changing consumer attitudes – and how supermarkets react to this – will create a new set of long-term challenges and opportunities for construction companies to face.

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