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2006 has been a good year for the
retail sector in terms of capital investment on new buildings and
refurbishments with the supermarkets in particular investing substantial
sums on store improvements and extensions, driving growth in the sector.
Over the last five years, there has
been an increase of over 76% or £4 billion in retail capital
expenditure, which now stands at an estimated £9.1 billion. Of this
figure, 51% of capital expenditure is in the grocery sector – mostly
through the supermarket chains and variety stores – and the remaining
49% in the non-food sector, of which the majority investment is in the
clothing, footwear and accessories sector – and is driven by the
department store chains.
Levels of
capital expenditure have been boosted by a number of expansion
programmes in the grocery sector, for example,
WM Morrison
has undertaken significant expenditure on the conversion of Safeway
stores following its acquisition of the company. Investment has
also been made by Waitrose to purchase and refit Safeway stores
being divested by WM Morrison and by Marks and Spencer following
its purchase of a number of stores from
Iceland.
Going forward, capital expenditure
levels are likely to remain steady over the next few years, albeit at
lower rates of growth than seen in the previous few years. Growth is
expected to remain at around 5-7% until 2010 when capital expenditure is
forecast to reach £12.2 billion.
In 2005 contractors’ output
from new retail sector construction work reached £4.4 billion and
accounted for around 8% of new work obtained by contractors in the UK.
The immediate outlook for retail construction remains fair in 2006 with
growth of around 2%, but a slowdown in output to around 1.5% is expected
in 2007 and 2008 to reach an estimated output of around £4.7 billion,
driven by falling consumer demand. Beyond 2008 the market is expected to
improve, driven by the completion of a number of the 300 shopping centre
schemes currently in the development pipeline. The majority of this
floor space is expected to be completed between 2009 and 2010. By 2011
output in the retail sector is expected to reach around £5.2 billion.
Leading contractors undertaking work
in the retail sector include
Carillion,
Chard Construction,
HBG Construction,
Kier, Midas,
Miller Construction,
Pearce Group,
PEL Group,
Styles & Wood and
Simons Construction.
The way in which retail clients
procure work for construction and refurbishment programmes varies,
but is usually focused on either management contract or design
and build, with both routes sufficiently flexible to accommodate
change. Shop-fitting and retail refurbishment is rapidly moving towards
the design and build model, providing a complete package for retailers.
Most national retailers with larger and more complex
rollout refurbishment programmes tend to follow a design and build
route.
Whilst capital building programmes in
the grocery sector have been buoyant, there has been a general shift of
development back into town and city centres from out-of-town
locations, due to tighter planning controls. There is now more of an
emphasis on mixed-use and regeneration projects on brown
field sites and the conversion and remodelling of existing premises.
All of the major grocery multiples have
annual programmes of expansion, conversion and refurbishment
aimed at growing and maintaining share within the
market. Increased competition and tighter profit margins in the food
sector have facilitated a rapid expansion of the larger
supermarkets into non-food areas, which increase consumer
interest and boost footfall into stores. Non-grocery items now
account for up to 10% of supermarket sales. At the same time, large
multiple retailers have sought growth by moving into the fast-growing
convenience sector, where planning consent for smaller stores is
easier to obtain. Growing investment by the major multiples in the
convenience sector has therefore increased the upward trend in
smaller store sizes, with examples seen in Tesco ‘Express’
and Marks and Spencer ‘Simply Food’ formats.
The growing dominance of the ‘Big Four’ supermarkets
in the UK retail market is indisputable, with the combined sales of
Tesco, J. Sainsbury, ASDA and WM Morrison now
accounting for 74.3% of sales in the overall grocery market. Such has
been the growth of the top four grocery retailers that, in 2006, the
combined capital budgets of
these retailers is expected to rise to £3.6 billion, which will account
for around 73% of capital expenditure in the grocery sector.
The ‘Big Four’ supermarkets, in
particular, have built up significant land banks sometimes with
the intention of delaying subsequent development. It is thought than in
excess of 300 undeveloped sites are currently owned by the ‘Big Four’
and have remained undeveloped for around 8 years. Larger supermarket
chains have the resources to delay expansion plans for longer periods
once a site is owned until circumstances favour development. The
Competition Commission (CC) has
launched its own investigation
into the planning system with regard to retail development and could
instigate a change in planning controls which could prevent supermarkets
from opening too many outlets in a single area, resulting in the selling
off of development sites and the scaling back of expansion plans.
The retail sector is highly concentrated, with
sales in the grocery sector dominated by the largest four supermarket
retailers – Tesco, ASDA, WM Morrison and J.
Sainsbury. The combined
market share in terms of sales of these largest four supermarket
retailers in the UK is currently estimated to be 74.3%. In the non-food
sector, retailing is dominated by large multiple store chains, who
currently account for around three quarters of annual sales. Marks &
Spencer, Debenhams, House of Fraser and John Lewis
have, between them, cornered around 75% of the department store market.
Total UK retail sales were £260
billion in 2006, of which the grocery sector accounted for around 48%
with the remaining 52% accounted for by the non-food sector.
UK retail sales remained steady in August 2006,
with consumers undeterred by the interest rate rise in July. Sales rose
0.3% in August, taking the annual growth rate to 4.3%, lifted by strong
sales of household goods. Non-store sales, which include mail order and
Internet shopping, rose by 6.3% - the biggest monthly rise since
December 2002. The increase of online sales is changing the way in
which retailers collate and deliver their online goods, with the impact
on retail construction being seen with the emergence of a number of
large distribution depots specifically designed to satisfy internet
orders. Tesco, for example has just completed its first dedicated
home delivery unit in Croydon.
Underlying growth in retail sales remains strong compared
with average sales growth in recent years. However it is doubtful that
retail sales can maintain their strength in the short to medium term,
with consumers facing higher utility bills, possible further rises in
interest rates and increasing debt levels. Forecasts for retail sales
over the next two years are therefore expected to fall slightly to 2.8%
in 2006 and 2.5% in 2007.
The UK grocery market was
valued at around £123.9 billion in 2006, an increase of 3.4% on the
previous year. The overall UK grocery retail sector is expected to
experience steady growth over the next 5 years at a rate of around 3%
per annum and will be worth around £137 billion by 2010. Growth is
expected in all types of store portfolio including the convenience
retailing sector, which is forecast to reach £32.3 billion by 2010
and £33.9 billion by 2011 and hypermarkets, forecast to increase
numbers of stores by a third over the next five years from 660 to 880
outlets.
The UK non-food retail market
was valued at an estimated £126 billion in 2005, a slight decline of
around 5% on the previous year. The market is split into clothing sales,
accounting for around 24% of non-food sales; household electrical goods
5%; DIY & hardware 12%; and furniture and furnishings around 7%. The
remaining 52% is composed of other goods such as books, newspapers,
stationery, records, cosmetic and pharmaceutical goods and motor
vehicles.
About 60% of retail development
currently takes place in out-of-town locations,
with a rising percentage of “edge-of-town” locations. There are
a total of 826 out-of-town retail parks currently operating in the UK.
An estimated £85bn of sales is generated by retailers in out-of-town
locations, which is set to increase to around £109bn by 2010.
Traditional out-of-town retailers are, however,
facing a threat from traditional high street retailers expanding into
the out-of-town sector. A move
by clothing and general merchandise retailers such as Debenhams,
Clarks and Next to expand into out-of-town locations is
transforming the market, increasing competition with traditional
out-of-town operators.
Retail warehouse development
has been declining over the past 3 years due, in part, to strict
planning controls and, over the last year, there has been a reduction in
all stages of the planning and construction process of out-of-town
developments. At the beginning of 2006, planned retail park floor space
had fallen to 23.60 million square metres, its lowest level in four
years.
Shopping centre pipeline
development has also declined over the last year to reach 31.20 million
square metres at the beginning of 2006. Town centre development
continues to account for the majority of development with around 80% of
the total pipeline. Around 30% of total shopping centre development is
currently new build, with the remaining 70% accounted for by additional
phases of construction, extensions or redevelopments. There are
currently more than 300 shopping centre schemes in the development
pipeline due to be completed by 2015 totaling over 50 million square
metres. The majority of this floor space is expected to be completed
between 2007 and 2010. UK town centre shopping centre retail
provision is expected to grow by 10%, with 2009-10 expected to be the
peak year for openings.
The recent push towards mixed-use
development has led to many major regeneration projects in UK towns
and cities. Mixed-use schemes have proven to be a popular trend,
co-locating residential, commercial, retail and leisure facilities, with
retail being a big driver of these developments.
The number
of mixed-use schemes in the development pipeline has increased by 150%
since 2003 and around 75% of schemes have a residential component, which
increased significantly in 2005 driven by an increase in edge-of-town
schemes.
Many supermarket chains are now actively branching out
into housing and residential development and have succeeded in gaining
an active role in regeneration partnerships with local authorities.
ASDA, Tesco, Marks and Spencer, J. Sainsbury
and B&Q all have combined residential and retail developments
under construction or in the pipeline.
Retail construction in the UK is being
increasingly affected by a number of issues including planning laws,
restricting the amount of out-of-town development; the increasing
dominance of the major supermarket chains and the issue of
undeveloped land banks; Government and EU legislation concerning
environmental policy changes; online retailing; and the increasing
use of modern methods of construction (MMC) including lean
construction, supply chain management and pre-fabricated building
as a means of simplifying and speeding up the development process.
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