Does retail offer real opportunity?As the sector adapts to radical change, we look at the trends in the retail construction sector - where do the opportunities lie?

SELLING… The construction story

BROUGHT TO YOU BY…

Over the last quarter of the 20th Century the retail sector provided a growing share of the nation’s construction work as Britons shopped till they dropped. The share of new construction provided by the sector pretty much doubled from below 6% to above 11%.

On average between 1997 and 2007, the retail sector accounted for almost 10% of new construction work. Then the world changed. Recession struck.

For retailers this was just one of many factors disrupting the way people shopped and in turn the business model they had developed over decades.

They were already facing huge forces unleashed by the Internet through online commerce, where delivery vans filled up while shops emptied of people. And for the established players, their market was under threat from the swelling presence of discount retailers.

As if all that hadn’t been enough of a challenge, the vote to leave the EU on June 24th generated yet further uncertainty over the economy and

placed huge question marks over future investment in retail property. It also prompted a drop in the value of Sterling, pushing up the prices of

imported goods – which account for a huge proportion of what Briton’s buy. A perfect storm seems to underestimate the challenges placed at the door of retailers.

This might not sound like a likely good news story for construction. For many it isn’t and will not be. But even today the retail sector accounts for £4.7 billion of construction a year (see Fig. 1.1). And where there’s change there’s opportunity and for some in construction the next few years may herald great opportunities.

This report picks at the data and the trends in search of where those opportunities might lie.

OVERVIEW…

The background to the story

0

2,000

4,000

6,000

8,000

10,000

1980

Valu

e (£

m)

1985 1990 1995 2000 2005 2010 2015

Value of construction £m, adjusted for inflation Share of all new construction work (%)

0

2

4

6

8

10

12

Share (%)

FIG 1.1

The value and proportion of construction work in the retail sector Source: ONS

The retail sector accounts for £4.7 billion of construction a year

SECTOR TRENDS…

The changing retail scene

CONTINUED

60

80

100

120

140

160

Oct 10

Units

Oct 11 Oct 12 Oct 13 Oct 14 Oct 15 Oct 16

Mainly food stores Non-food stores Non-store retailing Automotive fuel

Index 2013=100 (seasonally adjusted)

02468

1012141618

Oct 10

Mar

ket s

hare

(%)

Oct 11 Oct 12 Oct 13 Oct 14 Oct 15 Oct 16

12-month moving-average trend

FIG 2.1

Comparison of the four main retail sectors Source: ONS

FIG 2.2

Internet share of retail sales Source: ONS

To fully understand a construction market you have to understand the clients and their aspirations, so it’s worth taking a glimpse at the world retailers.

Retail sales and change in types of shoppingBritons spend about £350 billion a year shopping, £385 billion if you include fuel (see Fig. 2.1). Growth in retail sales has increased since 2013. Importantly it has remained strong, if not stronger, since the EU referendum. In October 2016 the ONS estimated the volume of goods bought rose by 7.4% compared with October 2015, the largest year-on-year growth rate since April 2002. All store types showed growth with the largest contribution coming from non-store retailing.

While this might suggest the Brexit vote has not deterred shoppers, it is early days. Currently the price of goods in shops is falling in real terms. The sharp fall in Sterling, if sustained as is likely, will sooner or later feed through into higher prices in the shops. That will be the real test of consumers’ resilience and so the full effect of Brexit remains uncertain. That leaves aside longer-term uncertainties over what tariffs there might be on imported goods.

Naturally of concern to retailers is the confidence among the buying public. Here the news is not good. The latest (November) Markit Household Finance Index found that households were becoming significantly more pessimistic about how the country’s long-term economic prospects have changed as a result of the EU referendum.

Internet sales, where it’s impactingThe average weekly spend online topped £1.0 billion in September 2016, hitting £1,056 million in October, an increase of 26.8% on October 2015. This increased the proportion of retail spending (excluding automotive fuel) spent online from 12.7% in October 2015 to 15.2% October 2016. Each year over the past decade the Internet has taken more than 1% out of the total retail market, growing its market share from below 3% in 2006 to 14% today on an annualised basis (see Fig. 2.2).

Internet shopping currently splits about 50:50 between non-store and store-based retailing, so stores continue to play a significant role even within Internet shopping.

Size of firms and types of firmsThere are about 182,000 trading businesses in the UK retail sector. The latest survey data from ONS suggests small and medium-sized firms are growing faster than larger firms, with firms with 40 to 99 employees growing fastest, although their share of the market is relatively small (see Fig. 2.3). The ONS data also show that currently non-food stores are seeing faster growth.

New entrants have always unsettled existing firms in all market sectors, but the rapid expansion of discounters, notably Aldi and Lidl in the groceries sector, have hit the big retailers at a vulnerable time and further disrupted a volatile market. Figures from consumer analysts at Kantar

Worldpanel, suggest that in the groceries market while the big four, Tesco, Sainsbury’s, Asda and Morrisons have lost between 0.8% and 1.6% of the groceries market each from the start of 2014 to November 2016, Aldi and Lidl gained between them 3.6% of the market. These figures vary month to month, but indicate a broad direction of travel over recent years.

The effect on shops and constructionThe impact of the recession continued to put pressure on household purses and the Internet has meant that shop vacancies remain high. Local Data Company figures show that shop vacancies were below 6% before

the recession and leapt to over 14% as ever more stores closured. They have since fallen back and appear to have stabilised at just above 12%.

Faced with multiple attacks on their existing business model, the majors cut development programmes and abandoned projects in the pipeline. 2014 was a watershed year for large supermarkets, according to Barbour ABI analysis. Out of 27 major projects recorded, 11 were scrapped,

planning was withdrawn on four and planning was refused on another with no follow up plans submitted.

This, however, has not meant a reduction in the number of stores, quite the reverse. Annual reports data show that from 2012 to 2016 Tesco increased its UK stores from 3,116 stores to 3,743. The number of Sainsbury’s stores rose from 1,106 to 1,374. Critically the focus was on smaller local shops. It is the larger stores that pose the greatest concerns for the UK’s major supermarkets as shopping habits change. The expansion of local stores goes hand-in-hand with the growing use of click and collect.

What we see in the data collected by Barbour ABI is the high proportion of convenience stores among those planned by Tesco, Sainsbury’s, M&S and Morrisons.

Local Data Company research found that between 2010 and 2015 supermarkets and discount stores increased the number of stores in Britain’s towns by 2,057. The increase in discount stores was 52% while the growth in mainstream supermarkets was 33%.

Key concepts driving retailersPhysical stores continue to be key in drawing in shoppers and pivotal to the strategies of most retailers. In meeting the needs of the future, some may decide they need more presence on the high street, some may

feel they need fewer, smaller or maybe just better stores. But a physical presence remains important. It explains why firms like Apple see value in opening stores.

Today, shops are not simply about shopping and shopping is not simply about buying things. For many retailers the critical concept is the experience. This obviously involves customers finding the right products, but it’s also about shopping as a leisure activity.

Shops offer a place to touch, feel and engage with products. But they offer much more. For people they provide trust, experts to quiz, places to meet friends or have a break. They offer serendipity. For retailers drawing in people as visitors provides an opportunity to engage. That could simply be selling or promoting. It could be building a brand. It could be to reassure, deal with queries or build trust in a product or service.

Multi-channel 24-hour shopping is a goal for many retailers. That means opening the way for customers to buy in the shop, over the phone, or via the internet from any device. They can then pick up the purchases in the shop when they buy, have goods delivered to their door or have them ready to collect when and where convenient.

Ultimately today’s retailer is looking to improve the experience of their customers. That will be reflected in how they design and use the buildings they occupy.

CONTINUED…THE CHANGING RETAIL SCENE

The expansion of local stores goes hand-in-hand with the growing use of click and collect

-10

0

10

20

30

40

Grow

th (%

)

MarketShare

Number of employees

100+ 40-99 10-39 0-9

FIG 2.3

Retail businesses growth rates by size over 12 months to October 2016 Source: ONS

Number of stores (1 Jan 2014 – 31 Aug 2016)

0 50 100 150 200 250

Aldi*Lidl*

Sainsbury’sTesco

M&SWaitrose*Morrisons

Asda

* Details on convenience stores not available

StoresConvenience (where details available)

FIG 2.4

Planning permissions submitted for new stores submitted since 2014 Source: Barbour ABI

Fig. 3.1 shows clearly how, based on a moving 12-month average, the number of contracts for commercial retail projects being let has continued to increase over the past five years. Meanwhile the value has been in decline for almost two years.

Seen as a share of new work being let to contractors in Fig. 3.2, we see the proportion of retail contracts being let remaining reasonably steady while the proportion of total contract values for retail work has been in decline for the past five years. Simply put, retail is a smaller share of the

value of construction work, but in terms of numbers of contracts it is broadly holding its share.

Fig. 3.3 shows the regional distribution of retail contracts let over the 12-months to September and as a comparison the spread of contracts let over the previous five years. As Fig. 3.4 shows, the spread is far more even when we were to adjust for the population sizes. The exception would be London and to a lesser extent the West Midlands, where there have been fewer contracts per head over the 12 months to September 2016.

Over the previous five year there was a very strong relationship between the numbers of contracts let and the population. Yorkshire & Humber on a per-head basis has seen the most retail contracts let. It has also seen some of the strongest growth recently followed by East Midlands and the North West.

The pattern is less even when we look at Fig. 3.5 and 3.6 which show the value of contracts awarded. Yorkshire & Humber still stands out as the top region for retail work on a per-head basis, closely followed by the

CONSTRUCTION TRENDS…

The changing mix of retail construction

FIG 3.2

Retail sector as a share of new build GB construction projects and value Source: Barbour ABI

FIG 3.1

Retail sector construction projects numbers and contract value Source: Barbour ABI

Retail is a smaller share of the value of construction work, but in terms of numbers of contracts it is broadly holding its share

The key change in the work coming through the retail sector is that projects are smaller. This fits with emphasis, especially from the majors, towards smaller more local shops.

0123456789

10

Sep 11

Mar

ket s

hare

ove

r 12

mon

ths (

%)

Sep 12 Sep 13 Sep 14 Sep 15 Sep 16

Proportion of value of all new construction work Proportion of the number of projects

Valu

e of

pro

ject

s (£m

)

Sep 11 Sep 12 Sep 13 Sep 14 Sep 15 Sep 16

Value of retail construction work let over 12 months (£m) Number of retail construction projects let over 12 months

0

1,000

2,000

3,000

4,000

Number of projects

0

200

400

600

800

1,000

CONTINUED

CONTINUED…THE CHANGING MIX OF RETAIL CONSTRUCTION

East of England and London. The difference being that work is expanding in Yorkshire & Humber and the East of England while it is declining in London.

Fig. 3.7 shows the change in the number of contracts and the value of work let over the 12 months to September 2016 compared with the average over the previous five years. This gives a quick indication of the relative strength of the sector to pre-existing levels.

In most regions the number of contracts is up, if not up by a substantial amount. However, for most regions the value of work being let has declined. In most regions the number of contracts is increasing more (or decreasing less) than the value. This provides a clear indication of a widespread trend towards smaller contracts. The exceptions to this pattern are in the East of England, London and the South East where contract values on average have increased compared with the previous five years.

FIG 3.6

Value of retail contracts per region Source: Barbour ABI(adjusted for population size)

FIG 3.7

Change in value and number of retail sector contracts Source: Barbour ABI(comparing 12 months to September 2016 and previous 5 years average)

FIG 3.5

Value of retail contracts per region Source: Barbour ABI

FIG 3.4

Number of retail contracts per region Source: Barbour ABI(adjusted for population size)

North East

North West

Yorkshire & Humber

East Midlands

West Midlands

East of England

London

South East

South West

Wales

Scotland

0 20 40 60 80 100 12012 months to September 2016 (contracts) Previous 5 years – average (contracts)

North East

North West

Yorkshire & Humber

East Midlands

West Midlands

East of England

London

South East

South West

Wales

Scotland

0 100 200 300 400 500 60012 months to September 2016 (£m) Previous 5 years – average (£m)

North East

North West

Yorkshire & Humber

East Midlands

West Midlands

East of England

London

South East

South West

Wales

Scotland

0 5 10 15 2012 months to September 2016 (contracts) Previous 5 years – average (contracts)

North East

North West

Yorkshire & Humber

East Midlands

West Midlands

East of England

London

South East

South West

Wales

Scotland

0 10 20 30 40 50 60 70 8012 months to September 2016 (£m) Previous 5 years – average (£m) Value of work (%) Number of contracts (%)

North East

North West

Yorkshire & Humber

East Midlands

West Midlands

East of England

London

South East

South West

Wales

Scotland

-50 -40 -30 -20 -10 0 10 20 30 40 50 60 70 80

FIG 3.3

Number of retail contracts per region Source: Barbour ABI

PROJECTS…

Retail projects across 2016In 2016, the twenty largest retail projects across the UK accumulated a value of more than £570 million (see figure 4.1). Southern England would seem to be the hub of activity for larger retail projects, with the total value from the twenty biggest projects across the southern regions reaching £421 million.

2016 largest retail projects Location Value

3 Rushden Lakes Shopping Park Development Northamptonshire £60,000,000

4 Dover Town Centre Regeneration – St James Site Kent £50,000,000

5 Chelsea Island London £50,000,000

6 Better Barnsley Regeneration – Phase 1 South Yorkshire £36,000,000

7 Cameron Toll Shopping Centre Lothian £25,000,000

8 Sainsburys Superstore – Barking Essex £15,000,000

9 Kingsgate Business Centre Surrey £11,250,000

10 Oxford Street Retail Store Extension London £10,000,000

11 Micheal Kors Limited – Internal Refurbishment London £10,000,000

12 Skegness Town Football Club – 4 Retail Units Lincolnshire £8,000,000

13 Grove Vale – Retail Unit & 20 Flats London £6,700,000

14 Stop 24 Services – Phase 3 Works Kent £6,000,000

15 Coal Drops Yard London £6,000,000

16 Home Bargains Store Lothian £5,000,000

17 Former Stake Works – Warehouse Extension Hampshire £5,000,000

18 Unit C Strood Retail Park – Redevelopment Kent £5,000,000

19 Triumph Motorcycles – Visitor Centre Leicestershire £5,000,000

20 Bluewater Shopping Centre – H&M Extension Kent £5,000,000

1CHARTER PLACE SHOPPING ARCADE– INTU WATFORDLocation: HertfordshireValue: £178,000,000

2THE 02 RETAIL OUTLET VILLAGE– PROJECT MINTLocation: LondonValue: £75,000,000

FIG 4.1 Source: Barbour ABI

However, construction work in the retail sector in the future looks set to be less about pouring concrete and more about hitting and surpassing the now more complex strategic objectives of retail clients through better design. Success will lie in finding ways to make shops more attractive, more engaging and more satisfying to customers. Put simply that implies less brawn and more brains.

The need for large retailers to refresh and reshape their existing stock, and over time their increased numbers of newly-built smaller stores, suggests that designers and contractors will also need to be better

managers and find ever neater ways to work swiftly to keep disruption to customers to a minimum. Convenience stores need to be convenient.

The value of work may have shrunk, but the number of projects being let by retail clients is holding steady providing similar numbers of opportunities to impress clients. And the eagerness of clients to see value added through the skills of the construction sector has not

diminished. The lay of the land very much points to the opposite. To make physical shops work, both in competition and in collaboration with other means of trading, places even more stress on the skills and ingenuity of those creating them.

This means great potential for contractors and project managers to show off their prowess in managing work and adding value through neat production. But the greatest prospects most likely lie waiting to be grasped by smart designers. The prize will be great for those architects who can most effectively rethink retail space and exploit the developing nexus between the physical and digital shopping experience in a way that excites and delights customers.

The key it seems to designing physical shops in the future is to consistently find new ways to improve the experience of customers and potential customers alike. Making places appealing is right at the heart of what architects do. The question is, out of the disruption created largely by the Internet, will we see emerge a new golden age of design where old, familiar and comforting certainties meet new, unexpected and exciting technologies.

OUTLOOK…

The future – what opportunities knock?

The greatest prospects most likely lie waiting to be grasped by smart designers

The Internet has disrupted many business models across many sectors of the economy across the globe. It is transformational. Its effects have certainly forced a profound change in the retail sector. But any idea that physical shops will be a thing of the past or that retail work will fade and wither for the construction industry seems misplaced.