Market for supermarkets

Even though it sounds a bit of a mouthful, the market for building supermarkets - and not just building them, but refurbishing and extending them as well as making them more environmentally friendly - is one to whet the appetites of contractors.

First there are the record profits: Tesco's most recent pre-tax profit was an enormous £2.6bn, while M&S's latest results show it's nearly back to its previous benchmark of £1bn. This market success story is enough in itself to fund serious expansion programmes.

Then there's the competitive intensity generated by trying to make the most of such a lucrative market. Dowdy stores are being replaced, re-furbished or remodelled hand over fist in order to continue to attract the punters. Smaller chains are either amalgamating or are gobbled up by larger ones, creating yet more fit-out work.

The growing corporate awareness of concepts such as sustainability and carbon footprints only serves to add more fuel to the fire. Tesco and Asda have both initiated a process to determine how to build 'environmentally friendly' new stores, while M&S has embarked on a similar process for refurbishment.

Finally, the proposed new planning regime is set to remove the 'need and impact' test, long a hurdle to the development of supermarkets. This will, according to one commentator, have 'significant' consequences for the building of new supermarkets - and the consequences seem unlikely to be adverse.

How big is the market?

Figures for the total market for construction work for supermarket clients are elusive. This is compounded by the fiercely competitive environment, which means most companies are unwilling to elaborate on the information they are obliged to publish in their annual reports. Nevertheless, a trawl through these annual reports from a selection of the major players hints at the scale of the market.

Tesco, alone, has considerable further expansion plans for next year. According to its latest results it has made "further good progress with the development of new space and store formats. A total of 2 million sq ft of new sales area was opened during the year in all formats. Going forward, we are aiming to maintain our rate of growth in selling area."

This means plans for an additional 2.1 million sq ft of space for the current year.

M&S, meanwhile, has a property strategy for adding 15% to 20% of new space over the next five years. What's more, according to chief executive Stuart Rose, "70% of the company's store portfolio will be modernised by the end of the year".

Giant US retailer WalMart's presence in the UK market, through the Asda brand, is also set to expand. It says it will build a minimum of 18 new stores across the UK this year, and in addition, will carry out major extensions and improvements to 15 existing stores and roll out the non-food format 'Asda Living' to a further 10 sites within the next 12 months.

Then there's erstwhile market leader Sainsbury's, which has set three-year targets (2007 - 2010) for its 'from recovery to growth' policy. These include 10% growth in new space split equally between grocery and non-food and more than 50% of the property estate to be developed.

"Our current store estate provides substantial development opportunities and we intend to extend a further 75 stores by March 2010," says Justin King, chief executive. "Our target is to grow our total sales area to more than 19 million sq ft. The new space will be split equally across grocery and non-food ranges. The pipeline will be developed to deliver space growth at 5% per annum from 2009/10. The company is also exploring partnerships to deliver major development opportunities. To support these ambitious expansion plans, we expect our total capital expenditure over the next three years to be £2.5bn."

Market split

What's the likely split between new build, expansion and refurbishment, and between big and small stores?

At M&S, there is a focus on expanding the smaller, existing flagship stores of around 85,000 sq ft to the 100,000 sq ft average for the larger stores. Retail parks will also be a major focus and the company hopes to open seven this year. There will also be a drive to increase the company's secondary presence on the high street with its Simply Food stores, and there will be a small amount of consolidation - in towns which, for example, have two stores.

Sainsbury's figures for the 2006/07 financial year show 20 supermarkets were opened and 18 extended. A further 50 were refurbished, one was downsized and 48 benefited from investment in their non-food offerings. In the convenience operation, 20 stores opened, 22 were refurbished and 30 converted to the 'Sainsbury's @' format. The company plans to open 30 new supermarkets and 100 new convenience stores and is targeting the completion of 75 extensions and 190 refurbishments with the large majority undertaken in its freehold and long leasehold estate.

According to Tesco, more than 660,000 sq ft of last year's growth - one-third of the total - was in extensions to existing stores. "With Extra and Express being the company's least mature formats and with both now delivering above-average investment returns, these are important drivers of our growth," the company adds. Other growth will come from a combination of extensions, principally for non-food, and new stores.

To put this growth in context, last year the company opened another 18 Extra hypermarkets, most of them through extensions to existing stores and 115 new Express stores. A further 130 new Express stores are planned for 2006/07.

What are the factors driving the market?

"It's a competitive environment, but it's also broadly right to say the sector is growing - there's still potential for growth in existing markets and for new markets to be opened," says Paul Browne, head of property at the British Retail Consortium. "The characteristics of this growth will vary, including both new formats - such as the convenient, town centre stores - and also the extension of existing stores and the building of new ones."

Then there are the proposed changes to the planning process. "The new white paper removes the 'need and impact' test, which has always been controversial among supermarkets and indeed across retail. This is likely to have significant consequences for the building of supermarkets. The task now is to find out what the new test is," Browne explains.

Last, but not least, there's the environment. "Environment issues are very important," he adds. "The government is now looking closely at environmental standards in new build, and we anticipate a code similar for commercial buildings as has recently been launched for domestic buildings. This is matched by a desire from the clients, which reflects the awareness in the head offices of large retailers that the use of their physical property offers the biggest carbon saving potential and is the best way to cut CO2 emissions. The question is how the construction industry will react to this. Micro-generation on site is just the tip of the iceberg - there has to be a more holistic approach."

Green is in the colour

Most major players in the supermarket sector have made pledges about their intentions to address environmental and sustainability issues, most of which in turn have a significant impact on the construction industry through either new-build or refurbishment work.

Waitrose, for example, has pledged to reduce its CO2 emissions by 10% by 2010, relative to its trading pattern in the year 2001. Sainsbury's says it has invested more than £15m in energy efficiency projects, with much of the work about good housekeeping. Almost all of its large supermarkets now have intranet-linked, automated building controls to allow improved efficiency and manage power loads to further reduce energy consumption, the company explains.

Tesco says that in the UK it has achieved an absolute reduction in energy use in its buildings despite growing sales by 9% and sales areas by more than 7%. Furthermore, against a baseline of 2000, it wants to cut the average energy use in its buildings in half by 2010. The company also built its first model energy efficient store in Diss, Norfolk, in 2005. A second model energy efficient store has now opened in Swansea and the company has set up a £100m fund to be used for innovation in sustainable environmental technology.

According to Niall Trafford, the executive in charge of store design and specification at M&S, although a lot of store re-modelling work was started before the adoption of the company's Plan A green agenda, this has itself generated further work.

"We're looking at what it will mean," he explains. "It will have a big impact on M&E. We're looking at all current material usage, for example, and considering alternatives that can be recycled. We're working closely with the supply chain to get their input, which is vital in areas where we wouldn't have the expertise to know what to look for. The construction industry is very keen to engage with us on this."

The company is in the process of writing a green specification for stores, which will be available from this summer, and has already begun Plan A-inspired modifications at its Bournemouth store, which will use up to 25% less energy and emit up to 50% less CO2 than an average M&S store.

"Improving the efficiencies of our existing portfolio of stores is the real challenge for us, especially if M&S is to meet its target of becoming carbon neutral by 2012," Trafford points out. "We're confident that our work in Bournemouth will show us how we can carry out eco-conversions at many of our other existing stores in the future."

The Bournemouth project includes operating a green travel plan for all construction traffic and managing waste materials to ensure that they are recycled where possible. It is estimated that up to 80% of waste and key construction off-cuts will be recycled or reused.