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4th June 2018
The prospect of a merger between Asda and Sainsbury’s might provide a short-term boost for the retail construction sector as stores re brand but the longer-term view remains weak.
Sainsbury’s has around 1,400 supermarkets and convenience stores and is looking to expand its 800 Argos stores in Asda’s estate, which comprises more than 600 stores.
The merger will generate a £600 million business integration programme. This could boost underlying retail construction starts, which have suffered from structural changes at leading retailers as shoppers move online.
Marks & Spencer will close 100 stores by 2022. Mothercare expects to shut 100 shops, New Look is closing 60 shops and House of Fraser is shutting 20 stores.
If these stores re-open under new brands, this may temporarily boost fit-out work in the retail construction sector, which continues to suffer.
Underlying retail construction starts fell by 12% in the quarter to April 2018 according to Glenigan’s market analysis, while work being given planning approval fell at an even steeper rate of 15%.
Glenigan economics director Allan Wilén says: “The top four supermarket chains have scaled back their investment programmes, redirecting funding towards the convenience store market, which more often entails conversion of existing high street premises with Sainsbury’s moving into franchising.
“A merger between Asda and Sainsbury's may bring a short term rise from expanding the Argos estate and also rebranding any stores that may have to be sold off to satisfy the regulator, the outlook for the sector is difficult.”
Less work, smaller jobs
Both Asda and Sainsbury’s have shifted away from major store developments with an increased focus on smaller projects.
In the 12 months to April 2018, Glenigan’s construction market research shows that the average construction contract awarded by Sainsbury's was just under £1.6 million and at Asda the average award was just £460,000.
Neither company features amongst Glenigan’s ranking of the industry’s top 100 construction clients, which only features two retailers: the German discount grocers, Aldi and Lidl.
Lidl is ranked in 14th position after letting £331.9 million-worth of construction work in the 12 months to April 2018, while Aldi is in 60th place after awarding main contracts totalling £141.4 million.
However, Lidl’s construction contracts total has slipped just over 2% in the past year, while Aldi’s is down by 15%.
Like Asda and Sainsbury's, Aldi and Lidl are progressing smaller construction projects and the average contract was valued at £4.4 million and just under £1.9 million respectively but both the German discounters are letting less work.
A silver lining?
After a 10% fall in 2017, Glenigan expects the underlying value of retail construction work starting on site to bounce back by a similar amount this year to 2016 levels before another fall of around 7% next year.
To put the dwindling size of the retail construction sector in context, underlying construction starts are expected to comprise just 5% of the sector as a whole and are forecast to fall below that level in 2019.
However, a silver lining may begin to emerge.
Mr Wilén adds: “As supermarket chains have moved into click and collect, retail construction work has diminished but a need for more warehouses has boosted the industrial sector.
“Another positive spin-off from a merger between Asda and Sainsbury's would be the likelihood of their landbanks being sold down and this would provide more sites for the residential construction sector, which has been an emerging trend over the past few years.”
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