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Chart 1: Retail Construction over 2011

In the wake of Tesco’s recent profit warning Glenigan Economist, James Abraham, takes a look at the possible ramifications for the construction industry.

News that Tesco’s recent price cuts have failed to win business, therefore hitting expected profits, led to a mass selloff of shares last week. Though Tesco was the worst performing on the big four supermarkets – with sales increasing by 3.4%, compared to Asda’s 10.7% and Sainsbury’s 6.7% over the four weeks to the 24th of December (according to research group Nielsen) – there was general pessimism surrounding the industry. Analysts have cut their predictions for this year’s pre-tax profit for M&S, and Credit Suisse repeated their “underperform” rating for Sainsbury after revising down its profit forecasts.

The changing business conditions mean that the big supermarkets are likely to pare back their rapid expansion. Over 2011, as the underlying value of retail project starts increased by more than a fifth, supermarket projects accounted for the vast majority of this new work (see Chart 1).

As other parts of the retail industry were hit by rising VAT and falling consumer spending, it was supermarket expansion – spearheaded by Tesco and Sainsbury’s – which fuelled construction. It has been suggested by analyst that this investment in new premises will be reined in, particularly at Tesco. However, the firm are apparently looking to increase its spending on its stock of existing stores. The Sunday Times quoted Phillip Clarke, Tesco CEO, as saying they wanted to invest as much as £400m in store renovations, as well as hiring more staff.

This shift in emphasis from new builds to refurbishment or extension work has already been captured in Glenigan data. As is evident in Chart 2, the growth in supermarket starts over 2010 came after the underlying value of new builds doubled. Conversely total growth in 2011 has relied on refurb or extension projects.

This trend is likely to continue into this year. Though the overall supermarket pie could well shrink in the next twelve months, refurb work could grow to become an increasingly important source of work for the industry. This means that despite the shift away from building new premises, the supermarket chains will continue to bolster the retail sector as a whole, which otherwise would suffer an even bleaker 2012.

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