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Overview of the sector

The retail sector is heavily influenced by economic factors such as interest rates, unemployment levels and the availability of disposable income. It has enjoyed a boom in recent years, thanks to the strong growth in household spending driven by increased borrowing and low interest rates. The Office for National Statistics says the rate of growth has slowed from the beginning of 2004, although the volume of sales is 5% higher in September than the same month in 2003.

So work in the sector has been abundant, but at the same time it has changed. In the 1990s, new-build out-of-town retail developments were common, but planning restrictions have shifted demand to town and city centres, which means regeneration and mixed-use projects on brownfield sites, and the remodelling of existing properties.

The changing nature of the shopfitting sector has led to shopfitters taking on wider roles, such as design and project management, to deal with the more complex construction issues caused by this shift. This has been complemented by a demand for increasingly sophisticated designs as retailers focus on the ambience of stores as a source of competitive advantage.

Shopfitting firms are diversifying into other commercial and public building sectors such as museums, leisure centres, airports and financial organisations. This has reduced the exposure of the market to the retail sector and has, to an extent, altered the focus of many companies from shopfitting to interior design.

The outlook for the retail sector is cautious. According to the Office for National Statistics, retail production growth will continue to slow from 3% in 2004 to 2% in 2005 before a marginal improvement in growth in 2006.

Hot topics

Design and technology
Recent trends in design and technology, as well as the need to have more engaging store environments, have led to the use of new materials and technologies. The addition of mezzanine levels to existing buildings is becoming popular. These are generally constructed by fixing steelwork to the existing frame, and the cost for a mezzanine structural floor ranges between £350/m² and £450/m^2. Tungsten halogen lighting systems are increasingly common and plasma display screens, coupled with entertainment software, are appearing as a promotional tool. Another growth area is the use of resin flooring and mastic asphalt floor finishes for a cost-effective alternative look.

Procurement of materials
Recently, materials and goods have been largely sourced and supplied from South-east Asia rather than the UK and Europe. This is because savings of up to 40% may be possible.

Legislation
The European Working Time Directive, which prescribes a maximum week of 48 hours, appears to be having significant effects on the seven-day weeks that were common practice in the shopfitting sector. This has tended to marginally increase the overall programme period. Other regulatory pressures on the sector include the effects of London’s congestion charge, the introduction of chip-and-pin credit card systems, the requirements of the Disability Discrimination Act and the Control of Asbestos at Work Regulations 2002.

Emerging markets
The shopfitting market is growing on the strength of demand from customers, and new markets are emerging within it – some examples are the automotive and car showroom markets, hair and beauty salons and health spas. With the anticipated deregulation of gambling laws, there is significant potential for shopfit commissions within the casino market.

Convenience stores
There is a trend for supermarket retailers such as Tesco, Sainsbury’s and Somerfield to try to increase their market share of the food sector by purchasing small convenience chains. Tesco purchased T&S Stores, adding 870 stores to its estate. Some 450 of these stores will be converted into Express Stores and the rest run under the One Stop Shop badge.

Sainsbury’s says the convenience market is one of the fastest growing segments in food retail, and it has put its money on this by purchasing Bells Stores. Once Sainsbury’s has completed its roll out, it will have about 200 convenience stores.

Somerfield have moved into this sector by acquiring Aberness, a Scottish company that owns and operates 36 stores. It has franchise arrangements with the operators of five of them, and distributes to a further 130 stores, all of which operate under the Mace brand.

Internet shopping
Internet shopping is now an important market for retailers and presents a potential threat to shopfitters. Tesco.com is the largest e-grocer, and most profitable e-retail business, in the world. It has a turnover of £447m.

Specialist Q&A

The Pel Group is one of the UK’s top 10 shopfitters; it differs from its competitors in that it develops and manufactures products as well as project-managing fit-outs. It also has its own M&E arm, which enables it to offer a complete service from a single point of contact. Here, director Bill Fraser talks about the issues facing the shopfitting specialist.

What sector do you specialise in?

We mainly specialise in general retail. However, because retail sector demand peaks twice a year, we are trying to organise our business so we get 12 months of even workload by specialising in as many areas as possible. Our skills base is transferable to other sectors so we are looking at the automotive sector as demand there peaks at different times. We are also looking at the office sector and we have a framework deal with BAA for another six years – for example, we will make and install the check-in, security and customer information desks at Heathrow Terminal 5.

Is the shopfitting market healthy at the moment?

Yes, it’s very healthy. Our biggest customer is the House of Fraser, which provides us with a constant stream of work, followed by Marks & Spencer, Arcadia and Sainsbury’s. One of the biggest things affecting us is the lack of skills. The fact we can’t get skilled people shows how buoyant the sector is.

What are the main pressures on you at the moment?

The market is buoyant but very competitive – margins are under extreme pressure because the premier league of stores is trying to cut costs. Lead times are becoming shorter, we’re getting less money to do the work and retailers don’t want their stores closed while we do the work.

How are you coping with tightening margins?

One key thing is careful supply-chain management to bundle up packages of work to get the best possible price. For example, I can guarantee our fixing specialists constant work so I can get the best possible price from them. We are currently recruiting a supply-chain manager to look after this. Driving out waste is also important; we now use a collaboration tool that saves us money. And we’re in a good position in the market, as we’re a hybrid firm and can bring in new custom from our manufacturing arm. So we developed a fireplace stand for Homebase, now we are making it and project managing the installation and suddenly we’re doing the whole package. Traditional shopfitters don’t have the manufacturing and M&E capability so have to bring in subcontractors and add their margins on to the price.

How do you think more traditional firms will cope?

They’ll definitely have to work smarter to offer more. I think they will have to diversify their base and increase their turnover just to make the same amount of profit.

What are the current shopfitting trends?

Two years ago the big drive was to make the envelope – the ceilings, floors and walls of the store – last 10 years and the fixtures last two to three. Nowadays, people are trying to engineer out as much cost as possible and design just for today, not tomorrow. Also, everyone’s trying to use design to get people into stores and to get them to stay longer. There’s no new equipment coming into the market, it’s just better value.

Has the Disability Discrimination Act created extra work?

A fair amount of work is coming out of this; we are currently doing a lot of work on BP’s forecourts installing things such as ramps and voice amplifiers. As we approach January a lot of work will be created by the DDA; it’s a topic everyone’s talking about at the moment.

What will change in the next two years?

It will continue to be a competitive market.

The industry brings in a lot of manufactured products from the Far East but I think this bubble will burst and production will move to places like India and Poland. I think eventually production will come back to the UK as people have had their fingers burned by things like stuff not being delivered on time.

Procurement

A number of shopfitters interviewed recently have suggested that procurement and contractor selection is predominantly driven by cost rather than experience or quality of workmanship. However, it appears that an average of 50% of work is still procured by negotiation based on an agreed schedule of rates with previous or known clients. Some shopfitters say that profits and overheads generally appear to be falling. With profit margins sometimes as low as 1%, there is fierce competition, particularly where tender figures are used as the key indicator for contractor selection.

The key issues for most schemes are centred on cost, time and quality, and as mentioned above, achieving the right balance between sales footage, merchandising densities and ambience.

The aim is to minimise the construction and fit-out period to enable the earliest possible start to trading, and to do so for a low enough cost.

Where works are carried out while stores are trading, the contractor should advise the design team as early as possible about the buildability of their plans, and how the project will be phased as the design is developed.

Prefabricated components should be used wherever possible to allow trading to continue normally while work is carried out. The project might vary during the construction phase to accommodate site conditions encountered as works are opened up, so the ability to accommodate changes is important.

Procurement options
The following assumes the works are to an existing shell, or a new-build shell has been procured under a separate contract:

• Single-stage lump-sum tender 

The single-stage process enables quality levels to be controlled through detailed design, although this can lengthen the preconstruction period compared with other forms of procurement. Early input from contractors regarding buildability is not possible, making it difficult for retailers who demand flexibility.

A key factor is the quality of information produced by the design team, and if this can be kept to a high standard then cost security is maintained.

• Two-stage lump-sum tender 

The two-stage process ensures a shopfitter can be involved early in the co-ordination and detailed design process, and that the works packages are let to specialist contractors identified by the project team. This allows for early cost certainty and an agreed basis for valuing changes that the retailer may require.

The success of this process will depend on the project team’s ability to work together to respond to changes to the client’s requirements. If there is inadequate design preparation at the first stage it will lead to difficulties in securing both cost and programme.

• Construction management 

The construction management route delivers many of the benefits of the two-stage process. It also benefits from the construction manager’s knowledge of larger more complex projects and has the potential for making time savings by overlapping the design and construction processes.

The drawbacks are lack of cost certainty in the early stages and the client’s retention of risk. However, for some retailers this hands-on approach gives them the degree of control they desire.

• Design-and-build 

This route involves the completion of the outline design by the client team, and the detailed design, procurement and management of the works by the shopfitter or contractor. In this case the contractor takes responsibility for the design and it is more suitable for retailers who have set and repetitive designs or systems. The contractor is responsible for adapting these systems to site conditions.

The key benefits are a single point of responsibility and cost certainty, however an independent professional team needs to be appointed to act for the client to monitor quality and performance. The drawbacks are lack of flexibility to respond to changes.

Design considerations

Shops and retail outlets are designed to provide the occupier with a balance between the optimum possible sales area, a good store environment and back-of-house functional areas. Some of the key design issues include maximising the number of checkouts and ensuring that customers can circulate freely around the store. Store ambience includes good lighting to highlight products, an enticing shopfront to tempt people in and the right level of heating, cooling and ventilation. Consideration should also be given to the customer services areas such as fitting rooms and service desks, stockroom areas, offices and staff rooms and facilities and security systems.

Merchandising density
The bay-length of perimeter merchandising systems and shelving (usually 600 mm or 1200 mm) will affect the flexibility of increasing or decreasing merchandising space for departments or product areas. The distance between mid-floor units (1000 mm to 2000 mm) will depend on the products being displayed. Consideration needs to be given to the shelving system, for example the use of double or single-slotted uprights for shelving. This affects how many additional shelves can be accommodated independently of each adjacent bay. The ability to double-hang or single-hang merchandise, gondola sizes and heights and the ability of the shelving and metalwork system to support the products should also be considered.

Store environment and appearance
Materials used in shopfitting include timber, laminates, glass, acrylic, stainless steel and satin chrome. The choice of floor, wall and ceiling finishes affects the customer perception of the store and the brand, so as a general rule the more expensive the product, the more expensive the furniture used to display it.

Store flexibility and layouts
A flexible layout means stores can be easily reconfigured as needs change. Merchandising equipment with castors makes it easy to move units around and moveable screens provide an opportunity to demarcate departments or product lines as well as present branding opportunities.

Programme

The following programme times are for the design, manufacture and installation of sales area finishes, services, perimeter and centre merchandising systems for the sales area of typical stores.

Department store of 7432 m² sales area

• Design and procurement: 8-16 weeks (overlapping)
• Manufacture and production: 12-16 weeks (overlapping with installation)
• Installation: 12-16 weeks

Fashion store of 743 m² sales area

• Design and procurement: 6-12 weeks (overlapping)
• Manufacture and production: 8-12 weeks (overlapping with installation)
• Installation: 8-12 weeks

Convenience store of 185 m² sales area

• Design and procurement: 4-8 weeks (overlapping)
• Manufacture/production 6-2 weeks (overlapping with installation)
• Installation: 4-6 weeks

This datafile was compiled by Russell O’Hare, a member of Gardiner & Theobald’s Retail Group. For further information email: r.o’hare@gardiner.com