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You didn鈥檛 have to work for one of Tesco鈥檚 rivals to feel a certain schadenfreude at its public humiliation last month. With over 30% of market share - almost twice that of nearest competitor Asda - Tesco is a beast big enough to attract little compassion when it was forced to announce a 拢804m property writedown, and total withdrawal from the US market.

Tesco鈥檚 announcement was no huge surprise. In January 2012 the company鈥檚 chief executive Philip Clarke announced an end to the decade-long 鈥渟pace race鈥� in which the UK鈥檚 biggest supermarkets vied to get floor space, even buying up land with no intention of developing it to prevent competitors from doing so. 鈥淔or Tesco, with the sort of growth they鈥檝e seen in recent years, it just wasn鈥檛 sustainable to continue growing at that pace,鈥� says Ben Agyekum, director and head of retail development at consultancy Davis Langdon. 鈥淭here was always going to be a point where they have a few years to take a rain-check.鈥�

The implications of the announcement are a serious matter for the construction industry. While Tesco is expected to build out stores it has started, the 拢800m writedown was based on more than 100 sites that the company had bought before the 2008 crash and no longer intends to develop. In addition, Tesco has signalled its intention to move away from building more huge out-of-town developments and instead it intends to focus on renewing its existing stores and building up its presence in the convenience store market, represented by the Tesco Extra and Tesco Metro brands. That is a significant reduction in the retail pipeline. But how representative is Tesco鈥檚 situation of the wider supermarket sector? And how should the construction industry adapt?

Think small

According to industry analysts, while the retraction in Tesco鈥檚 store development is by far the most dramatic change, the other big supermarkets are rethinking their plans. For instance, Christopher Keen, director of the retail lease consultancy at property firm CBRE, says that Sainsbury鈥檚 completed 1.5m ft2 last year but is likely to reach only 1m ft2 in the next year. 鈥淚 think that the typical trend is that they鈥檙e all, apart from Tesco, going to press on with the big stores, they鈥檙e just going to do less of it,鈥� says Keen. 鈥淭hey鈥檒l be doing about two-thirds of what they have been doing. They鈥檒l just choose the stores that will provide the biggest return.鈥�

We are looking for more opportunities around the country. We鈥檙e looking at London suburbs. Growth in convenience stores is a big part of our strategy

Tony Jacob, John Lewis Partnership

The change in direction is being felt by construction, with architects specialising in big retail already noticing a difference. 鈥淕one are the days of buying sites to block competition and build up land banks - the money isn鈥檛 there anymore,鈥� says Darrel Owens, regional director, head of retail Europe and international at Aedas Architects. 鈥淪upermarkets need a healthy, quick return on investment. The majority of the supermarkets are pulling away from complex, mixed-use, and multi-ownership sites.鈥�

Contractor the Simons Group, which specialises in supermarket development, has also seen opportunities decrease significantly and has had to restructure the business to fit the 鈥渟ize and shape鈥� of the current market, according to customer relations director Mark Noonan. 鈥淲e鈥檙e continuing to work with those who do have expansion plans, so Morrisons and Waitrose are high up our target list in terms of how we keep our business fed,鈥� he says. 鈥淲e are starting to look at other markets and where else we could use the skills of the business to continue to get back to growth. But it is a challenge.鈥�

However, while there is certainly a move away from building out-of-town superstores, food retailers are increasingly active in the convenience store market. Tesco last month stated that it will continue to open convenience stores, with 150 scheduled to open in the next year out of a pipeline of 800. According to Keen, Morrisons will be 鈥渋ncreasingly aggressive鈥� and Sainsbury鈥檚 will continue to grow its market share, while Tony Jacob, head of construction and engineering at Waitrose鈥檚 parent company the John Lewis Partnership, says that the retailer is increasingly interested in moving into the market. 鈥淲e鈥檙e looking to deliver 10 of our core supermarkets and up to 10 convenience shops every year,鈥� he says. 鈥淲e鈥檙e still relatively new to the convenience sector. But we are looking for more opportunities around the country. We鈥檙e looking at London suburbs. Growth in convenience stores is a big part of our strategy.鈥�

In part, the move towards smaller shops is indicative of consumers鈥� changing shopping habits, with city-dwellers in particular preferring to do big shops online and either have them delivered or pick them up from stores at the weekend. They then buy extras from convenience outlets during the week. 鈥淗ow often do you get a chance to get in the car and do a big supermarket shop?鈥漚sks Peter Cummings, director of retail at QS Turner and Townsend. 鈥淚 think you鈥檒l see more and more convenience offerings in and around transport.鈥� CBRE鈥檚 Keen adds: 鈥淭he pot of capital expenditure that exists for store development isn鈥檛 unlimited. In the past they鈥檝e pursued growth by building big superstores. Now that pot is going to be spent on convenience stores. The reason for that is changing consumer habits - people do more top-up shopping.鈥�

However, there are also shorter term financial and strategic motivations at play. Convenience stores are far quicker and cheaper to get off the ground than big out-of-town developments. For a start, they are generally located in existing space or part of a wider development, meaning planning isn鈥檛 such an issue, and if a supermarket takes on a lease from another developer there are no construction costs, just the fit-out to pay for. What鈥檚 more, in the current market, big food retailers are in a position of strength when it comes to negotiating with a developer: a pre-let with a major supermarket can make the difference between a viable scheme and one that is merely aspirational.

鈥淢ost developers now are looking at smaller format supermarkets with other uses around it,鈥� says Agyekum. 鈥淭hat鈥檚 been a driver because retailers do have a good covenant. So if you鈥檙e looking at a development and you know you can get a Sainsbury鈥檚 Local or a Tesco Metro they鈥檒l give you a good covenant and rent and will make your development work.鈥�

Shrink to grow

However, perhaps the greatest driver of the rush to the convenience end of the market is that the big supermarkets have spotted a major growth opportunity. While the big food retailers have the market largely sewn up when it comes to larger stores - when was the last time you found an independently-owned supermarket? - they still represent a small proportion of all convenience stores in the UK. According to CBRE research, independently owned stores make up 40% of the convenience store market, while franchises such as Spar, Budgens and Londis account for a further 30%. In contrast, 禄 禄 the big supermarkets comprise just 20%. 鈥淚t鈥檚 an immature market,鈥� says Keen. 鈥淚t鈥檚 clear that there is a massive opportunity there. There鈥檚 just so much to go at - it鈥檚 a sensible place to concentrate your resources.鈥�

Going down the convenience store route could also fit in well with retailers鈥� online expansion and provide an alternative to the development of so-called 鈥渄ark stores鈥�: logistics stores laid out as supermarkets in which workers put together customers鈥� online orders for distribution. If a supermarket decided to concentrate on providing 鈥渃lick and collect鈥� shopping, an extensive convenience store portfolio could serve a huge chunk of the population. Even storage is less of a problem than might be presumed: in order to be allowed to trade all day on a Sunday, convenience stores need to be under 3,000ft2, but most have at least the same again for storage. 鈥淲e expect to see more click and collect, and convenience stores provide a very powerful network,鈥� says Keen. 鈥淚t鈥檚 almost a better network than the Royal Mail has got.鈥�

Most developers now are looking at smaller format supermarkets with other uses around it

Ben Agyekum, Davis Langdon

So, driven by the rise of online shopping and with a strategy based on expansion into the convenience market, the building needs of the supermarkets are changing significantly. This of course has a massive impact on what type of work will be available to the construction industry in the short and medium term. First, the majority of new convenience stores are likely to open in existing units, with spaces vacated by the likes of HMV prime targets. 鈥淭he biggest impact [of the change in direction] is that it鈥檚 changed the supply base to the big retailers,鈥� says Noonan at the Simons Group. 鈥淲hen you鈥檙e only building or fitting out a 4,500ft2 unit it gives the customer the opportunity to buy further down the supply chain.鈥� In other words, the concentration on opening convenience stores in existing locations may be beneficial to fit-out specialists, but it is of no value to main contractors.

Even where convenience stores are planned for new build developments - typically on the ground floor of a residential or commercial block - contractors that have built up a relationship with the supermarkets are unlikely to see any work as the supermarket is unlikely to act as client and will again only directly engage a fit-out specialist. 鈥淲e can have the best and longest-term relationship with these guys where we鈥檝e been delivering sites for them for years,鈥� says Noonan. 鈥淏ut when it comes to convenience stores it鈥檚 being bought in an entirely different way. Our relationships with them are fairly irrelevant.鈥�

The development of dark stores too is unlikely to provide a great deal of work for main contractors. While some hope has been invested in the concept, the supermarkets have proceeded cautiously and discovered that in most cases existing structures can meet their needs adequately: all they really need is a shed the approximate size of a supermarket, which they can then fill with outdated shelving from stores undergoing refurbishment. It鈥檚 a cheap and effective solution for the supermarkets - and another disappointment for construction.

However, for other types of firms there will be work available. For instance, Tesco isn鈥檛 alone in placing greater emphasis on improving their existing stock - Sainsbury鈥檚 too has major refurbishment plans - which should provide opportunities for firms specialising in retrofit work. 鈥淲ith energy prices going through the roof, life-cycle costing is becoming very important,鈥� says Aedas鈥� Owen. 鈥淲e鈥檙e seeing a lot of estate management initiatives being looked at, such as upgrading the building envelope and renewable energy.鈥�

So the circumstances have changed and the industry must adapt to the new reality. 鈥淭he construction supply chain must adapt accordingly - developing leaner, faster teams for what will generally be a higher volume of smaller value projects,鈥� says Colin Turner, head of corporate occupiers and retail at EC Harris. Turner & Townsend鈥檚 Cummings adds: 鈥淲hether you鈥檙e a consultant or a contractor, the clients will be looking to us to drive efficiency. So if you鈥檝e got a bit of volume coming through - say 50 small jobs instead of one big one - how do you drive efficiency and consistency? It鈥檚 not all negative.鈥�