Retail fit-out offers repeated high volumes of work as well as high-end one-off projects. Neal Kalita of Davis Langdon outlines the particular demands of high street fit-outs, details the procurement and project management issues and breaks down the refurbishment costs
Retail fit-out as a sector typically involves delivering a variety of sales floor formats across a diverse portfolio of buildings. For both consultants and contractors, this work usually entails a challenging programme and slim margins but offers repeated high volumes of work. Retail fit-out has its one-off clients, too, who – particularly at the high end – can offer a range of challenges associated with briefing, design, quality of workmanship and client expectation.
This article examines the scope of retail fit-out works, details the procurement and project management issues and the construction costs associated with the refurbishment of high-street units forming part of the portfolio of a nationwide retailer.
02 The retailer’s drivers for change
In refurbishing a shop unit, the goal of the project team usually is to maximise sales revenue for the minimum capital expenditure. Creating an environment that is both appealing to the consumer and displays the retailer’s merchandise in the best possible light are fundamental to this goal. How this is achieved depends on the brand values of the retailer.
A recent survey conducted by Wates Retail and Allegra Strategies asked retailers what their prime motivation was for store refurbishment. The top three responses were:
- Need – creating an environment that attracts shoppers and displays the retailer’s products as favourably as possible
- Competitor actions – reacting to portfolio refreshments by competitors to prevent loss of sales
- Return on investment – generating additional sales. Any expenditure needs to contribute directly to the bottom line within an acceptable payback period.
Other common drivers behind a retail refurbishment programme include:
- Increasing the sales area of units to raise the potential for generating more revenue
- Implementing a rebranding exercise
- A change in the client’s management board
- As part of an expansion programme where the retailer may have recently purchased a number of stores from a competitor
- In response to declining share performance, when the retailer may embark on a store refreshment programme to recover its position
- The implementation of measures to ensure compliance with regulations, such as the Disability Discrimination Act
- The introduction of technology to offer shoppers new experiences (such as WiFi or the internet) or to derive greater operational efficiency (such as RFID product tagging, electronic point of sale, or chip and pin).
The challenge for the project manager involves relating the brief to these drivers. This places a premium on the project team’s understanding of the client’s objectives and their ability to meet them within challenging time and cost targets.
The primary tension is between capital expenditure and revenue expenditure. Most retailers prefer to focus their spending to meet only their immediate objectives. However, sustainability and corporate social responsibility are starting to change the agenda.
Because of accounting policies and profit and loss considerations, retailers prefer to invest capital in the retail portfolio rather than rely on revenue expenditure. In some cases, retailers will spend to save, investing in new kit to reduce running costs. Whatever the source of the finance, these projects are highly cost-sensitive, with the multiplier effect of a large portfolio increasing the incentive to drive costs down through the supply chain.
The balance between capital and operational expenditure will also have a knock-on effect on product selection to meet the required specification, replacement lifecycles and planned maintenance regimes.
Another challenge is the level of workload in the sector and the limited availability of shopfitters capable of meeting a retail client’s expectations. Merger and acquisition activity, such as Primark’s refurbishment of 40 Littlewoods stores and Morrison’s sale of six stores to Waitrose, add to the pressure on resources.
The sheer weight of workload associated with a national roll-out, and the challenges of delivering most work out-of-hours, can mean that there are few fit-out specialists capable of meeting the demand and geographical spread of the work available. An alternative strategy is to identify local, smaller shopfitters that can deliver a number of
fit-outs in their region. This potentially increases the management effort required by the client and raises the risk of inconsistent delivery.
Critical success factors
Success revolves around the control of cost, programme and project risks related to maintenance of sales, reputation and so on. Additional factors include:
- Minimal disruption to customers and store operations
- Avoidance of loss of sales during the works
- Increased sales and prompt payback on the cost of the works
- Alignment between store environment and brand values
- Presenting merchandise in a manner that creates maximum impact
- Keeping customers and attracting new ones.
03 Portfolio-wide issues
Most fit-out opportunity is focused on the refurbishment of high-street units, with logistical and site management issues associated with location, deliveries and “considerate contractor” issues such as noise prevention.
For food retailers, a particular challenge relates to the limited working hours available to perform the works. Out-of-hours working has an impact on costs, and the availability of operatives and site management. Other programme-related pressures relate to seasonal sales patterns. Retailers focus on the key sales periods of Easter and Christmas and naturally projects have to be completed by February and September respectively to be ready to trade. These priorities can make for a lumpy pattern of workload, and clients can expect lead-in times for the manufacture of shopfitting items to increase during these periods, too.
The format being refurbished also largely determines the complexity of the programme of works, with department store-style units being the most complex, because of the wider range of facilities such as catering, customer WCs, and staff and store management suites.
The difference in fitting out a high-street unit and one in a shopping centre primarily revolves around design and layout. In the high street, the retailer can brand the unit as and how they see fit, but the layout of the store is determined by the unit’s dimensions and shape. Whereas in a shopping centre unit, the unit is uniform and there is greater flexibility in store layout. However, the design of the shopfront may be constrained by the centre’s design guidelines.
In general, there are two types of fit-out works:
- “Refurbishment” involves significant works where all elements in the front of house, comprising shopfitting, signage, sales floor reconfiguration and M&E systems, are refit. Retailers typically try to keep the scope of work to back-of-house functions as limited as possible, and these are rarely incorporated into the works.
- “Refreshment” focuses on the elements that will have the highest impact on sales for the least cost and disruption.
Some programmes comprise both types of work, particularly when merging store portfolios that were formerly part of different retail chains. This combination is a cost-effective way of homogenising a disparate retail estate – refresh the units you already own and refurbish the units you just bought.
The location, age and layout of the building stock comprising the portfolio also contributes to the complexity of the refurbishment required. Existing buildings present their own challenges, including:
- Not enough capacity in the services infrastructure
- Not enough room to accommodate the M&E plant
- Higher than usual costs of complying to DDA and Part L requirements.
Some of the issues affecting the units in general, regardless of age, include:
- Unit size, retail frontage, extent of zone A
- Variations in the product mix – this has an impact on the amount and types of racking, and so on, that need to be installed
- Heritage buildings in the portfolio potentially raises issues such as the need for planning/listed building consent and DDA compliance.
Another issue related to the age of the base building, will be the condition of the fabric and M&E systems. Because of the challenging delivery programmes, it is not always possible to obtain comprehensive surveys ahead of the completion of the design. As a result, the condition of the base building, including the presence of asbestos, can be a source of considerable risk until the building is opened up.
04 M&E services issues
When it comes to M&E systems, the capital expenditure vs revenue issue mentioned earlier is particularly significant. With energy emerging as a major cost centre, some retailers are beginning to consider “spend to save” options. Similarly, where a retail unit has been taken over from another retailer, previous maintenance regimes might not meet the new client’s standards, and additional capital expenditure investment might prove necessary to bring the systems up to an acceptable standard.
The key priorities in replacing M&E systems as part of a refurbishment programme are simplification, the use of standard products, minimising on-site work and phasing the works in such a way so as to allow trading to continue. Prefabricated systems are an option, but other than skid-mounted plant or packaged units, there is not much opportunity to implement mechanical systems in a high street unit. Plug & Play technology, which eases the installation of busbars and track lighting, also meets the simplified agenda and is used to a greater degree.
The focus of M&E refurbishment is usually on lighting and the reconfiguration of the sales area layout to increase the flexibility of the space – for example, moving the tills into grouped banks and locating them on the perimeter of the sales area. This enables all services to be distributed via the ceiling void and perimeter, rather than via a floor void. In older stores, reconfiguration can affect the means of escape strategy, which needs to be carefully considered.
Lighting contributes significantly to the “feel” of the retail environment. The normal specification for display lighting can be up to 1000 lux, compared with the BCO standard for offices at 350 lux. Controls, high-efficiency lamps and fittings can contribute to reducing the energy consumption, as can the use of alternative lighting technologies such as fibre optics or LEDs.
Refurbishing refrigeration and cooling units usually involves increasing efficiency either by replacing the gas compressor or by installing higher-efficiency units. Although the initial cost may be higher, the payback is the lower running costs. Because of their sensitive nature, the installation of security systems is usually performed in-house (that is, by the retailer) and are part of the final fit-out.
The main procurement routes used in retail refurbishment programmes are management contract and design-and-build. Managed correctly, either option can give sufficient flexibility to accommodate necessary change but not enough to disrupt or delay practical completion. In addition, they can allow for “discovery” items not previously taken account of, such as old or redundant services.
Management contracting (MC) involves the appointment of the contractor on a two-stage basis in accordance with a fee and preliminaries submission. Measured works are tendered or negotiated as the design is completed, forming part of an agreed contract sum. Design-and-build (D&B) can be let on the basis of single-stage or two-stage tenders. The fundamental difference between MC and D&B is the allocation of single point responsibility to the contractor under the design and build option. D&B is particularly well suited to the delivery of a relatively standardised product such as a chain store interior.
As speed of response can be so important to retail clients, partnering and framework arrangements are well suited to major roll-out programmes with a known volume of work available. Some partnering arrangements are formal, whereas many others are based on long-term, informal practice. The benefits of framework agreements such as these include:
- Savings on tendering time and cost
- The project team gets to know the retailer, its values and what it is trying to achieve with its property portfolio
- Retention of the right people
- Consistency in quality, service and availability for any additional works
- Lessons learned in early refurbishments can be transferred to later units in order to drive costs down further.
Retailers are masters of supply chain management and regularly use their buying power to leverage economies of scale. Direct purchases can cover long lead-in items such as lifts and escalators, but are mostly used to deal with high-volume items such as lamps, light fittings and shopfittings. When negotiating a direct contract for long lead-in items, it is important to factor in a call-off arrangement in order to maximise the benefits of purchasing direct from the supplier or manufacturer, and to put in place necessary arrangements for novation to the contractor once works start – if appropriate.
Site works associated with a direct contract may be either by the supplier or the main contractor. Clarifying who is responsible for installation and co-ordinating any interfaces are important aspects of the management of the on-site works.
Rising energy costs are fast becoming a major operational cost for retailers. This has prompted low energy-driven sustainability to come to the fore. The underlying business drivers for the retailer are that the cost of getting goods to the shop floor is rising, but the increase cannot be passed on to the shopper for fear of losing them and thus harming sales and revenue generation.
The biggest sources of direct and embodied energy use, such as intensive lighting installations and regular refurbishments, are fundamental to the retail model. Therefore, investment to mitigate their effects is the only practical option. An initial step might be to identify the financial incentives for implementing energy efficiency practices. Enhanced capital allowances (ECAs) can contribute to reducing the capital cost of implementing such a strategy, offering recovery of 100% of allowances in the first year. There are caveats, however:
- ECAs are only available on equipment listed on the Inland Revenue’s website. These include things like multi-speed pumps, which form part of bigger components such as chillers and so on.
- ECAs don’t make efficient options cost-competitive on an initial cost basis – this is crucial to deciding whether they will be applied to the refurbishment programme.
Retailers are also conducting pilot trials of sustainable technologies in store, to assess the impact on footfall, operational costs and the payback period. The focus of most of the trials are to investigate methods of reducing energy cost such as:
- The use of renewable energy sources and how this might work in the high street or shopping centre context
- In food stores, the recycling of cooled air generated from refrigeration to lower the ambient temperature of the store and/or using a heat exchanger to take the heat generated by refrigeration to raise the ambient temperature.
07 Project management best practice
As mentioned earlier, a successful refurbishment programme entails managing the repeated delivery of a product as efficiently and cost-effectively as possible within programme constraints. Here are some best practice pointers:
- Understand the client’s requirements and concerns in respect of lost sales through disruption, relocation of departments and reduced sales areas while the work is progressing
- Understand the pace of the retail sector and respond quickly to all the associated issues
- Advise the clients of associated risks with refurbishments and managing those risks proactively. For example, asbestos removal, programme implications and phasing
- Appoint and manage a proactive, appropriately experienced, professional team that understands retail fit-out and refurbishment
- Procure work so that when an area is taken out of use, all subcontractors are available to work and all information to allow them to work is signed off
- Carry out work at times of the year when the store is less busy
- Minimise the disruption to customers by phasing, careful use of hoardings, quiet working periods and use of temporary signage
- Maximise night-time working where this is cost-effective
- Regularly liaise with both the contractor and the store manager to ensure the store manager knows the current state of phasing.
a - Retail fit-out cost breakdown
The costs represented in the model relate to refurbishment works of high-street units in the portfolio for a national retailer. All rates are based on daytime working.
Due to the varying quality levels of fit-out, the model focuses on items common to all refurbishments. Tables (c) and (d) reflect cost and specification variation respectively for retailers across the quality spectrum.
The costs presented are derived from current project data, dated June 2006, for units located in London. Excluded are professional fees, VAT and specific site abnormals. The rates may need to be adjusted to account for specification, site conditions, procurement route programme and amount of out-of- hours work.
For preliminaries and overheads, an indicative percentage of 18% should be added. A further 7% should be added to this to account for out-of-hours working.
With respect to the M&E costs, refurbishment of retail spaces involves modifications to existing services, where ductwork and grilles, for example, have to be relocated to suit new shop-floor layouts. Rates include installation.
It has been assumed that new installations are taken from existing risers that have sufficient capacity to cope with the new installations.
- Fittings and furnishings
- End-user equipment (telephone hardware and equipment)
- Builders work in connection
- Electrical works to fire/smoke/emergency generation/UPS installations
- Works to utilities, except where shown
- Equipment for head end use
- Decanting/relocation/enabling works
- Hot and cold water services
- Audio visual
- CCTV installations
The costs presented here are for outer London. Most items used in retail refurbishment are proprietary and hence a low level of labour is required. As such there is little regional variation in the costs and rates presented.
(See table - “Indicative rates for high-street retail services refurbishment”)
Nick Clare, Lionel Dore and Paul Zuccherelli, partners, Davis Langdon retail sector.
Special thanks to: Ross Charrot of Mott Green Wall and Daniel Hunt (DL Retail) for the cost model data.