Supermarkets have long been Britain’s toughest clients. Well now they’re getting even tougher. Sarah Richardson found out how – and what construction firms are doing to meet their demands
One thing supermarkets are superb at is using their buying power to squeeze their suppliers’ margins. When the construction market was booming, consultants and contractors had some protection; now that it is in famine, they have none. So far this year, fees have been cut by 40%, contracts have been renegotiated and payment periods have stretched to 90 days. In effect, the industry has been forced to offer a permanent January sale.
Up until now, Tesco has been setting the pace for other chains, but it seems the others are catching up. Fee cuts of about 25% are now seen as “fairly standard”, according to one senior source. Building can also reveal that some retailers are going further, demanding money back from firms to which they award more than one contract.
Even though they are being forced to offer discounts and cashback, contractors and consultants are reluctant to leave a sector that offers £2.5bn of work a year. Instead, they are having to come up with ways to survive in the market – and some are taking the fight back to the retailers with cuts of their own.
One of the most controversial policies being adopted by some retailers is a rebate system. This hits contractors and consultants that win large sums of work with a particular retailer with a demand to pay back money from earlier contracts when new work is won, effectively lowering the fee received for all the work. Rates vary, but can be as much as 7.5% of the contract value, according to a senior consultant. The source says: “It’s triggered if you get over a certain volume. Typically, if you win work worth up to £500,000 in fees then you’re fine. But if you get more, they will ask for some money back.” The level of rebate rises according to the amount of work done, so a firm earning £1m-£2m, for example, will be charged more than one earning £500,000-£1m. The system is understood to be more common in retailers with larger programmes. The consultant source says: “There are some chunky requests; it’s a voracious bidding war among providers.” It is understood that some retailers have used the system previously, but sources say it has become more prevalent during the recession.
It is understood that the Co-op, which recently took over Somerfield, is among those employing the policy. Supply chain sources say that Tesco has also made similar requests, with one company claiming it was asked to pay a six-figure sum. However, a Tesco spokesperson denies that the company is using a rebate system.
Although Tesco denies the charge, its tough attitude to its suppliers in other respects is well known. But the fact that tough tactics are being used by the Co-op, a brand that prides itself on its cuddly image, might come as a surprise. A Co-op spokesperson declines to confirm or deny its policy towards suppliers: “We employ numerous contractors and many more would work with us if the opportunity arose. However, details of contracts must remain confidential.”
Tesco’s tough attitude to its suppliers is notorious, but the fact that it is being copied by the Co-op might come as a surprise
Catherine Tobiasinsky, head of retail at EC Harris, says the fact that even clients like Co-op are getting tougher is an indication of the market: “There’s a generic direction of travel now among retailers. There’s nobody out there with soft terms.” She adds that the Co-op’s £1.6bn takeover of Somerfield in March had led it to review its supply chain arrangements. “Generally, there has been price deflation, the merger is used to bring supply chains in line with that.”
Another source in the Co-op’s supply chain says: “It might be a shock in terms of brand. But the Co-op has large in-house teams, which creates an ‘us and them’ situation. You feel it could take the work in-house if you don’t give it what it wants.”
In fact, frameworks up and down the sector are being retendered or scrapped as clients try to get out of deals agreed when tender prices were rising. “Numerous retailers are looking to retender their frameworks, and others are also in direct negotiations to reduce costs,” says Richard Taylor, head of retail at Davis Langdon. Companies also say there is a growing tendency to tender projects individually. Clive Pople, retail director at Willmott Dixon, which works with Morrisons and Waitrose, says clients are focusing on lowest bids rather than outturn costs. “Although retailers are still seeing the delivery benefits of frameworks, there is a tendency to introduce price competition.”
Retailers are also continuing to ask for fee cuts from consultants, a practice that emerged in January when Tesco wrote to its supply chain asking for reductions of up to 40% on previous rates. One source says: “Tesco are ahead of the market, but it’s the same thing wherever you go. It’s quite frightening.” The Co-op, again, is one of those understood to be asking for cuts. “It’s not Tesco-style, but it’s double-digit percentages.”
The source ventures that the spread of the fee-cutting could be partly explained by the Tesco diaspora. The supermarket, which has had a high churn rate in its development team over the past three years, recently axed about 30 jobs in its property division. “There’s been a lot of migration of Tesco ‘talent’ and we’re seeing a lot of Tesco-style practice.”
The consensus among the suppliers is that retail may always have been tough, but the sector is now pushing the supply chain to its limits. “They’re looking to drive the last penny out of a deal,” is the verdict of one contractor.
A source at a major consultant says their firm is taking senior staff out of projects where it can use a junior alternative
However, with the Construction Products Association forecasting a 42% decline in retail new build over the next 18 months, the big clients in the sector represent vital work for those who can get it (see box, below). For this reason, most suppliers are reluctant to walk away from them, meaning they are being forced to review their own services to cope with the pressure on costs.
EC Harris is one firm that has altered its strategy. “It’s an economic reality for us,” says Tobiasinsky. “It’s forced us to scrutinise how we resource and deliver pieces of work and programmes to drive greater efficiency.” One efficiency is to provide clients with a combined cost and project manager. “We’re asking people now to work in different ways than they would have done before.”
Another source at a major consultant, who does not want to be named, says their firm is taking senior staff out of projects where it can use a junior alternative. The source says: “We’ve taken anything that’s not actually part of the required scope out of our offering. We’re delivering what the client wants and no extras. We’re working with clients to look at ‘juniorising’ the team. In retail that’s possible as it’s a standardised format. Quite frankly we find efficiencies.”
Davis Langdon is adopting the opposite approach. It is taking more of a hit on its own costs to keep winning work. The firm says it “recognises the benefits of major repeat client programmes” and off the back of this undertakes specific research projects at little or no cost. It is also seconding people into retailers to assist with their programmes.
Such moves, however, are not an option for smaller players. The managing director of one niche consultant says his work with Marks & Spencer dried up at Christmas, and since then he has avoided new work in retail. “Even on frameworks, clients are asking for as much as 40% off,” he says. “We haven’t been pushing in the sector since our work went dead, for that reason. We’ve got enough elsewhere.”
Bob Rendell, managing director of Leadbitter, echoes the view that clients are putting unbearable pressure on their supply chains. “People are getting discounts already in the prices quoted by contractors as the supply chain has been discounting over the past 12 months,” he says. “They’re at a level now where they’re becoming unsustainable for many companies. If clients are asking for discounts they should have been doing it two years ago. All they’re going to do is cause supply chain failures.”
Such views are likely to cut little ice with the retailers. As one consultant puts it, the industry is up against an aggressive commercial mentality and has to deal with it. “At the end of the day, you go shopping and you look for bargains. If baked beans are 20p in one place and 30p in another, you’ll buy the 20p ones. They’re working the market to their advantage, but they’ll be around for a while and there isn’t much we can do.”
What the retailers have in store …
It plans to open about 2 million ft2 of floorspace in 2009/10. It spends about £1.4bn on construction a year.
Following its takeover of Somerfield, it is engaged in one of the largest rebranding exercises in UK history. This year it will refit 700 retail outlets.
It plans to build 50 stores in 2009/10, with floor space set to grow by 5%. It plans a further 100 in 2010/11.
It built £234m worth of stores in 2008/09, and plans to open 22 more this year. John Lewis Partnership, its parent, has previously said it intends to spend up to £300m a year over the next decade, although this is subject to review.
Plans to open 500,00ft2 of
retail space in the year to January 2011. It is also integrating the 38 Co-op and Somerfield stores it bought in December after the merger of those two companies.