Company tells analysts the need for economies of scale makes the sector unviable for small operators.
Contracting-to-plant-hire firm Allen is quitting housebuilding because it cannot compete with larger rivals.

Analysts said the decision put a dent in the argument that there are no gains to be made from economies of scale, a claim often advanced by major housebuilders resisting consolidation.

Reporting a pre-tax profit rise of 14.5% to £20.6m for the 53 weeks to 2 April, chairman Donald Greenlaugh said that although the housing market remained strong, the firm could not continue to operate as a regional housebuilder.

Allen, which built 523 houses last year, told analysts on Tuesday that larger housebuilders could buy materials and labour 5-8% more cheaply, because of their greater purchasing power, and the bigger players could sell houses for 3-5% more because their marketing and advertising spend increased the value of their brands.

Stephen Rawlinson, analyst at Peel Hunt, said: “Allen has revealed that there are economies of scale in housebuilding after all. It appears the big boys have lower costs and get better prices than the small guys. The old argument that there are no advantages to be gained from size is false.”

Mike Foster of stockbroker Granville Baird said Allen’s move highlighted a change in the business culture of housebuilding, away from a reliance on local knowledge and land buying contacts to the economies of scale that larger players were starting to achieve through the Internet and e-commerce.

It appears the big guys have lower costs and get better prices than the little guys. The old argument that there are no advantages to be gained from size is false

Stephen Rawlinson, Analyst

“The argument about there being no advantages to being big is wrong and has now been shown to be wrong,” he said: “Frankly, the smaller players are now in a different league.”

Allen’s housing business, which operates out of seven offices in the North-west, North Wales, the Midlands and Yorkshire and employs about 100 staff, may be wound down, but is more likely to be sold. It made a record operating profit of £4.2m on turnover up 11.6% at £41.9m.

It reported an average selling price of £81 000 and an operating margin of 10.1%, both below the average for the listed sector. Allen is focusing growth on its tool and equipment hire divisions and its utilities business. The hire services arm had an operating profit of £15.4m, a rise of 13.2% on turnover up 19.9% to £82.5m. The utilities division made an operating profit of £2.6m, an increase of 3.6%, on turnover up 30.5% at £63.1m.

Once it has sold the housing arm, Allen may consider a move to support services, said chief executive Ken Fox. “It’s a possibility,” he said, “but the market has a habit of levelling itself out, and just as ratings seem to be coming down in support services, they seem to be coming back a bit in construction.”