Store revamp budgets have gone the same way as the economy – down. John Ryan asks how the shopfitting market is adapting
Nothing is forever. If you’d had some spare cash in November 2006, taking a punt on newly listed shopfitter Styles & Wood would have seemed judicious. The IPO priced shares in the company at £1.50 and by the summer of 2007 they had headed north towards the £2.50 mark.
They never got there, however, and a gradual, and then increasingly rapid, decline set in.
By the middle of last year the shares were changing hands at a little under 80p. Things picked up somewhat following a management change but then fell off a cliff when the newly installed chief executive issued a profit warning. At the moment you can pick the shares up for less than10p.
So what went wrong? After all, Styles & Wood seemed like one of the most solid bets in shopfitting, listing retailers such as John Lewis, Argos, Boots and Marks & Spencer among its many clients. And every year seemed to bring a fresh set of market-leading results with burgeoning order books, more extensive framework agreements and profits that may have appeared modest in relation to the turnover, but which invariably went in the right direction.
The truth of the matter is that this was a company that might have tried to diversify its activities, with a range of services over and beyond store fit-outs, but which was still reliant on the business of equipping shops for 70 per cent of its turnover. And as the economy tightened for retailers, so Styles & Wood’s attractiveness to investors faltered as store chiefs put the brakes on development programmes.
However, a little like M&S in 1997, there might be fewer customers availing themselves of Styles & Wood’s services, but among store fit-out firms it is still a large company, even if the share price might indicate otherwise.
And for chief executive Ivan McKeever, who has been in the hot seat for just under a year, there is still work to be done… just for a lower price. “There’s been less work going round. There’s pressure on margins, there’s no doubt about it. Consumers are looking for better value in the store and retailers are looking for best value,” he says. “I’m sure you’ve heard of the customer for life thing. Well now it’s the customer through thick and thin.”
Loyalty at a cost
From a practical perspective, for McKeever this has meant deciding whether cut-price work is worth doing for the sake of maintaining relationships in the hope that such loyalty will be rewarded when the economy recovers. He forecasts that Styles & Wood’s sales and profits will tumble by 20 per cent this year, but says that it’s essential for shopfitters to consider the nature of the business they undertake with retailers if they are to see out the recession.
He lists a number of projects that, while perhaps not green shoots in terms of the overall business, indicate there is still work around, such as the rebrand of Morrisons and contracts for Tesco, Sainsbury’s and Lidl all being carried out over the past 12 months.
And yet the point is that these are all food retailers. McKeever says: “The bit that’s been successful for us has been the food business.” Supermarkets have been retail’s golden goose since the onset of the recession and the majority of shopfitters that have been in a position to do so have directed their energies towards it. The problem is that while food retailers represent a very large slice of the UK retail cake, they are probably not enough to tide the whole of the shopfitting sector over.
So what is to be done? National Association of Shopfitters director Robert Hudson puts things succinctly: “As far as the banks are concerned, you’re in construction and so you’re a bad risk.” The same is true of investors, who have dumped Styles & Wood shares in favour of other stocks perceived as less risky.
Yet the fact is that Styles & Wood, like a number of the other larger players within the shopfitting sector, continues to be a pretty efficient company and one that still garners a substantial number of large retail fit-out and refurbishment jobs.
The nature of that work, however, is probably undergoing an overhaul. ISG Cathedral and ISG Pearce head of retail solutions John Mawhinney says: “There are a lot of enquiries coming through at the moment. But where you’ve got framework agreements, you’re generally in a safer position.”
He adds: “What a lot of clients are looking for are constructor-led solutions. This means we get more involved as a strategic partner.”
In plain English this means that rather than expecting more for less when delivering a new store, retailers want more for the same. Like McKeever, Mawhinney notes that companies that are prepared to accept lower margins and have “real relationships” are likely to be those that emerge from the present turmoil – others will not.
There is also the matter of declining contract numbers. Nino Calandra, chief executive of storefitting at Nuttalls, says that many retailer are “shelving longer-term projects” and that this is resulting in shopfitters being forced to lay off substantial numbers of skilled workers.
The problem for retailers, he says, is that when an upturn does happen there is a real possibility that a UK-based shopfitting skill base will no longer be on tap. He also points out that with the fall in the value of the pound, the notion of UK operators sourcing shop fixtures and fittings from the Far East has become very much less attractive than might have been the case just a year ago.
This might seem to point towards a return to the good times for UK shopfitters as retailers buy local, but as Calandra observes, the possibility exists that if this happens, the next generation of shopfitting apprentices may be conspicuous by their absence.
However, McKeever sees a number of options for canny retailers and for those who supply them. “Can we challenge the design content without losing the aspiration that the retailer has in terms of methods and materials?” he asks. He suggests that retailers should perhaps be considering whether a major revamp is worthwhile when set against a more modest “store refresh”, which might cost a third of the price.
Capital expenditure budgets are finite, he says, adding that there is some merit in interim refurbishments that will last two or three years. “It may not have the same longevity, but it will do for the moment,” he explains.
It is also worth noting that the gloom is not all pervasive. At the end of February, Northampton-based shopfitter Deane & Amos acquired some of the assets and customers of rival Withey Contracts from the administrators. In the process, it gained access to Next, Barclays, O2 and DSGi and will also receive a modest bounty for helping the administrators recover some of the outstanding £2m owed by Withey to its creditors.
Deane & Amos itself seems in market-bucking fine fettle. Its financial year ended in March with profits of £500,000, up on the previous year, on sales that were level, at £18m. Chairman Mark Deane says that the reason for this solid performance has been the fact that money has not been taken out of the business and “we’ve prepared for a rainy day”.
A very mixed picture therefore, and one that is likely to see retailers having fewer options when deciding which shopfitter to use when building, equipping or refurbishing stores. The likelihood is that the pattern will end up the same as that being experienced by the retail sector. Eventually, there may be fewer players, but they will be stronger and more able to deal with store bosses’ varying requirements.
The overseas perspective
European company Umdasch fits out shops across the Continent and the US and provides template for others looking at how they can become cross-border operations.
Managing director Dr Horst König says the downturn has not been confined to the UK for shopfitters. “The business [has been affected] in two ways: on one hand the expansion of retailers’ plans are taking place at a reduced pace, and on the other hand the refurbishment of good stores is as important as opening new ones.
“This is happening on a global basis and certainly affects our figures as well. This situation of reduced pace is putting pressure on prices, which varies from market to market, but it does mean that retailers always go for lower prices. Value engineering, for instance, is a key term, giving experienced companies like ours good chances to walk new ways with customers,” he says.
He says a positive effect is that potential customers are approaching Umdasch to develop long-term relationships.
Getting rid of ‘dead wood’
While there are pockets of optimism, the general mood continues to be downbeat, with most forecasting that present conditions will continue for the rest of this year. Some believe that orders from retailers will not return to last year’s levels for another 18 months.
Like the retailers they serve, though, there are probably more shopfitters than the market needs and what consultants refer to as “rightsizing” is on the cards.
The National Association of Shopfitters director Robert Hudson says: “I’m under no illusion that it is bad out there. But I do think the recession’s been a good excuse to get rid of some dead wood.”
The recession may also force the larger shopfitting operations to become more international in their outlook, following the retailer money as it continues to head offshore. The news last week that Tesco increased its overseas sales by 13.6 per cent against UK sales growth of 9.5 per cent serves as a more general pointer of the need for shopfitters to consider their international options if they are to thrive.