Bellway Plc is a holding company with subsidiaries; its main subsidiary company is Bellway Homes.1 Bellway's principal activity is the construction of houses, bungalows and flats primarily in the private market mainly on recycled and reclaimed land but also provides properties to housing associations and inner city urban renewal projects.2 Bellway is involved in three further activities; estates which deals with planning issues and long term strategic land acquisitions, financial Services which offer customers mortgage and insurance products and group administration.3
Bellway was founded by John T Bell and his two sons in 1946. It now has a market capitalisation of ï¿½1,174m4 and operates in seventeen different geographical areas of the UK5 and is headquartered in Newcastle-upon-Tyne.
Bellway's build low-cost homes on disused sites or sites that have been left to abandon, it aims is to not to let any plot of land go to waste.6
Construction & Building Material Industry
The construction and building material industry comprise of 357 UK companies and is an 'industry basket' of the FTSE Actuaries 3508 index. The industry consists of number of different type of companies.
The construction industry is identified as being cyclical and is inclined to follow overall GDP tread.
Over the last five years the industry has experience a significant rise,9(See Graph & table) it has doubled in value. During 2005 economic conditions and rising raw material cost has led to a slow down in the industry.
Bellway's Position in the industry
Bellway's is in 173rd position in the FTSE 250 index10 and is in 5th position by maintaining a strong organic growth in the UK private housebuilder sector. With George Wimpey being the largest housebuilder by unit sales until November 2005 when Persimmon the second largest builder took over Westbury and became the UK housebuilder leader.
The housebuilding industry has recently experience strong growth, driven by an increasing demand in the market arising because of social and demographic pressures facilitated by lower interest rates; the inability of supply to meet demand, has forced house prices to rise.
Supply is being constrained by heavy restrictions on construction on greenfield sites in an attempt to conserve the environment and regenerate industrial and urban sites. The lack of availability of skilled labour and lengthening planning delays together with the current economic climate largely due to increasing in oil prices, raw material costs, cost inflation in the labour market, terrorist activities and high value of the Sterling pound, generating uncertainty which is anticipated to lead to an overall slowing in the industry.
However the government are pushing for annual house construction to rise from 150,000 to 200,00011 from 2006 to meet supply and demand. Gordon Brown emphasised the need to 'bridge the gap' between the high demand for "houses young people can afford"12 and the supply of them to build 'sustainable communities'.13
Industry has no influence or control over prices or demand making it a highly risk industry controlled mainly by the economy.
It is being driven by strategic consolidation, market penetration and product development by companies resulting in the industry transitioning into the maturity phase of the life cycle.
Transition in the life cycle
Key Strategic Issues
* More of a competitive market
* Staking out a sustainable competitive advantage that will provide a basis for competing against other firms.
* Buyers become more sophisticated
* Focusing greater attention on costs through strategic cost analysis
* Slower industry growth constrains capacity growth is leading to consolidation in the industry and reduction in profitability.
* Reduced supply-chain liabilities & improved relationship with regulatory agencies
* New products and methods are harder to come by
* Configuring the product line, opening it to new markets
* International competition increases
* Product and geographic diversification.
The demand in the industry is being rallied by the pension crisis stimulating the buy-to-let market, Tv diy programs and new 'public interest'14 law introduced by the government to make hosing more affordable.
The legislations have reduced the stamp duty payable, provide mortgage help and funding to speed planning permission application and permitted property to be included into SIPPs.
The future drivers of the industry will be:
* High demand
* Government encouragement & incentives
* Relatively low interest rates
* Buoyant market
* Increase in GDP
Rivalry in the private housing industry is quite high as land is in scarce supply. There is little product differentiation among the competitors for private housing, so they have to compete in other area such as quality, price, brand loyalty, and location.
Therefore successful companies have exhibited a strategy of dominating the market through acquisitions; shifting the industry market structure from monopolistic to oligopoly. No individual company claims 10% of the sector15. Acquisitions would reduce competition and supply cost efficient developments by acquiring resource-supply companies, which would lead to better market and product development. It will also build barriers making entrance into the market more difficult. As the companies would have resource-based advantages and strong-hold dominating particular geographical areas due to the fragmentation nature of the industry.
This strategy has been adopted by companies such as George Wimpey, Berkeley, and Persimmon who has now became the industry leader and the first housebuilder to join the FTSE 100.
Other companies based on organic growth have taken the strategy of developing creative advertising campaign such as Barrat and Beazer who have successfully employed new intensive advertising and sales techniques.
It is important to perform a vertical analysis performance against a competitor in the industry to asses weather Bellway's performance is improving at the same rate.
For benchmark technique to be of any value, comparison of identical companies in the same market and period is required. It's impossible to choose an appropriate benchmark as the construction & building material industry very broad; thus each company has a variety of core activities.
Bellway core activity is construction of residential private and social housing. Wilson Bowden would be the most suitable competitor to use, as both companies are UK based focusing the core activities in the same market (regions). A small proportion Bellway's profit is derived from rental income, whilst Wilson is also engaged in commercial property development. This will distort an accurate assessment, which would question the validity of the results. Procedures have been used eradicate dissimilar aspects however every aspect can not be eliminated.
When judging the performance issues of difference in accounting policies, reporting periods and quality of management need to acknowledged.