September 26, 2004

The revolution will be Tesco-ised

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What is the cheapest petrol station in Ireland? Texaco, Esso, Maxol or Statoil? What shop was the biggest seller of computers in the past six weeks in the country?
PC World, Compustore or Dixons?

What bank provides the lowest interest rate for credit cards? AIB, Bank of Ireland, Ulster Bank or NIB? What insurance company sells the cheapest life assurance?

Irish Life, Hibernian or New Ireland? What bank provides the best value in fixed interest personal loans? AIB, Bank of Scotland, ACC or PermanentTSB? Wrong on all counts.

The answer to all five questions is Tesco. The supermarket, famed for its fruit and veg, sells the cheapest petrol, the most computers and the best value finance in the country.
Clearly, there is a revolution going on in retailing and Tesco is leading the charge. In the past, a garage sold petrol, a computer shop sold computers and a bank sold money.

Not anymore. Everything is turned on its head and when this revolution is complete, Irish main streets from Kilkenny to Kilibegs will look very different.

It is impossible to tell who will eventually emerge as the winners but present trends suggest that both the large multiples like Tesco and the small convenience stores like Spar are now ahead of the pack.

Last Tuesday, Tesco UK, the parent company, released spectacular profit forecasts. These numbers (which include its Irish operations) reveal an extraordinary insight into the way we shop these days.

First, Tesco is so far ahead of its rivals that the game appears over. It will make close to e3 billion this year thanks, in part, to selling truckloads of school uniforms, DVDs, newspapers and magazines.

Tesco appears to have hit the retailing G-spot and managed to convince its fruit and veg buyers to also buy computers, petrol and credit cards as well. Its share price has risen in tandem and while some of its competitors languish, it is powering ahead.

Why is this happening? Tesco has tapped into a profound structural change in our society. The way we shop reveals much about who we are. The growth of Tesco can be directly related to the demands of its new consumers and the laziness of its competitors.

In the past few years, “convenience” has become the watchword for Irish shoppers. We have seen the explosion of Spars and Centras and the emergence of the Tescos of this world. The main losers have been small semi-urban or suburban supermarkets. Once again, this can be explained by demographics.

Ireland is undergoing an enormous social change, unparalleled in any European country since the Industrial Revolution, which saw 30 per cent of the population moving from the land to the factory with enormous social and political consequences.

In Britain, this occurred over sixty years between 1800 and 1860.Between 1990 and 2001 – a period of just eleven years – the percentage of Irish women working increased from 30 per cent to 48 per cent. This is an enormous change: the number of women working increased by close to 60 per cent in little more than a decade.

It is mainly women under the age of 40 who have switched from the kitchen to the office. So we have experienced an industrial revolution style demographic shift in less than one fifth of the time and Irishwomen are swapping kitchen for office at a rate quicker than anywhere else in Europe with profound ramifications.

Let’s focus on the Tesco-isation of the suburbs (which is but one manifestation among many others).

Despite the social revolution, Irish women (rather than men) still make all the pivotal decisions about who eats what at home and the missus continues to do the shopping.

The difference today is that the missus has also put in a 50-hour week outside the home and – due to our mini population boom evidenced in the last census – she is probably picking up two kids from the creche on the way home.

Of the 250,000 or so women who have joined the workforce since 1990, there are roughly two types: the singletons that live in apartments in our cities and towns and those young mothers who have migrated to the suburbs.

While the twentysomethings are opting for convenience stores like Spars and Centras, the “Tesco Thirtysomethings” are fast becoming the dominant force in retailing. The retailer who understands the desires of the “Spar Generation” and the “Tesco Thirtysomethings” will be the big winner in the next few years.

Tesco has been very smart in cultivating its thirtysomethings. The company has gradually extended its brand into computers and bank loans.

In Britain, Tesco has an online legal store selling DIY Separation and Divorce Kits, special offer at €7.49, House Buying, Selling and Conveyancing Kits for €11.95 and “triple club-card points” with its €9.99 Last Will and Testament Kits. Pick up a bottle of wine; draft a power of attorney.

It is likely to continue selling other goods such as mobile phones and maybe ultimately cars for the same reason it sells petrol. It has a captive audience and this audience already has her hand in her purse when she arrives at Tesco, so why not max out on the credit card a bit more?

The question for many is where will this end and what will our cities and our suburbs look like in 2014. A few years ago Alan Greenspan stated that because of its impact on general inflation, the low prices of Wal-Mart accounted for 1 per cent of total US productivity.

This may be great news for economists, but the colonisation of our suburbs by Wal-Mart fills many with dread.

The government has already said that it’s against granting planning permission to out-of-town hyperstores (one wonders is this because so many local councillors are also shopkeepers) but many are rightly sceptical.

The pattern of our population growth, particularly in Leinster, makes a mockery of this idea that the state wants to see small family run shops in provincial towns protected from hyperstores.

If this were the case why preside over the suburbanisation of the entire east coast from Gorey to Drogheda?

You cannot create urban sprawl with its car dependent consumers and pretend to be the friend of the small family-run supermarket in the local town. It doesn’t work like that.

Ultimately, the hyperstores will get their way.

Ironically, the one fact that might retard this development is the brand loyalty of Irish consumers.

In your average British supermarket, 50 per cent of the goods are own brand. For example, Tesco orange juice or Marks and Spencer’s knickers and bras.

In Ireland, we are reticent to embrace “own brand” goods and, despite their best efforts, the large multiples can only get us to spend 35 per cent of our income on own brand stuff.

If Tesco can provide the best value in banking, insurance, petrol, computers and school uniforms and is prepared to open 24 hours a day, what is to stop it selling cars, mobiles and kitchens? The retail revolution has begun and the battleground is for the purses of the Tesco thirtysomethings.

By the time they are panicking over the caterers at their 40th birthday party (which is incidentally the new 21st), it will be interesting to see where they will buy their champagne – the local wine shop or Tesco?

Viva la revolucion! 

  1. Paul Rux, Ph.D.

    David, again,you have provided an insightful piece of
    writing! Over here, in the State of Wisconsin, USA, where
    I live, we refer to stores like Tesco now as “big boxes.”
    Our small-town retailers are waging a similar struggle as
    you describe in Ireland. They will lose for the same
    reasons that you suggest. Here, in the USA, the rise of
    the big boxes is coupled to the collapse of our middle
    classes. Our “big boxes” are in effect deep-discount
    stores for persons who are losing more and more purchasing
    power. The middle class stores, the suburban supermarkets
    that you mention, are collapsing here because of the “big
    boxes.” It is not just a matter of commuting, but it is
    also more and more downward pressures on standards of
    living. I gather from your piece that women in the
    workforce accounts for the uptick in the “big boxes” in
    Ireland. I recall also that the Irish economy according
    to your analysis is unable to provide home ownership to
    many persons in their 20′s and 30′s. Perhaps this is why
    women more and more are jumping into the Irish workforce.
    As you note, the “big boxes” provide them with convenience
    of one-stop shopping. Here they also provide deep-
    discount prices, which matter the most to more and more
    consumers here. In short, our marketing gurus predict that
    we shall have an economy that has 20% shopping at
    exclusive stores and 80% shopping at deep-discount “big
    boxes.” The concern for the small and medium-sized
    retailer is the same. The “big boxes” are squeezing them
    to death. I see no way out of this, with one exception.
    Electronic commerce may in some cases eat eventually
    into “big box” and “high end” retail. Right now, the
    Internet is still in its infancy. But online acutions
    like eBay are starting to do more and more deep-discount
    business online, and they will continue to expand. For
    now, as you note, the “big boxes” win. I also find it
    fascinating that the gap between North America and Europe
    is now so narrow in terms of futuristic developments that
    we in effect are really now a global economy with the same
    costs and benefits. Again, you are one of only two
    columnists whom I read weekly. This is because you offer
    exceptional insight and value, and objectivity with a dose
    of good humor. I remain your North American fan in
    Wisconsin, Paul Rux, Ph.D.

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