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CoStar Column: The demographics driving Tesco's diversion

By James Watson - Tuesday, February 13, 2018 11:35

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Speculation this week about Tesco developing a new brand which would diversify into the preserve of the UK’s leading discount supermarkets – Aldi and Lidl – may say more about demographic changes in the country than a fightback by our biggest supermarket operator, writes James Watson, head or retail capital markets, Colliers International.

Whilst Aldi and Lidl have run brilliant press campaigns featuring champagne and lobster special offers which have suggested that they are wooing away the middle classes from the ‘Big Four’, the real strength of their business model lies in the way in which the UK’s demography is changing.

Firstly, we’re an aging population which means that there is an increasing percentage of the population relying on the meagre state pension. Today, around 12m in the UK are of state pension age. By 2040, that is projected to have risen by a third to over 16m*. Of course, not all people of pensionable age are financially constrained, but the outlook for this age group has been exacerbated by a number of private pension failures from the Mirror Group 30 years through to BHS et al today.

Secondly, simultaneous to the development of an aging population, we’ve had the growing phenomenon of workers on ‘zero-hours’ contracts who do not have a guaranteed minimum number of paid hours work in any given week. The trend is believed to be slowing but estimates still put this employment group at around 1.7m people**.

Suffice to say, both ‘zero hours’ workers and the people of pensionable age need to be very careful with their expenditure and therefore are natural customers for the discounters. Put simply, the structure of our society is currently ‘manufacturing’ millions of new shoppers for Aldi and Lidl and will continue to do so for the foreseeable future. Outside of commutable London, the main driver of shopping preference is value and this characteristic will become more pronounced as the years go by.

Accordingly, a venture into the world of discounting by Tesco may actually be less about winning back any customers they’ve lost to the discounters, and more about targeting the UK’s biggest growth demographic: the poor and the price-conscious.

Sainsbury’s discount supermarket joint venture, Netto, tried to go to war with Aldi and Lidl a couple of years back but beat a hasty retreat. Tesco may prove to be a more formidable opponent.

James Watson, Head of Retail Capital Markets at Colliers International

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