Rich and powerful people, from the Rothermeres to the Hollicks of this world, very often want to buy newspaper groups. When companies become rich and powerful, they sometimes want to become banks.
We saw it when the building societies rode the property market in the Eighties. But they could, at least, make the case that they were already in financial services. Now, J Sainsbury has announced that it intends to develop banking services alongside its cajun chicken dips and chardonnay gondolas.
The whole thing is extremely spooky, not least because it reminds me of Saatchi & Saatchi’s attempts to take over the Midland Bank nearly a decade ago, a comparison I will return to in a moment. And I think it says a lot about both Sainsbury’s and our high street banks that all of them would rather was left unsaid. So I will say it.
First, let’s look at Sainsbury’s. I am suspicious of the timing of this announcement. It was made for the Saturday papers, when more retail punters have time to read the papers. Nothing wrong with that – I’m sure Sainsbury’s saw brisk trading last Saturday as a result.
What I think is weirder is that the announcement should be made the weekend before the Wednesday when Sainsbury’s is due to reveal its interim figures. The company could well have flagged its new banking intentions at the press and analysts meetings that accompany such occasions. That would not be an unusual manoeuvre.
All the more so if the half-way performance is more lacklustre than management would like. There’s nothing quite like drawing attention away from operating figures by announcing a wonderful new marketing initiative.
City analysts have consistently marked down interim pre-tax profit forecasts recently by some 25m from last time’s 451m. Could it be the picture will be even gloomier and consequently it was deemed that the banking announcement would be undermined if it was made concurrently?
By the time most of you read this, the results will be public and we will know the answer to that question. But, whatever the downgrade in profits for the year that will ensue this Wednesday, the separation of the banking announcement from the results tells a wider story.
Grocery superstores begin to look like a mature market. Out-of-town opportunities are finite: there is only so much you can do with guacamole and Chilean red and the shopping public grows increasingly (and pleasingly, in my view) inured to seasonal price wars. It follows that earnings growth will have to be sought elsewhere. We have seen it with petrol. Now we are about to see it with banking.
But banks, if you will allow me to state the obvious, are different from petrol stations and I have two concerns specifically relevant to the circumstances that have led Sainsbury’s to the threshhold of banking.
The first relates to the timing of non-banking organisations’ decision to enter the sector. It is all too often the maturity of existing business, rather than the opportunity perceived in the retail banking market, that is the driver of banking ambitions.
We witnessed this syndrome when Saatchi made its ill-starred play for Midland in the late Eighties. Wild-eyed expansion, not unlike that of the supermarkets latterly, had brought the advertising conglomerate to an earnings-growth summit. Where to go for further earnings growth? Why, the banks run a lovely cash business, so let’s go for that. For Saatchi, of course, that turned out to be a false summit.
But banks are about credit-risk and cash reserves, as well as about customers and marketing. Sainsbury’s, as with Saatchi before it, knows all about customers and marketing (and British retail banking could do with some of that expertise), but I do wonder whether it would have a better grasp of bad-debt exposure than the admittedly woeful record of the banks.
My second concern relates to a classic danger in competitive marketing: uncontrolled momentum.
This is when rivals enter a new competitive market – in this instance, financial services – and seek to trump each other until their growth in the sector overheats and they’re lumbered with a monster they can’t manage.
Tesco launched a loyalty card. Sainsbury’s was rude about it, but was forced to follow. Tesco offered proper credit facilities on its card. Sainsbury’s said it would be a bank. What next? Tesco announces it is entering the Singapore derivatives market?
All this is, perhaps, unduly Luddite of me. I may well have been the one that suggested that Marks & Spencer should not diversify into food retailing or, for that matter, financial services, which it seems to be making a decent fist of. And it is undoubtedly true that the high street banks have been pathetically slow in developing their markets through technology, pan-product innovation and a prime-position retail network that should be the envy of the retail sector.
New banking operations are moving to where people want to bank, be it at home on the phone, in shopping centres or at work. And Sainsbury’s choice of partner in Bank of Scotland is shrewd – the bank won’t on the whole be competing against its own branch network.
But none of this makes the Sainsbury’s decision a wise one. What happens when interest rates rocket, there’s a sterling crisis and SainsBank drops a few hundred million in Chilean loans? No more Chilean red, I suppose.