Supermarkets call the tune

Purchasing insurance or a loan alongside the weekly shop of baked beans and toilet roll has gone from being incongruous to the norm. So much so that Tesco was able last week to brag that it is attracting 90,000 customers every month to its financial services arm, which contributed more than five per cent of the supermarket group’s &£822m profit in the first half of this year.

Tesco is not the only supermarket stepping into the finance limelight and forcing other new brands, in particular online banks, to watch from the sidelines. Sainsbury’s Bank, just as active as Tesco Personal Finance on the financial services stage, is planning a renewed assault on the car insurance market with Esure, and has asked agencies to pitch for a &£15m advertising push (MW last week).

The traditional financial services providers, strong performers in their own right, should have been best placed to create the financial stars of tomorrow, but their offspring – online banks such as Egg and Intelligent Finance (IF) – appear to have been upstaged by the supermarkets. Though initially strong performers targeting key markets, online banks now seem to be running out of steam. HBOS (Halifax Bank of Scotland), for instance, is understood to be reviewing the future of IF. Prudential has been unable to find a buyer for Egg, despite a humiliatingly public seven-month search, and is now following a strategy of encouraging its existing customers to buy more of its products. Tellingly, both Egg and IF are currently making do without the services of a marketing director. A sign, perhaps, that all is not well. Certainly, the City has been left with real doubts over the online brands. Commerzbank analyst Roman Cizden says: “Quite clearly Egg didn’t sell. The whole online financial services sector has been devalued as a result.”

From retail to riches

By contrast, the leading supermarket banks, Tesco Personal Finance and Sainsbury’s Bank, are a hive of activity. Tesco is piloting a bureau de change (in partnership with Travelex) in its Newcastle flagship store and is considering offering mortgages sourced from Royal Bank of Scotland’s First Active brand. Tesco Financial Services (a 50:50 joint venture with RBS) already has 4.6 million customer accounts, including 1.4 million car insurance policies. And its tally of 370,000 pet insurance policies makes it the third-largest provider of pet insurance.

At J Sainsbury, the financial services arm (a 55:45 joint venture with HBOS) was the business’s only growth area, reporting a rise in underlying profits of 18 per cent to &£26m for the 12 months to March 27. Sainsbury’s Bank has 2 million customer accounts and is growing by 40 per cent a year.

Slice and dice the debt

Given the success of the Tesco and Sainsbury’s finance operations, it is scarcely surprising that the industry is awash with rumours of other retailers cranking up their efforts to get a larger slice of financial services. By contrast, there is little talk of either traditional banks or insurers launching a new brand from scratch, as seemed the rage not so long ago when Abbey launched Cahoot and Co-operative Financial Services launched Smile.

Asda is rumoured to be considering offering mortgages alongside its existing range of insurance, while Wm Morrison, which has a longstanding partnership with HSBC whereby the bank has 40 mini-branches in larger Morrisons stores, is thought to be planning an extension of the partnership following its takeover of Safeway. Safeway was in a partnership with Abbey (MW February 26). HSBC already has strong retail distribution following its &£762m purchase of M&S Money. It also processes John Lewis’s credit and store card business, and John Lewis is rumoured to be expanding its services. Meanwhile, Argos is revamping its financial services and Boots is believed to be considering extending its financial products. Debenhams and Bhs are piloting insurance products in partnership with Norwich Union.

A fairer balance

These new entrants have helped to change the banking landscape, forcing the traditional players to sharpen their act, says Ian Schoolar, a former brand director at NatWest. Schoolar remembers a strong bureaucratic culture while he was there in the early Nineties. “Branches closed at 3pm and customers got in the way of balancing the tills at the end of the day. Cashpoints were put on the outside to stop customers coming inside,” he recalls.

He adds: “Then the banks realised that if they wanted to sell other products, it might be a good idea for customers to come inside and have a discussion with them.”

Brand strength is commonly cited as one of the ready-made advantages that the supermarket banks enjoy. “Customers see us as Tesco rather than Tesco Financial Services,” says Tesco Personal Finance marketing director Crawford Davidson. Sainsbury’s Bank marketing director Kate Nicholson says her brand benefits from people seeing what the supermarket has done in bringing value for money in other sectors, such as CDs and petrol.

Nevertheless, as financial services brands, the supermarkets have their detractors. Paul Gordon, managing director of financial services agency CCHM, does not agree that supermarkets automatically have the upper hand when it comes to brand strength: “Look at the Halifax brand: it is as strong as any, and probably stronger than the Sainsbury’s brand.”

There is also the question of prestige, an important part of the marketing mix for financial services brands. Cahoot marketing director Deborah Cutler asks: “Do people really want to put down a Tesco credit card when they are paying for a meal in a really nice restaurant? It’s faintly embarrassing. Brands such as Cahoot have more cachet; people like to be associated with them.”

Paper profits

Yet few would dispute the success the supermarkets have had in bringing their culture of simplification to financial services. Davidson says Tesco would consider offering any financial services product that “can be simplified and put on a leaflet: anything that my granny would understand”.

The supermarket banks have other advantages too. Gavin Rothwell, a senior retail analyst at Verdict Research, says: “Tesco and Sainsbury’s don’t need to plough a lot into advertising to build brand strength – a simple in-store display can go quite a long way. They both also have huge ready-made databases that they can exploit to market their financial services products.”

Power of loyalty

The Tesco credit card doubles as a loyalty card, earning double reward points when used to pay for goods at Tesco. Davidson claims the rewards are generous enough to allow the average person to have a free holiday every two years. However, the loyalty schemes also offer potent rewards for the marketers on the customer acquisition trail. Sainsbury’s Bank’s Nicholson says: “We use Nectar to acquire people: it’s a good way to get business. For instance, we know which customers have bought a car magazine, and can then send them information on our car insurance.”

Of this seemingly seamless approach, Davidson says: “We are not here to sell, we make products available. In Tesco, we talk about making people feel that they are being pulled rather than pushed. Our research suggests that if people call a traditional financial services provider, they fear they will be sold to.”

A spokesman for Asda says its financial services arm benefits from its customers having a more familiar relationship with the supermarket than traditional banks or insurance providers enjoy. He says that to fit in with this customer-friendly ethos, the call centres, operated by partners Scottish Widows and Norwich Union, had to be retrained: “We Asda-ised them, encouraging them to be chatty and very straightforward.”

He says that the service is being watched closely by Wal-Mart, to see if the financial model of its UK business would be successful in the US, where supermarkets’ foray into financial services is largely limited to offering credit cards.

While traditional banks and insurers are losing customers to the supermarkets, they are not losing out altogether. The joint-venture structure means that they too benefit from the profits, effectively hedging their businesses. The partnerships also prevent online or supermarket banks from being too disparaging of the traditional competition, with platitudes of “shared learning” and “there is room for all of us” being offered by both sides instead.

Core lines

Despite their success, CCHM’s Gordon believes banking operations are still “a pimple on the backside” of retailers and that their real business lies elsewhere. This, he says, is proven by Marks & Spencer’s decision to sell its financial services arm to HSBC earlier this year as soon as the going got tough. Verdict’s Rothwell agrees that financial services as a business is complementary rather than core for supermarkets. Although it provides another opportunity to exploit the brand, financial services is a less important diversification for the supermarkets than clothing, adds Rothwell.

But a former supermarket marketer suggests otherwise: “What is important for the supermarkets is to become a one-stop shop. The more sticky they can make the relationship with their customers, the better the business will perform. Margins on food are so tight that they have to look at other areas where they can get better returns. And space is also crucial – unlike clothing, leaflets don’t take up much floorspace.”

Outlook poor

Schoolar points out that when the supermarket banks and online brands launched they had a favourable economic climate to establish themselves in. But he feels that gathering economic storm clouds will harm the online providers: “With macro-economic instabilities on the horizon and more uncertainty, people will fall back on trusted brands, such as Tesco or high street brands, rather than internet brands.”

Apart from wider economic considerations, the very success of the supermarket banks in challenging the traditional banking model could generate a backlash. Not only do supermarkets choose to play safe and only lend money or offer insurance cover to the lowest-risk consumers, they also avoid the very necessary, but unprofitable current account. Derek French, director of the Campaign for Community Banking Services, says: “There are parallels with what happened with the village shop. These new players cherry-pick products that are less labour-intensive and more profitable. This in turn reduces the flexibility of banks in serving all of the community.”

Just as their wider food offering and cheap prices have led to the destruction of the village shop, the supermarkets pose a threat to high street branches of traditional banks.