At a time of unprecedented tumult in Britain’s grocery industry, the country’s supermarket groups are leaning more heavily on their banking units.
J Sainsbury PLC, Britain’s third-largest supermarket chain by market share, and Tesco PLC, its bigger rival, have reported losses in their most recent fiscal years but both would have fared worse had it not been for their banking arms.
The real benefit that the companies’ executives are holding out for, though, is the extra business that their banks could bring to their main supermarket operations rather than the profits they generate directly.
Customers who take out a banking product spend up to 15% more each month in-store after 24 months, Sainsbury Chief Financial Officer John Rogers said in an interview. “There is a real synergy between financial services and grocery retailing,” Mr. Rogers said.
Sainsbury on Wednesday reported profit in its banking unit rose 13% to GBP260 million ($395 million) even as the group reported its first pretax loss in a decade and warned of narrower profit margins in the future.
There is also a wealth of customer data that comes with offering financial products such as credit cards.
“All of that data allows supermarkets to do more effective customer selection for marketing,” said Warren Mead, head of challenger banking and alternative finance at KPMG. “The theory goes, supermarkets have enough data to know we’re going to get divorced before we do.”
Grocers could, for instance, decide to stay open an hour later if credit-card data shows lots of people are visiting a convenience store nearby that stays open late. If customers are buying baby clothes from elsewhere, a supermarket might want to target them with vouchers for diapers. Supermarket chains are increasingly considering these kinds of uses for bank data, Mr. Mead said.
Sainsbury was the first major British supermarket company to open a bank, back in 1997, in a joint venture with Bank of Scotland, now Lloyds Banking Group PLC. Early last year, the retailer took full control of the Edinburgh-based lender, buying out Lloyds in a move Sainsbury has said will increase its share of customer spending and allow its finance products to be more closely integrated with the Sainsbury’s shopping experience.
Since then, the bank has been expanding its product lineup. It launched two new credit cards in May 2014, and in October it increased its maximum limit on personal loans to GBP35,000 from GBP25,000.
“The bank is one of our most exciting growth opportunities,” Mr. Rogers said. “Just four to 5% of customers have a Sainsbury’s credit card; there is no reason we can’t at least double that over the next three to five years.”
Tesco is also bullish on its banking business amid the difficult trading conditions its supermarkets face.
The retailer recently reported annual revenue at its banking unit up 2.1% from a year earlier at GBP1.02 billion. Trading profit at Tesco Bank, which has 7.4 million accounts, was flat from a year earlier at GBP194 million. Those results came as Tesco swung to the deepest loss on record for a British retailer.
“It is as if nothing that is happening in the retail world is affecting bank customers,” Tesco Chief Financial Officer Alan Stewart told reporters at the time.
Tesco in 2008 bought Royal Bank of Scotland Group PLC’s 50% stake in its personal-finance joint venture and last year began offering a current account–equivalent to a checking account in the U.S.–going to head-to-head with neighborhood banks.
Still, competition in the U.K. retail-banking sector is notoriously fierce. Other supermarket operators offer financial services while U.K. lawmakers have encouraged challenger banks to take on the country’s main lenders.
Marks & Spencer Group PLC runs an M&S-branded bank with HSBC Holdings PLC that offers current accounts, while Wal-Mart Stores Inc.-owned Asda has Asda Money, which provides credit cards and insurance. Co-operative Group Ltd. now owns 20% of the shares of Co-op Bank, recently rescued after much of its equity was wiped out by bad property loans and a failed information-technology project.
U.K. retail banking is currently dominated by five banks: Barclays PLC, HSBC, RBS, Lloyds and Banco Santander SA. Lloyds spun out TSB Banking Group last June.
The U.K. has seen the emergence of a number of smaller banks since the financial crisis. These include Virgin Money Holdings PLC and Aldermore Group PLC, both of which recently went public.
For the retailers, new banks may not prove too serious a threat.
“The opportunity for [new] stand-alone… banks is more challenging,” said Mr. Rogers. They don’t have the benefits of seeing additional spending elsewhere or using customer data in the same way as retailers, and likely don’t have the same kind of brand recognition as national grocery chains, he said.
Source: MarketWatch
