The decision to buy out Royal Bank of Scotland’s 50% stake in their joint retail services joint venture for £950m is, depending on your perspective, the next stage in its quest for world domination or a shrewd move to bolster its domestic performance by extending its presence in a sector with, arguably, much greater bottom-line growth prospects than food.
The move, which sees Tesco Personal Finance merge with online sales and telecommunications to form a new retailing services division, has met with general approval by analysts and the media. “Tesco has been at this game for 11 years now,” says Clive Black of Shore Capital. “It’s a profitable business but it’s reached the point where Tesco Personal Finance Group needs to be wholly owned by either Tesco or RBS to drive it forward.”
But how does Tesco plan to transform a division that currently generates an annual profit of £400m into a fully fledged bank generating closer to £1bn? And where does the move leave rivals?
Anyone doubting the seriousness of Tesco’s intent need look no further than the appointments of finance director Andrew Higginson to the new job of chief executive of retailing services and Benny Higgins, the former head of retail banking at RBS and HBOS, to the post of chief executive of TPF. This is no half-baked attempt to capitalise on the current woes of banking.
Higginson has confirmed it is looking at current accounts “very carefully”. Tesco is also known to be trialling a bank kiosk at a Glasgow store with a view to rolling the format out across its larger stores. But most experts believe Tesco will try to build the business from the ground up and, in the short term at least, steer clear of higher-risk products such as mortgages. “It’ll want to bed in the management team first,” says Black. “Where it goes after that is not clear – probably to a broader loan proposition before looking at current accounts down the line.”
When it does, Tesco will be pitching itself against the giants of UK banking, but it has several factors in its favour. “Tesco’s point of difference is its accessibility, simplicity and trustworthiness,” says Black. “At a time when banks are plagued by negative headlines, Tesco can capitalise on what the retailer calls its “special relationship with consumers”.
Tesco’s other big strength is its footfall, adds another analyst. “The main thing Tesco has is in its favour is traffic going through its stores and website,” he says. “Tesco is very good at capturing this traffic. It wouldn’t have to devote too much store space or management time to the service. So long as it is uncomplicated and quick to use it has every chance of succeeding.”
He also praises Tesco’s shrewd decision not to put a time frame on its £1bn profit aspirations.
The potential returns make any risk worthwhile, adds Black. “Tesco has to diversify. The growth potential in food is limited,” he says. “From a strategic perspective it makes sense.”
However, being all things to all people is not without its challenges. “Tesco will have to focus more on its consumer-friendly side but also on managing bad debts, two things that don’t necessarily go hand in hand,” he says. “It needs to make sure it protects the brand.”
Fail to do so and its supermarket rivals will be quick to capitalise. But for now they are playing it cool. “I’m not sure how much of a difference it will make as Tesco is already in the [financial services] market,” says Gideon Ingham, head of insurance and savings at Asda. “It gives them more control over their own destiny, but I’m not sure that it creates something totally new as they have been in the market for a decade.”
Asda plans to pursue a wait and see strategy, he says. “We have no immediate plans to get into personal banking, we will review how the market develops,” he says.
Sainsbury’s is more tight-lipped. A spokesman says it has no plans to offer any further financial services beyond what it does already and analysts believe Sainsbury’s would be foolish to follow Tesco’s lead before getting the basics of its financial offer right.
Meanwhile, Tesco has just put a bit more space between itself and its rivals. “It’s just another example of Tesco stealing a march on the competition,” says Jonathan Pritchard of Oriel Securities.
As Tesco looks to stretch further away from the field, the only medals still up for grabs in this race look to be silver and bronze.
Sainsbury’s: Sainsbury’s Finance is a 50:50 joint venture with HBOS bank. Products include insurance, credit cards, savings and loans but analysts believe Sainsbury’s is ill-equipped to make the move to a full retail bank
Morrisons: The most food-oriented of the big five, Morrisons currently has no financial services and has no immediate plans to offer any
Marks & Spencer: M&S was one of the first retailers to embrace financial services in 1985 when it launched its store card. Its money arm was bought by HSBC in 2004. It says it will “watch with interest” Tesco’s progress