Supermarkets find move into banking difficult
March 26, 2014 Leave a comment
March 18, 2014 11:02 pm
Supermarkets find move into banking difficult
By Emma Dunkley
It’s not just the grocery market facing troubles, as supermarkets trying to establish retail banks are finding out.
Sainsbury’s, which has reported its first fall in sales for nine years, was the inaugural retailer to launch a bank in the UK, as part of a joint venture with the Bank of Scotland, now Lloyds Banking Group.
But retailers leveraging off a big brand in the grocery market have found this does not necessarily translate into being a household banking name.
“There’s a lot of loyalty in banking; people are not prepared to switch banks as there’s a lot of apathy, even when customers are not satisfied,” said Neil Saunders, retail analyst at Conlumino. “The problem for Sainsbury’s is in terms of growth and getting customers.”
In its last interim statement in November, Sainsbury’s said the bank’s profit was flat year-on-year, in what remained a “challenging” marketplace. The supermarket’s share of the bank’s post-tax profit was £12m for the half-year, in line with the previous year.
Sainsbury’s said the bank had maintained profitability levels despite “extremely” high competition and a low interest rate environment.
On top of this, Sainsbury’s has “double running” costs after buying out the Lloyds stake this year. Sainsbury’s accrued costs of £17m in the 28 weeks to September as part of the purchase of the stake and expects related costs for the second half of last year to reach £25m.
But although ending the joint venture frees up Sainsbury’s to expand its bank, which outgoing chief executive Justin King sees as “an important source of profit diversification”, the retailer’s model has yet to prove a success.
Tesco Bank, another big supermarket in this field, was perceived as a threat to high street banks after it bought out the Royal Bank of Scotland’s 50 per cent stake in 2008. Indeed, antipathy towards high street banks during the financial crisis was thought to create a favourable environment for trusted supermarket brands.
However, it is only in the past 18 months that Tesco bank has geared up to launch mainstream products such as mortgages, with current accounts set for release this year.
And the Co-operative Group, whose chief executive Euan Sutherland resigned in early March, has seen its bank engulfed by controversy and failed takeovers.
Its talks to take over 600 Lloyds Bank branches fell through last year, and the bank’s chairman Reverend Paul Flowers was arrested on drugs allegations. The bank was also on the brink of collapse after finding a £1.5bn capital black hole, prompting a restructure plan.
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