Tesco’s new plan: it’s taking on the banks

Tesco: could be a ‘multi channel’ goliath

Is it time to dump your supermarket stocks?

If you follow the sector, you might be forgiven for thinking so. There’s a lot of doom and gloom at the moment.

The British Retail Consortium says food sales are facing outright deflation. Meanwhile, the internet piles on more and more competition, all for the benefit of the great consumer.

To cap it off, biggest British supermarket chain, Tesco, has just announced its worst results in 40 years.

But despite it all, I’m nailing my colours to Tesco’s mast. In fact, I think this goliath is well-placed to come out of the supermarket war on top.


A non-foods future

Well, in many ways the food side of the supermarket gig is a red herring nowadays – it’s the non-food side of things where we should focus our attention. That’s where the margins are, and it’s where consumers are willing to spend.

The truth is that British consumers seem increasingly unwilling to spend a lot on food. In fact, as someone who spends a good deal of time on the Continent, I find it amazing how little Brits are prepared to spend on food. Except for fast food, that is!

But people are perfectly happy to spend on clothing, electronics and all manner of other goodies. – This leaves us in a peculiar situation of facing outright deflation on food while non-food sales go through the roof.

Driven by circumstances more than design, food retailing has almost become a loss leader. Even Philip Green wants to start selling food in BHS, just to get the punters through the door.

No huge surprise then, that Tesco is realigning itself towards non-foods. And this week, it revealed the next part of its plan.

It’s taking on the big banks

Currently, three quarters of UK current accounts are run by the big five banks – Lloyds, Barclays, HSBC, RBS and Santander. Now, Tesco wants in.

Think of the possibilities: banks have the ability to cross-sell other products using information from current accounts – and a bank in control of your everyday money-flows can garner a lot of useful information about you as a customer.

Tesco would be able to use that information to cross-sell its own products, for example, with pinpoint accuracy.

Tesco’s business plan for the new bank is pretty transparent. For customers depositing at least £750 each month, there’s free banking and a rather generous 3% interest on balances (less than £3,000).

On top of that, the bank will offer its Clubcard points for all debit-card spending through the account. Tesco clearly wants genuine customers, using the account for everyday items.

But watch out – without the monthly deposit, the fee for running the account rises to a rather rich £5 per month.

About time – this industry is ripe for change

This news has been well received by us here at The Right Side. We’ve lamented the awful state of the financial services industry for many years.

My specific gripe is the way customer loyalty is increasingly punished, rather than rewarded. Whether it’s insurance, electricity, or pension savings – long-term customers who fail to shop around get taken to the cleaners.

Customers are quickly realising that their loyalty doesn’t pay, and I expect Tesco to soak up some unhappy customers now that it’s entered the current account market.

Following new rules implemented in September, switching accounts has become a darned sight easier. The banks now have just a week to make the switch, which includes “seamlessly” switching direct debits and standing orders too.

The result is a 14% rise in customers making the switch in the six months since the new rules came into force.

People are increasingly willing to make a change, and that should benefit both Tesco and, hopefully, the industry as a whole.

For Tesco, this is the future

After 40 years of enjoying the benefits of the shift from traditional high street shopping towards supermarkets, it seems the industry has now reached an important crossroads: remain a simple offline retailer with superstores and local stores, or branch out into online and non-foods and go multi-channel?

Well, Tesco has made its choice. It plans to develop its position as the UK’s most influential multi-channel retailer. And now it seems that this includes a significant banking operation too.

Right now, the market is sceptical. Analysts still seem focused on falling margins and falling sales. But I think management should be given a fair crack of the whip.

After all, why on earth would you want to focus on an industry facing outright deflation; on a grocery sector that’s looking more like a loss-leader than a profitable business?

You can invest in this story

The fact is, Tesco is at the beginning of a long-term journey that takes it into non-food sectors, alongside unique and innovative forms of delivery: online, offline; click and collect; mobile telephony, and now the banking sector too.

Tesco’s timing is clearly good – and they’ve got the means by which to tackle the industry head on. With some 3,000 outlets across the UK, there’s plenty of physical space to develop a banking operation.

While traditional banks are shutting down, these guys are opening up outlets. And because Tesco fully owns its bank subsidiary, it’s not hamstrung by the traditional banking industry and archaic ways of thinking.

Meanwhile, as the mainstream press focuses on what appears to be an awful story, it’s interesting to see that Tesco’s share price is actually holding up. At just below £3, with a dividend yield of around 5%, I think it represents a fair punt.

And if you’re not convinced, you could always try their current account – 3% interest on your current account isn’t to be sniffed at!

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  • Pinkers Post

    A rather optimistic take on “all-over-the-shop” Tesco. The “big four” dinosaurs face extinction unless they face up to reality: The retail environment – and the grocery sector in particular – has changed dramatically over over the last 5 years. The ‘new’ retail is about establishing a well-defined niche. The customer wants to know what a ‘label’ stands for. Waitrose and Aldi have got it sussed; so have Prada and Primark. The consumer is less obsessed with ‘brand’ and ‘image’ but more with ‘DNA’ and the proof is, as ever, in the pudding: Before the great crunch, a loyal Waitrose customer would not have been seen dead shopping at Aldi. Now it’s not only ‘cool’ but also makes sense: The consumer has become by far more sophisticated. Kate Moss, another trend setter, wouldn’t dream wearing 100% Steve McQueen… how naff is that? At least the pair of socks will be sourced at Primark – just to take the ‘edge off’… The Duchess of Cambridge, too, has embraced this concept to great effect… and, of course, to the delight of both high- and low-end retail.

Of the “big four”, Tesco is the worst offender. When Clarke replaced Sir Terry Leahy in 2011 it triggered the biggest leadership change at the retailer in almost a generation. Three years on, the Tesco lifer, with 40 years’ experience under his belt, is the last man standing from the Leahy era and the sole executive director on a board where once there were eight.

The scale of the management clearout means that he will have no one left to blame for Tesco’s ongoing woes. In an entry posted 13 March 2014 Pinkers Post commented: “Tesco is clearly in trouble and it will probably take years to turn round this supertanker. Facing a battle on both the national and international front, this will be no mean feat. Furthermore, it appears the British have simply fallen out of love with Tesco. It’s just out of fashion. Pinkers suggest they hire Saatchi & Co to overhaul the brand… perhaps “Tesco is working…again”? (full entry: ‘Snap up Sainsbury’s’, pls scroll down to 13 March: http://pinkerspost.com/inout.p… )

The solution to the problem is surprisingly simple: Mr Clarke is all about the ‘old’ Tesco; he even lived (or still does?) in the same village north of London on the same street as his famous predecessor. Let’s face it…The management clearout hasn’t gone far enough and the only way to salvage this operation is for the CEO to give himself the sack!

    Nobody knows what this company stands for or, indeed, what it IS! Supermarket? Restaurant (Giraffe!)?, coffee shop chain (Harris & Hoole)?, tech retailer (Huddle), insurance company?, bank? and so the list goes on… Clarke clearly doesn’t get it: the old-style Leahy conglomerate is not the future, it’s history. Retail analysts pressing for a price war, too, don’t seem to get the message. Slashing prices and reducing profit margins is not the answer; it will only provide a short-term blip in the landscape. Radical action is needed: Break ’em up! And Clarke is not up to the job. He is panicking, pursuing a ‘strategy’ which is well past its USE-BY (as opposed to SELL-BY) date. 

    Sir Ken Morrison, well… he HAS got it sussed… ignore his recent outburst at your peril: Brilliant and spot on: Loose your DNA and you’ll perish. Sainsbury’s, too, face massive challenges but appear to be tackling these issues, albeit rather too slowly.

    Last but not least: The “big four” have to stop running scared of Aldi et al: They will not be taking over the world and, for once, the old adage: “If you can’t beat them, join them” does not apply.

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