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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