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Saga, the provider of financial services and travel products for the over-50s, hammered shareholders with a massive profit warning yesterday.
The dividend was cut. The book value of a big chunk of the business (goodwill) was slashed by more than £300m. Profits are set to come in nearly 40% lower than the City had expected.
As a result, the share price dived by almost 40%, too, to a record low.
Should you catch this falling knife, or leave well alone?
The trouble with selling commodity products
The problem for Saga is that it makes most of its money from selling insurance policies to consumers. And that market is now very much a commoditised market.
What does that mean? A commodity market is one where it’s very hard to build a brand because the basic product is so similar from one provider to another. And that is a big problem for a company whose value largely comes from its brand.
Being the “go-to” financial services provider for the middle-middle-aged and above is a very desirable position to be in – after all, it’s the over-50s who have all the money. And Saga built its brand on the promise of providing products aimed at the over-50s. At one point, when it was much harder to compare policies, that would have worked well.
You’re on the hunt for insurance, you’re over the age limit, your Saga magazine has come through the door – so you think: “I’m over 50 – I guess I should try Saga, they do good deals for people my age”.
The problem now for Saga and other insurers is that rather than painstakingly phoning around insurers and giving each of them your details, you can now stick all your details into a computer – once – and you can very quickly see who offers the best value for money.
So if you are looking for a new policy, it’s the cheapest providers who have the edge – they are going to appear nearest the top of the picks. And unless they look like total cowboys, most of us have no reason to go much further down the table, particularly for something as straightforward as motor insurance.
So that’s your first problem – getting new customers in the door is hard (and this is before I even mention GDPR, a recently-introduced set of EU regulations that make it much harder to prospect for potential new customers).
It’s hard to make profits when you can’t exploit consumer apathy
The problems don’t end there. Your existing customers are much less sticky too. And that, if anything, is an even bigger problem.
In the old days, the way you made money as an insurer was to draw someone into your net with a keen price to start off. You then rely on their apathy to keep them there as you gradually raise prices every time the renewal date comes around.
This is the sort of loyalty penalty that we see consistently pretty much across all financial services. And in the days when changing insurer was a major hassle and comparing prices was difficult, it was easy to get away with it.
As a top executive, you could perhaps even justify it to yourself by arguing that inactive customers were paying a “convenience and service premium” rather than a “loyalty penalty”. (All the time while praying that your over-70s long-term customers still hadn’t worked out how to use the internet).
Not anymore. Now it’s incredibly easy to compare premiums, and the average comparison site will email you a reminder every time your renewal date is coming up.
This is a problem for every insurer. I don’t have the data but I suspect that they’re all as bad as each other. However, this is where Saga’s brand becomes a serious hindrance.
It’s one thing to be a bog-standard insurer, doing what they all do and taking advantage of long-running customers. But that’s much worse when your brand is all about “looking after” a client base who (at its upper age limit, certainly) is seen to be vulnerable.
As a result, Saga has come in for countless prominent kickings over the years from powerful consumer advocates from Radio 4’s MoneyBox to the Daily Mail for charging higher prices for long-term customers.
Saga’s bold new strategy
So what is Saga’s solution?
Here’s how chief executive Lance Batchelor put it on Radio 4 yesterday, notes Victoria Bischoff on the Daily Mail: “We’ve made the decision to fundamentally change the way we sell insurance… It’s a painful day for shareholders but a good day for consumers.”
In other words, the company is going to be less profitable because it’s re-focusing on providing better value for money and better products for its customers.
The most obvious change here is that Saga will be offering three-year fixed-price insurance to consumers who come to it direct (ie, avoiding the comparison websites).
It sounds like a strategy that might work (although they’ll have to be offering good value for money if they don’t want to end up in the consumer personal finance sections again). But it will hit profits (as recognised in the goodwill writedown) and you do have to wonder how much differentiation is really possible in this market.
What does it all mean for investors? Saga clearly has a lot of potential – it’s a widely-recognised brand. But the problem is, it’s also somewhat stale (I really don’t think today’s 50-somethings want to be associated with a “pensioner” brand).
Major shifts of strategy also have a habit of being a lot harder to drive through than the man at the top makes it sound. This is one reason why the City wags often say that “profit warnings come in threes”. It’s not strictly true by any means, but ones of this nature – a strategy revamp – often aren’t the last (there’s a lot more on this in my book, The Sceptical Investor).
In short, I wouldn’t be in any rush to buy Saga down here. If you fancy it, take your time, do your research, make the case to yourself, and don’t get distracted by the fact that it’ll no doubt bounce a bit. Better to miss the first 20% of a sustainable rebound, than to end up in a stock that gets hit with another 50% loss six months from now.