Wednesday, April 29, 2009

emained small. When Royal Bank of Scotland came under pressure last year to shed assets to repay government loans, Tesco bought the bank’s half of the

TO BE NOTED: From the NY Times:

"April 30, 2009
British Supermarket Chain Places Bets on Banking

LONDON — As traditional banks scale back, their reputations tarnished by major losses, Tesco, the largest retailer in Britain, is moving onto their turf.

Despite the shrinking economy and rising unemployment in Britain, the company, a supermarket chain, is expanding the financial services it offers, like loans, savings and insurance programs, to add checking accounts and, in the future, mortgages. Tesco is hoping for an additional source of revenue just as its traditional grocery business is losing market share.

But other retailers in Britain and the United States have made similar forays in far better economic climates — with less-than-spectacular results. Some analysts said they feared that Tesco’s gamble could end up undermining both its image and its bottom line.

Brian Sozzi, an analyst at Wall Street Strategies, said the expansion plan represented an “unnecessary risk.”

“They could have too much exposure to a risky market,” Mr. Sozzi said.

“If you’re a retailer, then stick to retailing.”

Tesco said its experience in financial services would help it avoid the mistakes made by others, and Sir Terry Leahy, the Tesco chief executive, said he was confident the timing was right. What is happening in the banking sector and the economy, he said, “might actually help us.”

While the ASDA unit of Wal-Mart Stores and other rivals plan to beat the recession by cutting prices further, Tesco has declared its intention to become “the people’s bank.” Tesco believes it will be seen as a “safe haven” because it does not tap the financial markets for funds but instead operates like a more traditional bank, using deposits to make loans.

“There will not be a better time to increase our commitment to financial services,” Sir Terry, the Tesco chief, said. “Customers are looking for a better deal.” Tesco has already started to benefit: Customers have opened more than 100,000 savings accounts since the beginning of the year. The chain now has six million savings and credit card accounts, up by one million over the past year, and deposits have reached about £4.5 billion, or $6.6 billion.

Tesco could use the extra income. Sales growth in Britain has slowed as lower-cost competitors, like ASDA, cut food prices. The recession has undermined consumer spending on other goods Tesco sells, like clothing and furniture.

Because Tesco imports much of its goods, the recent drop in the value of the pound has further weighed on its profits. An expansion into the United States last year, where Tesco opened Fresh & Easy stores, has not been the success it hoped for.

The company, which had a profit of £2 billion last year, said it expected its retailing services division — which mainly consists of the personal finance unit but also includes its Web site and sales of mobile phone, telephone and Internet access services — to make annual profits of £1 billion within a decade, up from about £400 million last year. Some analysts said such aims are ambitious but not unrealistic.

Tesco said the financial crisis also allowed it to hire senior banking executives who might have been reluctant to work for a supermarket chain in the past.

Benny Higgins, who managed consumer banking for HBOS, before the company, Britain’s biggest mortgage lender, ran into trouble, joined last year to take control of the business.

Like many grocery chains, Tesco branched out into financial services 11 years ago, after financial industry deregulation. It set up a joint venture with Royal Bank of Scotland to offer credit cards and insurance, but the business remained small. When Royal Bank of Scotland came under pressure last year to shed assets to repay government loans, Tesco bought the bank’s half of the personal finance business for £950 million and vowed to invest in it.

Tesco’s banking plan stands relatively unrivaled for now, partly because competitors are currently focusing more on grabbing market share in the traditional food business. But in addition, many tried already but struggled to build successful banking services.

J Sainsbury has had its own joint venture with Lloyds Banking Group since 1997 but it was hit by bad-debt charges and is only expected to return to profit this year. Wal-Mart offers a credit card, payroll-check cashing and a money transfer service, but it dropped plans to apply for a banking license in 2007 following opposition from banks and lawmakers. In France, chains like Groupe Auchan and Casino also offer some credit card and insurance services.

“The others just don’t have the financial clout or interest to expand into financial services,” said Tim Attenborough, an analyst in London for Exane BNP Paribas. Tesco’s personal finance unit has a core Tier 1 capital ratio, a measure of financial strength, of 12 percent, more than Barclays.

As much as banking could be an opportunity for Tesco, it also poses risks.

Investing in a business that relies on the creditworthiness of its clients at a time of rising unemployment and credit card defaults could backfire.

Target and Sears are among those retailers that learned that lesson the hard way. Target finally bowed to shareholder pressure and sold a 47 percent interest in its credit card receivables to JPMorgan Chase last year. Sears invested more than $38 billion in the early 1980s, buying a brokerage and a real estate firm, in a “socks and stocks” strategy, but eventually sold off the businesses because they failed to generate the expected synergies.

Still, a Bank of America analyst, John Kershaw, cited growth prospects linked to the banking business as a reason for upgrading Tesco stock to “buy” in April.

Some analysts said profits would come from synergies with Tesco’s enormous customer-loyalty plan, Clubcard, which records the shopping habits of more than 12 million Britons and could be used to focus marketing for financial services.

Up to now, Tesco has offered its financial services through literature in its stores, online, and by telephone. But Tesco plans to open 30 bank branches in its stores by the end of the year and to start offering checking accounts within the next two years. The unit plans to hire 500 people over the next year, more than doubling its staff.

“The reputation of banks in the U.K. has taken a real battering whereas Tesco is definitely a brand that people trust,” said Sam Hart, an analyst at Charles Stanley, a London stockbroker. “There’s extremely good potential in financial services for them in the long-term.”

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