Tesco, which has just reported record profits, is about to open the first of 30 in-store bank branches. With plans to expand its insurance range, should brokers be concerned that a High Street giant is muscling in on their territory? Lauren MacGillivray investigates the importance of the personal touch.
The glossy insurance pamphlets beside supermarket check-out counters have not been much more of a threat to brokers than bargain flyers. After all, brokers base their success on the value of their advice – not on hooking customers buying their milk and bread.
Until now, that is. Tesco’s plan to launch 30 in-store bank branches across the UK brings a new threat for intermediaries as the supermarket will no longer simply offer insurance products through pamphlets or online.
Alan Sanderson, director of Norwich Union [soon to be Aviva], says there’s “a moment of truth” with a bank and home insurance, as home insurance is linked to lending products. “If Tesco distributes products through that banking relationship, then we’d be interested. We’ll watch how it develops,” he says.
The first branches are due to open next month in Coventry, Blackpool and Bristol. The supermarket certainly has good timing. With retail banks under heavy fire, it plans to reward customer loyalty by handing out Clubcard points – although a Tesco spokesman has said the strategy has nothing to do with the current turmoil in banks.
Tesco Personal Finance (TPF), which has been authorised by the FSA since 2001, was established 11 years ago as a joint venture with RBS. Tesco bought out the troubled bank for £950m in December last year.
It works with a number of insurers, including Axa and Direct Line, across its range of products and runs the aggregator, Tesco Compare. It has 2.4m policies and its key products are motor, home, pet, travel, dental, health and life. In motor, it has 4.5% of the UK market and 2.9% of new business.
It also offers credit cards, personal loans and saving products. A current account is planned within two years, once the technology is in place.
Meanwhile, its plans for the insurance side are less clear – it refuses to answer questions on its ambitions here, but does say that it’s on the hunt for a non-executive director with insurance expertise.
Sanderson says: “When [Tesco] moves into a market like they did with electrical goods or clothes and fashion, they move in very successfully. The hearts and the minds of the whole organisation line up to make it work.”
In its annual results released earlier this month, Tesco set a new profit record for UK retailers. In the 12 months to the end of February, its underlying pre-tax profit jumped 10% to £3.13bn. Sales worldwide topped £1bn a week for the first time with group sales growing 15.1% to £59.4bn.
In the UK, sales rose 9.5% to £41.5bn. UK non-food sales grew 5%, compared with 9% the previous year, with total non-food sales increasing to £8.7bn.
Within Tesco’s retailing services division, which includes TPF, the group delivered underlying profit before tax of £244m. Bad debts have increased but the company says the level is still better than the banking industry average.
Before it can be successful at selling insurance in branches, however, it will have to get the in-store banking bit right – something other supermarkets have struggled with in the past. Most major UK supermarkets offer some sort of banking and insurance products, but most of these offerings are online or through pamphlets. Asda savings are provided by Abbey; M&S Money is owned by HSBC; and Sainsbury’s life insurance is provided by Legal & General.
In 1997 Sainsbury’s was the first British supermarket to open a bank. But it now considers in-store branches to be “static”. Since 2007, it’s been an appointed representative of the FSA, which means its employees can themselves engage with customers on behalf of the bank.
It has manned travel money bureaus in selected stores but the rest of its products are now promoted and or serviced online and over the phone. “This gave us greater flexibility . . . instead we are concentrating far more on integrating with and coaching our colleagues in store,” a Sainsbury’s Finance spokesman says.
Supermarkets can struggle to sell products like home and motor insurance if they don’t offer any other connected service or product. But banks can more easily link products like home insurance and home loans. Travel insurance and payment protection insurance are also good sellers. And with the weight of a bank offering business accounts behind it, Tesco would be well placed to move into the brokers’ sacred ground: commercial lines.
Even if banking gets off the ground – opening the door for more insurance products and services – Tesco might still be lacking in an area where brokers reign supreme: advice.
“It’s really difficult to reproduce the breadth of knowledge around commercial insurance, even for a smaller business,” Sanderson says. “. . . Advice is one of the things where it sounds like you can systemise it, but it’s actually part of the bricks and mortar of a broker – years and years of experience of how businesses work, what their risks are, and how you insure them. That’s not an easy thing to transplant into a new organisation across a wide distribution network. Then there are issues around compliance and training.”
Graeme Trudgill, technical and corporate affairs executive for Biba, doesn’t see Tesco as a threat, and says the model simply “demonstrates that many people still like to buy insurance locally face to face. “Biba already receives many referrals that Tesco are unable to cover because they don’t offer anywhere near as many products as brokers do. These are passed on to members.”
Meanwhile, a spokesman from Jelf Group says the national broker doesn’t want to comment because “it doesn’t really affect us”.
It’s easy to see why Tesco’s current offering hasn’t created any real competition for brokers. But there is danger in apathy; just look at aggregators to see how quickly the distribution model can change beyond recognition.
It’s possible that the new Tesco model could deliver a major blow to traditional broker services. But it will depend on the shelf life of the in-house banks, and whether the supermarket views insurance as a bread-and-butter offering. IT