UK’s largest supermarket chain moves further into financial sector; Woolies, Coles to follow suit?

Posted by Daniel Palmer on 31st March 2009

Tesco, the world’s third largest retailer, is planning to introduce bank branches into 30 of its supermarkets before the end of the year, as supermarkets around the world continue to look for ways to boost profits outside of their basic grocery offerings.

The branches at Tesco outlets will offer Tesco’s existing range of financial services as well as provide access to Tesco Compare, a website comparing different insurance products.

The supermarket chain has also advised that it will offer a current account to customers, although it could be up to two years before it has set up the new IT platforms required.

“We’re very, very keen to offer the current account service,” a spokesman said, according to Reuters. “It’s a case of doing it properly.”

Tesco has gone a step or two beyond most global retailers in the financial sector by already offering loans, insurance, credit cards, and savings accounts. One could argue that the concept is enhancing what supermarkets are most noted for – convenience. At the other end of the spectrum is the concern about a company being involved in too many different business areas. After all, size does not prevent failure. Citibank taught us that.

Tesco first reported a plan to set up a full-service retail bank last year as confidence in the financial sector waned. At that time, they bought out the Royal Bank of Scotland from their financial joint venture for £950 million (A$1.99 billion).

The British retailer aims to make annual profits from their financial, telecoms and online shopping divisions, of £1 billion (A$2.1b) in a few years, up from under £400 million now.

In Australia, the major supermarkets have dipped their toes in the financial sector, with Woolworths last year introducing their own credit card – which has reportedly been well received by customers. Like Coles’ Source Mastercard, their primary focus appears to be on boosting loyalty with their financial services offering but, with competition in relatively short supply in the banking sector, the prospect of further expansion could prove alluring.

Notably, and perhaps ominously for banks, both Coles and Woolworths have been avid watchers of the success of the Tesco model and will no doubt be monitoring their financial services expansion very closely. For the time being, however, they appear content to work with financial institutions, who take on the receivables risk (HSBC in Woolies’ case and GE Money for Coles).