Tesco Personal Finance - Case Study Example

Table of Contents Introduction 2 Tesco’s Expansion to Full Service Consumer Banking 4 Banking System of the UK 5 Merger of Tesco with Royal Bank of Scotland 6 Level of competition in UK consumer banking system 7 11 Under the searing effects of the credit crisis, all the banks have seen unforeseen fall in their profitability in 2008. Only RBS has managed to achieve net profits among the banks considered in the sample. 11 Banking Strategy of RBS 11 SWOT Analysis of Tesco in Context of its Expansion 12 Conclusion 18 References 19 Allen F. et al, (2001), Competition among Banks: Introduction and Conference Overview, European Finance Review, retrieved online, 20 April 2009, from: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=292942 20 Forston, D., (2009), “Every little deposit helps: Tesco goes into banking”, Times Online, retrieved online, 4th April, 2009, from: http://www.timesonline.co.uk/tol/news/uk/article5993752.ece 22 Hall, J., (2009), “Tesco to launch bank branches and current accounts”, Telegraph.co.uk, retrieved online, 4th April, 2009, from: http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/5067042/Tesco-to-launch-bank-branches-and-current-accounts.html 22 Ivory Research, (2005), Strategic Management of Tesco Supermarket, retrieved online, 4th April, 2009, from: http://www.ivoryresearch.com/sample5.php 22 News Release, (2008), “Tesco takes full ownership of TPF and targets £1 billion from retailing services”, Tesco plc, retrieved online, 4th April, 2009, from: http://www.tescoplc.com/plc/storage/intannounce.pdf 22 Stern, M., (2008), “Interview: Tesco's FD, Andrew Higginson”, Financial Director retrieved online, 4th April, 2009, from: http://www.financialdirector.co.uk/financial-director/features/2229174/shelf-confidence-4297859 23 Royal Bank of Scotland Group PLC: RBS Preferred Series "T" and RBS Preferred Series "Q", (No Date), Stanford Law School Securities Class Action Clearing House, retrieved online, 17 April 2008, from: http://securities.stanford.edu/1042/RBST_01/ 23 UK Banking 2001: Preparing for Change, (No Date), Business Insights, retrieved online, 20 April 2009, from: http://www.globalbusinessinsights.com/content/rbfs0043m.pdf 23 Royal Bank of Scotland, (30-Jul-2008), UK Activity Report, UK Business Park, retrieved online, 20 April 2009, from: http://www.ukbusinesspark.co.uk/rod21150.htm 23 UK banking plan faces criticism, (19 January 2009), BBC News, retrieved online, 20 April 2009, from: http://news.bbc.co.uk/2/hi/business/7838347.stm 24 Introduction Tesco Personal Finance that was set up in 1997, as a joint venture between Tesco and the RBS. From a strategic perspective the TPF was established to draw on the Royal Bank of Scotland’s financial expertise while using the Group’s stores and online resources as a medium to recruit and cater financial services to the customers at low-cost. However, after a decade, the joint venture came to its termination with the Tesco gaining the full ownership of Tesco Personal Finance. On July 28, 2008, Tesco, the supermarket retail giant announced that it had come to an agreement with the Royal Bank of Scotland (RBS) to buy its 50% stake in the Tesco Personal Finance for a sum of £950 million (News Release, 2008). This acquisition of Tesco over the 50% stake of RBS coming as a direct challenge for the high street financial institutions which currently are on the stormy side of the economic recession tide and presently are in-waiting for the bank charges decision by the High Court. The acquisition will help Tesco to make its expansion from financial services that revolved around an assortment of popular financial services and products to full-fledged retail banking offering more preference, innovation and value to customers and better returns to its shareholders. It is a part of Tesco’s strategy through which Tesco will be able to further enhance its growth in the services market sector that includes telecoms and internet/home shopping as well. According to Tesco’s estimation for the year 2008, by taking the full ownership of the TPF, Tesco would be able to increase its annual profits to £1 billion from £240 million (News Release, 2008). This acquisition clearly reflects that Tesco has identified considerable scope for further possible developments and advancements in the financial sector which is itself a very extensive and a dynamic sector. Hence by taking the full ownership, Tesco will be better equipped to be able to exploit the prospective offered by the TPF in the more basic version of banking. This second half of the paper examines the strengths and weaknesses of Tesco hence offering an analysation of the resources and capabilities that Tesco can muster up to compete effectively and develop TPF into a full service retail bank making a success of full- fledged consumer banking. Tesco’s Expansion to Full Service Consumer Banking On the acquisition of RBS stake and TPF’s expansion into full- fledged retail banking in the coming years, Sir Ted Leahy, the COE of Tesco plc reflected, “As consumers look to make every pound work harder it is a good time for Tesco to expand its presence” (BBC, 2008). The phrase “good time” refers to the current financial turmoil, which in recent times has revealed the shaky foundations of many a high profile financial institution, and ironically has presented an opportunity for TPF to move into full service banking. As a result of the financial depression many of the TPF’s would be competitors will be at their weakest, hence competition that will be on offer will also be comparatively less. In order to make the expansion into the more core-sphere of banking, the management of Tesco will need to rally up their strengths comprising its assets and resources identify with the current financial trends the opportunities or threats presented by it and also realise their own weaknesses and accordingly create business objectives and strategies which will allow the optimum use of resources and strengths, maximum exploitation of opportunities, stablisation of threats and minimisation of weaknesses and other draw backs for the overall success Tesco’s expansion endeavor. For the present short time frame, Tesco’s strategic objective for the future development of TPF is to broaden the horizons of the existing financial services rendered by TPF, which includes services and products like savings accounts, credit card accounts and insurances and moreover increase its presence in the Tesco stores. However, on the long term Tesco hopes to expand TPF’s presence in the international markets, engage in providing more core banking services such as offering current account services (which will be available in two years time once the IT infrastructure is ready), mortgage services and as well as offer corporate banking options thus over time creating sustainable competitive advantage financial market and evolving TPF as one of the leading non-traditional financial services institution. Henceforth, after the acquisition, the first step towards making a success of this expansion venture in the coming years, Tesco has hired high profile executives from the high street financial circles to administer and supervise Tesco’s expansion into full service banking. Tesco, in the month of March, 2009, also announced the opening Tesco Banks branches in 30 of its UK stores by 2009 year end. The first of these branches will be opened in Blackpool, Brislington and Coventry, respectively in the month of April, 2009 (Hall, J., 2009). Banking System of the UK The banking system is the most important pillar of the economy of the UK economy. With the advent of new technologies, banks are now trying to move to more upgraded services. The banking industry is also struggling to meet regulatory requirements set by the watchdogs. The presence of a huge number ob banks make the consumer banking sector quite fragmented. The banks are also becoming single window for all kinds of financial products. This is because banks are increasingly entering new areas of services that they feel will increase their competitiveness. The banking system provides for more than 3.5 % of the Gross Domestic Product of UK. It is also the source of employment for almost 1.6 % of the citizens and about 40% of those working in the financial services sector. In an analysis of the performance determining factors, it has been found that liquidity of the banks negatively influences the Net Interest Margin but positively affects the return on average assets. The importance of provisions and reserves against bad debts provide a cushion against potential losses. It is thus natural that banks will have to guard their liquidity risk so that they can maintain their existence safely in times of crunch. (UK Banking 2001: Preparing for Change, n.d.) Merger of Tesco with Royal Bank of Scotland Tesco, the retail giant of UK has engaged in a joint venture with royal bank of Scotland. This association will mark the retail major’s entry into the financial services area through the formation of Tesco Bank. Interestingly, this new bank will have its contact points in the stores of Tesco. In a move to become a full fledged consumer bank, it has already recruited professional executives from Barclays, Scottish Bank The main idea for diversification has been the growing dissent among customers of the existing banks. Tesco Personal finance plans to cash on in this factor and attract customers with a new current account. The 50:50 joint venture between Tesco and Royal Bank of Scotland was the route through which the retail behemoth would make its foray into the seemingly lucrative banking and financial services sector. Moving for a banking service would be easy, since Tesco will be able to use its existing customers. In fact, it was the credit crisis and its impact on the financials of the existing banks that made take up the prospect of diversifying into banking. It feels that it can effectively utilize the void that has been created due to the exit of some of the major banks in the face of the crisis. The main reason for the exit was over exposure of these banks in toxic assets and credit derivatives. There has been a recent development in the scenario where Royal Bank of Scotland has been somewhat forced to sale its stake of 50% to its Tesco, against a price of 950 million pounds. This move is forecasted to generate one billion pounds for Royal Bank of Scotland which is suffering from tight cash conditions. (Royal Bank of Scotland, 30-Jul-2008) Level of competition in UK consumer banking system The level of competition in the consumer banking industry in UK can be best analysed by a comparative study of some of the major bank. For this purpose, a comparison of the Capital Adequacy Ratio of the different banks seems necessary. Going by the figures, the capital adequacy ratio of some of the major banks have actually witnessed a decline in the current period. This means that the effective risk control measures have not been properly executed. In fact the ongoing financial crisis has forced some of the banks like the Halifax bank of Scotland to become nationalized. The traumatic effects of the credit crunch have also seen Royal Bank of Scotland requiring government assistance. The prominent feature among banks in the UK in recent times is their over exposure to toxic assets and other credit derivatives. Another distinctive character of the industry has been the extensive network of the banks nationwide. This is perhaps the major reason for the existence of a fewer number of major players in the industry. (Allen F. et al, 2001) The level of competition can be best analysed through empirical evidence. The comparison between Royal Bank of Scotland (RBS), Halifax Bank of Scotland (HBOS), Bradford and Bingley (BB) and Northern Rock Bank (NRB) is depicted in terms of the following charts. In all the analysis, data for 2007 has been captured for Halifax Bank of Scotland. RBS garnered the highest net interest income in 2008 followed by Halifax Bank of Scotland (Data for 2007). BB and Northern Rock Bank are a laggard as far as interest income is concerned. The total assets are highest for RBS, followed by HBOS, BB and NRB. Under the searing effects of the credit crisis, all the banks have seen unforeseen fall in their profitability in 2008. Only RBS has managed to achieve net profits among the banks considered in the sample. Banking Strategy of RBS Royal bank of Scotland has been accused of practicing illegal banking practices in the past. In January 2009, investors have alleged that the information brochure of the bank’s T bill prospectus suffered from wrong statements as well as omission of important notifications. The extent of this fallacy was in fact far reaching; at the time of making the offering, the company was already exposed to the toxic subprime mortgages market. In addition to this, the company had not revealed the risks that it might suffer on account of purchase of ABN Amro’s assets. Financially the company seemed to have less than adequate capital reserves and was unable to write off the entire gamut of bad debts. Analysts felt that the Bank could well have resorted to corrective measures which would have prevent it from being bailed out by the government. (Royal Bank of Scotland Group PLC: RBS Preferred Series "T" and RBS Preferred Series "Q", n.d.) The ongoing financial crisis has affected the UK banking system in a negative manner. The financial performance of the Royal Bank of Scotland compelled the government to increase its stake from 58% to 70% in the bank. This comes in the back of reports of RBS expecting substantial losses in 2008. As a mater of fact, the bank might have to write off bad debts amounting to twenty billion dollar. (UK banking plan faces criticism, 19 January 2009) SWOT Analysis of Tesco in Context of its Expansion In context of TPF making a conversion to full service retail banking, a SWOT analysis the method which is generally used in the evaluation of strengths, weaknesses, threats and opportunities involved in a business venture will be helpful in determining the external and internal factors that are unfavourable and favourable for successful expansion of TPF. STRENGTH Brand Value: Tesco’s brand image usually associated with good quality and trustworthy goods and services and that makes for an excellent value. Tesco can always use its brand image and value, trusting relationship with the customers and its geographical coverage to the advantage of the expansion move and thereby profit by it (Stern, M., 2008) IT Integration: The Extranet system that is employed by Tesco as its IT infrastructure enables the organisation to make use of the internet in creating proprietary and customised stream of information between the company management and its business associates (Ivory Research, 2005). Increasing Market Share: As of the fiscal year of 2007-08, TPF held 6.9% share of the credit card market with 1.5 million credit card accounts and 2,700 ATMs in all Tesco Stores. In the car insurance market TPF enjoyed 4.3% market share. Altogether, TPF rendered financial services to 5.5 million customers and its savings accounts services accounted to 390,000, with an estimated profit pool worth close to £20 billion (BBC, 2008). The fig. below shows the performance of the TPF for the first seven years from 1998-04 of its financial services, giving a hint of the TPF‘s growth rate. Team of highly qualified personnel: This is the newly acquired strength of TPF. For the best supervision of Tesco’s expansion into full-fledged banking, the Group has hired some of the most prolific figures in the sphere high profile banking circles. Some of these newly appointed executives include- Ben Higgins the former retail banking head of RBS and Halifax Bank of Scotland Group (HBOS) as the new CEO of TPF. Bill Main, the former CEO of Scottish Windows Investment Partnership, Graham Pimlott the former director of Barclays and the former Chief Executive of the HFC Bank, Adrian Hill as the non-executive directors of the TPF (Hall, J., 2009). WEAKNESS Dependence upon the UK Market: Even though TPF has its presence in the international markets like in Ireland, Hungary and Poland, the financial operations there-mainly the credit card services and products, exists in very small scale OPPORTUNITY Financial Recession: The current financial turmoil ironically presents TPF with its greatest opportunity. Due to the ongoing global economic crisis, the high street banks are at their weakest and most vulnerable. This presents the opportunity for TPF to capitalise on the loss of consumer’s confidence in the conventional high-street financial institutions THREAT The threat of new entrants. Rivalry among the existing customers. Bargaining power of the suppliers. Bargaining power of the buyers and Threat of substitute products and services The SWOT analysis gives a fair insight on the formidable strengths in addition to the opportunities enjoyed by the Tesco providing an excellent platform for expanding its financial services to new and core banking horizons. Tesco’s 11 year joint venture with the RBS proved to be instrumental in furnishing TPF with the necessary financial skills and expertise required to function as a full service retail bank. Moreover, TPF’s phenomenal growth during the decade of the joint venture and Tesco’s overall special relationship with the consumers, a result of innovative services and products and its consistency in offering great value to the consumers will, to a great extent facilitate TPF’s expansion into the new level of financial services. Source: Coriolis Research Tesco is well equipped with all the tools of the banking trade to compete effectively in the full-fledged financial services sector. Be it financial services expertise gained through the eleven year joint venture with the RBS, the overwhelming array of its newly appointed high profile executive or the strong balance sheet that is rare in these desperate economic times. Tesco has everything it requires in terms of resources to make the expansion endeavor into a long term success story. In addition to these advantages Tesco’s move into full fledged retail banking comes in a time when the public anger has boiled over in regard to the extravagant amount of funds that accounted to over several hundred of millions of pounds that were paid to the bankers, including the RBS and the Lloyds to save them from disintegrating by the tax-payer funded bailouts (Forston, D., 2009). This resentment of the public and their loss of confidence in the traditional high street financial institutions, presents a perfect opportunity for Tesco to capitalize on. The times are just right for Tesco to woo new consumers thus increasing its financial services share in the market. Conclusion Having all the resources and the right opportunities, does give Tesco the fire power to launch its expansion endeavour and may guarantee TPF success in the coming years, however to make the success last, will count the most. The present financial crisis will prove to be immensely helpful for Tesco to exert its’ financial presence and gain competitive advantage, but the thing that will matter in the future will be making the gained competitive advantage last. A short term success does not make for true business excellence, a true business excellence demands sustainability. Business sustainability comes from the maintenance of competitive advantage and for maintaining a competitive advantage a business strategy is required. A strategy that will make the business exclusive and as well as carry the company and its business forward as the world around it changes (HBS, 2009). Therefore for the sustenance of the success over a long period of time a detailed stratagem is vital to make the most of the opportunities in order to facilitate the achievement of the objectives set forth in the beginning The only thing that is certain is change and in the present era this certainty of change is accelerating rapidly with time. Hence, for TPF to be able to compete efficiently and develop a sustaining competitive advantage will no doubt be a challenging task. The challenging task, which lies in keeping pace with the changing demands of the consumers triggered by the social and environmental changes that will require rapid innovations on the part of the TPF management. Every change and each new trend requires a new business strategy. A strategy is needed that will not just ensure a short term success but also a long term competitive advantage. Hence, the overall long term success of the expansion venture will depend on how well Tesco will make use of its strengths and respond to the opportunities and threats that will come in its path in the long run. The success of the Tesco’s expansion venture will be all about taking the right measures at the right time having an eye for the future on how the market may behave and being prepared for the changes. 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E., (1979), The Five Competitive Forces that Shape Strategy, Harvard Business Review, Harvard Business School, U.S.A., retrieved online, 4th April, 2009, from: http://www.exed.hbs.edu/assets/shape-strategy.pdf Stern, M., (2008), “Interview: Tesco's FD, Andrew Higginson”, Financial Director retrieved online, 4th April, 2009, from: http://www.financialdirector.co.uk/financial-director/features/2229174/shelf-confidence-4297859 Royal Bank of Scotland Group PLC: RBS Preferred Series "T" and RBS Preferred Series "Q", (No Date), Stanford Law School Securities Class Action Clearing House, retrieved online, 17 April 2008, from: http://securities.stanford.edu/1042/RBST_01/ UK Banking 2001: Preparing for Change, (No Date), Business Insights, retrieved online, 20 April 2009, from: http://www.globalbusinessinsights.com/content/rbfs0043m.pdf Royal Bank of Scotland, (30-Jul-2008), UK Activity Report, UK Business Park, retrieved online, 20 April 2009, from: http://www.ukbusinesspark.co.uk/rod21150.htm UK banking plan faces criticism, (19 January 2009), BBC News, retrieved online, 20 April 2009, from: http://news.bbc.co.uk/2/hi/business/7838347.stm Read More