In recent years, several major UK supermarkets like Sainsbury’s, Tesco, and the Co-Op have announced their exit from the retail banking sector. This strategic retreat has significant implications for both the retailers themselves and their customers.
To understand the reasons behind this trend and its impact on consumers, we spoke with Andrew Welch, Global Executive Director at Landor, who provided invaluable insights into this complex issue.
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Supermarket retailing challenges
According to Andrew Welch, the primary reason for this retreat lies in the highly competitive nature of supermarket retailing.
“Supermarket retailing has always been cut-throat. But never more so than now with the unstoppable rise of the discounters and the escalating price wars attempting to put a dent in the widespread cost-of-living crisis,” he explained.
The pressure from discounters like Aldi and Lidl has intensified, making it difficult for traditional supermarkets to maintain profitability across all sectors.
Moreover, the economic environment has played a crucial role.
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By GlobalData“Marry this with some of the highest interest rates in a decade or so putting pressure on funding costs, and supermarket operators have had to reduce their exposure to non-core businesses, trim back their balance sheets, and refocus on their core food business,” Welch noted.
High-interest rates increase the cost of borrowing, making it less feasible for supermarkets to support non-essential ventures like banking.
Competitive landscape with digital banks
The rise of digital banks such as Monzo and Starling has significantly impacted supermarkets’ ability to compete in the financial services sector.
Welch highlighted that “the likes of Monzo and Starling are founded ‘technology up’, can scale very easily and offer customers a simple, intuitive and ‘always available’ way to manage their money – unlike the more traditional banking propositions.”
These digital banks provide streamlined services at lower costs, which traditional supermarkets find challenging to match.
Welch provided striking statistics to illustrate this point. “Their impact on supermarket banking has been widespread with in-store bank branches closing at a rate that is seven times higher than that of traditional bank branches.”
This trend is not confined to the UK; in the US, in-store bank branches have also been closing at a much higher rate compared to traditional branches.
Brand stretch and customer loyalty
The concept of brand stretch is critical in understanding why supermarkets have not entirely succeeded in the banking sector.
While supermarkets have successfully diversified into areas like restaurants, mobile phones, energy, and broadband services, extending into banking has proven more challenging.
“Permission to stretch in grocery retailing is granted by having a strong brand equity, a commitment to quality and innovation, high customer service, and outstanding value – not (combined, at least) the hallmarks of every supermarket retailer today,” Welch elaborated.
Supermarkets like Tesco and Sainsbury’s have indeed made notable achievements in banking, with Tesco Bank serving over five million customers and holding a lending balance sheet of over £7bn.
However, Welch pointed out that “Banking – the safeguarding of your money – is often a very personal issue that can, in an instant, impact an individual’s lifestyle and personal wellbeing. And it is intensely private.”
This emotional connection and trust in traditional banks are difficult for supermarkets to replicate.
What this means for consumers
Seeking security and expertise
As supermarkets retreat from banking, consumers may need to reassess their banking choices. Traditional banks and emerging digital banks offer different strengths. While digital banks provide convenience and lower costs, traditional banks are seen as more secure and reliable.
Welch observed that during tough economic times, “customers seek security and control, and place their trust in expert, authoritative providers – banks.”
Focus on core competencies
For supermarkets like M&S that continue to operate in the retail banking sector, Welch suggested that they need to “deliver more ease and convenience than the digital banks” and “provide more authoritative products and security than the traditional banks.”
Understanding and meeting the specific financial needs of their customers better than their competitors will be crucial.
Implications of brand focus and specialisation
The retreat of supermarkets from banking underscores the importance of brand focus and specialisation.
While supermarkets have demonstrated considerable marketing and commercial skills, the banking sector’s capital-intensive nature demands a different level of expertise and investment.
Welch warned that “their retreat should serve as a warning shot across the bows for companies that believe they can use their brand to conquer capital-intensive sectors.”
Ultimately, the exit of major supermarkets from the retail banking sector highlights the challenges of maintaining diverse business operations in a highly competitive and rapidly evolving marketplace.
For consumers, this shift means relying more on traditional and digital banks for their financial needs, while supermarkets refocus on their core strength: providing quality food and related services.
