Banks, grocers and the changing retailing of financial services in Britain

Journal of Retailing and Consumer Services 7 (2000) 137}147

Banks, grocers and the changing retailing of "nancial services in Britain Andrew Alexander *, Jane Pollard
Department of Retailing and Marketing, The Manchester Metropolitan University, Manchester M1 3GH, UK
School of Geography and Environmental Sciences, University of Birmingham, Edgbaston, Birmingham B15 2TT, UK

Abstract The entry of the three largest grocery retailers into retail "nancial services marks an escalation of competition in "nancial services retailing in Britain. This paper explores the increasingly porous boundaries between banking and retailing, focusing on changes in the economics of information gathering, shifts in the production, marketing and consumption of retail "nancial services, and a series of changes in the competitive and regulatory environment of grocery retailing. The paper argues that grocery retailers' moves into "nancial services raise important issues concerning both the management of strategic alliances and their impact on social inclusion and exclusion. The paper elaborates on this argument by examining four potentially problematic issues arising from the alliances between banks and retailers: the shifting geographies of "nancial services provision, the development and maintenance of brand leadership, the production and use of management knowledge and consumers' access to "nancial services.  2000 Elsevier Science Ltd. All rights reserved. Keywords: Financial services; Grocery retailing; Competition

1. Introduction This paper examines the reasons behind, and some of the potential contradictions of, the recent entry of the large grocery retailers into retail "nancial markets in Britain. The three major grocery retailers *Tesco, Sainsbury and Safeway (formerly Argyll) * now o!er an increasing variety of "nancial services. Their intervention into "nancial services is not without precedent. Marks and Spencer, for example, has been selling own-brand "nancial products for more than a decade, with more than 8% of the Group's total operating pro"ts now drawn from Marks and Spencer Financial Services (Marks and Spencer p.l.c., 1998), while in the grocery trade the regional multiple Budgens launched its own credit card in January 1996 (IGD, 1998). Nonetheless, the entry into the market of the largest grocery retailers is signi"cant because of their considerable market power in Britain and their substantial investment in the creation of

Present address: School of Management Studies for the Service Sector, University of Surrey, Goildfold, Surrey G02 5XH, UK. * Corresponding author. Tel.: #44-1483-256334; fax: #44-1483259387. E-mail address: [email protected] (A. Alexander)

high pro"le strategic alliances with some of the major retail banks (see Alexander and Colgate, 1998). The creation of alliances between grocers and banks is indicative of an escalation of competition not just between, but also within, the banking and grocery retailing sectors. The signi"cance of such competition, in terms of power relationships in the supply chain, has been illustrated previously through an international comparison of retailers' aspirations in plastic cards and payment systems (Worthington, 1994). This paper explores the recent escalation in competition between British grocers and banks in three sections. Initially, we chart how and why the boundaries between retail banking and retailing are becoming more porous. In Section 1 we do so from the perspective of the banks, while in Section 2 we do so from the perspective of the major grocery retailers. In section three, we critically evaluate the implications of this heightened competition and suggest that the grocery retailers' moves into "nancial services raise important issues concerning the management of strategic alliances and their impact on social inclusion and exclusion. We argue that the uneasy alliances being forged between grocery retailers and banks may yield a number of contradictions, most especially for the retailers, but also for some banks and some groups of consumers. Speci"cally,

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A. Alexander, J. Pollard / Journal of Retailing and Consumer Services 7 (2000) 137}147

Table 1 Recent activity of large grocery retailers in "nancial services Year

Retailer

Product

Provider

Brand promoted in-store

June 1996 October 1996

Tesco Sainsbury

Natwest Bank of Scotland

Tesco Sainsbury

Dec. 1996 Feb. 1997 March 1997 July 1997

Safeway Tesco Morrisons Tesco Sainsbury Asda Safeway Sainsbury Tesco Sainsbury

Abbey National RBS Midland RBS, Direct Line, Scottish Widows Bank of Scotland Lloyds-TSB Abbey National Royal and Sun Alliance Direct Line, Scottish Widows Royal and Sun Alliance

Abbey National Tesco Midland Tesco

July 1997 September 1997 January 1998 January 1998 March 1998 June 1998

Instant access savings account Instant access savings accounts, credit cards Deposit account Instant access savings account Savings account Credit card, travel insurance, foreign currency Mortgages Insurance Instant access account Home Insurance Home Insurance Pet Care Insurance

Sainsbury Lloyds-TSB Abbey National Royal and Sun Alliance Tesco Royal and Sun Alliance

Source: Press announcements, company listings.

we identify four possible areas of con#ict concerning the shifting geographies of "nancial services provision, the development and maintenance of brand leadership, the production and use of management knowledge and consumers' access to "nancial services.

2. From 5nancial services to retailing From being the largest banks in the world in the inter-war period, the &big four' retail banks in Britain (NatWest, Midland-HSBC, Barclays and Lloyds-TSB) have seen their cosy oligopoly gradually weaken since the 1960s. The banks have been rocked by the recession of the early 1990s and their exposure to bad debt while rounds of re-regulation and deregulation, such as the 1986 Building Societies Act, have blurred the boundaries between di!erent "nancial specialisms and institutions. This has opened retail "nancial markets to newcomers. As a result, competition has intensi"ed in retail "nancial markets; some Building Societies have shed their mutual status while a range of non-bank institutions have also entered the fray. Utility companies, grocery retailers, insurers, and even professional football clubs are now o!ering a range of consumer "nancial products. Between 1987 and 1997, UK banks outside the Major British

 Numerous football clubs including Manchester United, West Ham United and Glasgow Rangers have launched branded credit cards and Celtic have launched a Personal Equity Plan (PEP) (Mintel, 1996a). Clubs are now o!ering pensions and mortgages in association with other "nancial service providers.

Banking Groups (MBBG) increased their share of private sector liquid assets from 17 to 23% (British Bankers Association, 1998). While it is too early to judge the likely success of the grocery retailers, their initial success in attracting customers is promising: between February and November 1997, Sainsbury's Bank attracted 500,000 customers and over C1 billion in deposits from other banks, while Tesco Personal Finance attracted 150,000 customers in its "rst month of operation (Hunter and Jones, 1997). Sainsbury's Bank now has 700,000 customers and C1.5 billion in deposits (J. Sainsbury p.l.c., 1998) and Tesco, now with more than 700, 000 accounts and with deposits and loans totalling over C1 billion (Tesco p.l.c., 1998a), exceeded its "rst year targets (IGD, 1998). Both report current operating losses, however, which are attributed to start-up costs (Tesco p.l.c., 1998b; J. Sainsbury p.l.c., 1998). The grocery retailers o!er a variety of products, ranging from instant access and deposit accounts, to mortgages, foreign currency, home and even pet care insurance (see Table 1). In Britain and elsewhere then, barriers to entry to "rms in retail "nancial markets have been lowered in the 1990s. This has been facilitated by a shift in the form of competition in retail "nancial markets, a shift that has encouraged the entrance of the large grocery retailers. Interior to this broad argument are three interrelated issues that need exploring: the evolution of information gathering in retail "nancial markets, the reorganisation

 The Major British Banking Groups are currently: Abbey National, Alliance and Leicester, Bank of Scotland, Barclays, Halifax, LloydsTSB, Midland, NatWest, Royal Bank of Scotland, Standard Chartered and Woolwich.

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of banks' production systems and changes in the production, marketing and consumption of mass-market retail "nancial products. 2.1. The evolution of information gathering Turning "rst to the evolution of information acquisition in banking, it has long been recognised that how "rms exchange information, together with the cost-e!ectiveness of that exchange, a!ects the boundary of the "rm/organisation (Coase, 1937). A growing body of literature is now recognising some important changes in how banks, and other "rms, are acquiring and using information (see Evans and Wurster, 1997; Leyshon et al., 1998a; Pollard and Leyshon, 2000). Retail banks have traditionally relied on a branch-based production system in which they generated market intelligence, built national brands and marketed products through proprietary distribution channels (their branches) (see Evans and Wurster, 1997). Bank branches were key sites for gathering market intelligence about customers, products and competitors; they contained the personnel and technological systems responsible for the information acquisition and management that enabled banks to distinguish between &good' and &bad' customers (Leyshon and Pollard, 1998). Physical proximity allowed banks to obtain rich, customised, interactive information about their clients, yet it also constrained the amount of information that could be gathered, in that banks relied on interacting with customers who walked into their local branch. Further, acquiring information in this manner was relatively labour-intensive (and hence expensive) and also produced a very decentralised model of loan decision making, a model which relied heavily on the judgement of branch managers. One of the shifts ongoing in banking is the evolving capacity of banks (and, critically, non-banks) to use information technologies to separate the production of valuable information from its association with the physical infrastructure of traditional distribution channels (Evans and Wurster, 1997; Pollard and Leyshon, 2000). US banks attempted to do this in the mid-1980s. The need for more central control over loan quality (following the debacle with loans to Less Developed Countries) and the prospect of generating more &throughput' (of loan applications) in branches pushed large retail banks to remove lending authority from branches and centralise it in specialised loans centres operating computer based credit scoring models (Pollard, 1996). Branches were left to raise customer awareness about loan packages and to

 The lack of face-to-face contact involved in credit-scoring at-adistance was also useful to banks when defending themselves against law suits for racial discrimination in lending.

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take in application forms, while the credit analysis was done elsewhere. British banks have followed suit (Leyshon et al., 1998b), relying, increasingly, on distanciated forms of information gathering. The information technologies that have facilitated this shift, however, are also available to retailers, insurers and other organisations who store and process information. It is no accident that the large grocery retailers have entered retail banking after they have established extensive relational databases collecting customer information developed around their loyalty card schemes. Sainsbury's, for example, have more than 10 million loyalty cards in circulation and almost 75% of Sainsbury's Bank customers have been recruited via this scheme (Finch, 1997). Banks' traditional intelligence gathering and product distribution networks are thus being superseded by the development of information technologies which allow a proliferation of the channels available for selling "nancial products. The traditional hierarchies of choice for consumers, wherein they select a bank, location and product are, suggest Evans and Wurster (1997, p. 75), being challenged by the development of hyperarchic systems, like the Internet, which are gradually allowing consumers direct access to numerous suppliers of "nancial services, without the need for physical proximity. These changes a!ect not only banks, but the retailing and marketing of all manner of goods. Schultz (1995, p. 25) argues that there is, a continuing and downward shift of information technology from the marketer to the channel to the consumer or end user which is generating a sea change in marketing practices and strategies. While "rms once had the market intelligence and products to build national brands and dominate proprietary retailing channels, information technologies such as Universal Product Codes and scanning * which provide information on what is sold, where, and at what price * allow retailers, and not brand producers, to dominate the market place and to negotiate with numerous suppliers for the best source of product (Schultz, 1995). The further extension of this process places information technologies in the hands of consumers, as is the case with home banking and Internet banking, and #ows of information between producer and consumer become interactive. In the future, computer literate consumers using software packages like Intuit's Quicken or Microsoft Money will be able to use Internet browsers to contact di!erent "nancial institutions for di!erent products. Bank branches are thus losing their

 The question of how consumer preferences are formed, however, and the role of "nancial institutions in structuring these, cannot be ignored (see Knights et al., 1994).

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A. Alexander, J. Pollard / Journal of Retailing and Consumer Services 7 (2000) 137}147

status as privileged channels for acquiring and distributing speci"c, customer-based information relevant to the production, marketing and distribution of retail "nancial products. 2.2. The reorganisation of banks' production systems Banks' evolving technological capacity to shift toward more distanciated forms of knowledge was not motivated solely by concerns over loan quality, but also by concerns over the costs of maintaining branch systems as the main channels for distributing banks' products. Banks traditionally competed on the basis of convenience, blanketing urban areas with branches in prominent locations and having their busiest, more pro"table, branches subsidise other parts of their branch network. In 1992, fully 65% of British banks' gross income was accounted for by operational expenses (OECD, 1992). Increasing competition and the recession of the early 1990s, however, prompted British banks * like their US counterparts in the late 1970s and 1980s * to try to reduce their cost: income ratios by upgrading computing facilities in branches (Anon., 1984), introducing networks of Automated Teller Machines (ATMs) and by centralising paper processing in large regional data centres, seeking scale economies while also freeing up space in branches for sales work (Leyshon and Thrift, 1993; Cressey and Scott, 1992; Leyshon and Pollard, 1998). This centralisation of paper handling is a!ecting both the operational side of branches * balance keeping, cheque processing, accounts queries and so forth * and also lending operations. As banks have looked for cheaper ways to sell their products telephone banking has become increasingly popular for standardised products, although for non-standard products and some types of business lending, banks still rely on face-to-face contact. Telephone service centres and ATMs allow banks to more cheaply process routine transactions while simultaneously reducing transactions handling, and sta$ng, in their branches. Shorn of their status as mini-banks, when they had a full complement of operations and lending sta!, branches now operate as retail outlets. Thus, branches in expensive-to-service rural areas and lowincome neighbourhoods in urban areas are being closed, while private banking facilities are being opened in higher income areas (Leyshon and Thrift, 1995).

of marketing strategy and research (Clarke et al., 1988; Speed and Smith, 1992; Hooley and Mann, 1988; Kerfoot and Knights, 1993) and to adopt the languages and practices of what Du Gay and Salaman (1992) term &the discourse of enterprise' complete with its neoliberal commitment to consumer sovereignty and customer service. It was not until the early 1980s, for example, that Midland Bank integrated its market planning and advertising functions, mimicking management structures at Procter and Gamble and Unilever (Gavahan, 1990). Through the late 1980s and early 1990s though, banks, and other "nancial institutions, have become more market oriented (see Hooley and Mann, 1988; Knights et al., 1994). As transaction handling and credit analysis have been taken out of branches, banks data centres have become increasingly important foci for information gathering. Although `UK banks have historically known very little about their customersa (Clarke et al., 1988p. 13), they are now using relational databases to accumulate customer based, as opposed to account based, information regarding customers' credit histories and patterns of spending (Anon., 1990; Leyshon et al., 1998a). This information is now used for credit rating, segmenting groups of customers on a variety of geodemographic criteria, and to facilitate relational marketing wherein di!erent products are targeted at di!erent groups of customers. The moves toward market segmentation and preparing di!erent groups of customers to pay fees to receive di!erent levels of service is an important shift in bank marketing. As the competition for customers intensi"es in retail "nancial markets, banks are looking to relational marketing to sell more products to existing customers, rather than rely on increasing their volume of customers (Anon., 1990) in a market where 83% of adults already have an account with either a bank or building society (Mintel, 1996a). Banks, however, are notorious for their poor customer service (Riley, 1996). In the past, customer inertia and the lack of competition have been such that this has not been a major issue (Knights et al., 1994; Cowe and Hunter, 1996). Customers have stayed with &the big four' banks because they perceived little di!erence between their products, prices and services (Mintel, 1997). Yet there are signs that some groups of customers are becoming more "nancially literate in their choice of product, company and service (Knights et al., 1994; Leyshon et al., 1998a), more prepared to seek "nancial

2.3. The production, marketing and consumption of xnancial services Third, there are a set of issues concerning the production, marketing and consumption of retail "nancial products. Although banks now expect branches to operate as sales outlets and to generate fee income, they have been relatively slow, compared with their counterparts in consumer and industrial goods sectors, to embrace the world

 Branch-based local knowledge, with all the trappings of &relationship banking', is of declining importance for many mass market products.  Research has shown that consumer demand for improved customer service is higher amongst banks than any other retail business (Welsby 1996) and indeed that pedestrians tend to speed up when passing banks (Naughton 1996).

A. Alexander, J. Pollard / Journal of Retailing and Consumer Services 7 (2000) 137}147

advice, read "nancial media, closely monitor their "nances and generally shop around. Walter Wriston, former head of CitiBank, once described money as &information in motion'. With retailers, utility companies and a host of other non-bank institutions now building and managing relational databases, banks are not alone in their ability to generate &at-adistance' information and convert it into knowledge of credit risks, spending patterns and so on. The form of competition has shifted in retail banking as banks' production systems and technology have changed and as banks and other "rms' ability to use information to segment market and cherry pick consumers has been enhanced. In essence, many mass market "nancial products have become more standardised (made with widely available production technology) and generic, in that product qualities are well established and can be sold through relatively anonymous market mechanisms (see Storper and Salais, 1997; Pollard and Leyshon, 2000). Extensive branch systems, once barriers to entry for non-bank "rms, are now relatively expensive channels through which to deliver products, relics of a di!erent era of competition.

3. From grocery retailing to 5nancial services 3.1. Competition, regulation and the search for new opportunities The interest in retail banking shown by Britain's largest food retailers re#ects a combination of factors issuing from changes in the nature of competition and regulation in the food retailing business, as well as perceptions of opportunities in the increasingly de-regulated retail banking market. Turning "rst to the issue of competition, it is estimated that in 1990 the top "ve British grocery corporations enjoyed as much as 61% of total grocery sales (see Wrigley, 1993). Of these "ve, it has been argued that Tesco, Sainsbury and Argyll (now Safeway) distinguished themselves as the &big three' in terms of growth, pro"tability and, importantly, annual capital investment in superstore development (Wrigley, 1993, p. 42; see also Langston et al., 1997). The intensi"cation of such investment activity became pivotal to these retailers' attempts to meet unrelenting market expectations of annual increases in turnover and pro"t during the late 1980s and early 1990s. Large superstores were more successful in generating increased sales than existing smaller stores, o!ering more space for the sale of high-margin and more demand elastic non-food categories. Further, their local spatial monopolies and relatively

 Estimates of market share vary according to source.

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lower labour and operating costs boosted operating margins (Wrigley, 1994; Blackhurst, 1996; see also Burt and Sparks, 1994). As Wrigley (1994) argues, however, a combination of factors during the early years of the 1990s highlighted the potential risks of this strategy in a period of recession. First, the revitalisation of the discount sector, precipitated by the entrance of European discounters and involving the breaking of existing spatial monopolies, forced a reduction in gross margins, the maintenance of which was integral to the superstore development strategy. Second, acceptance of the need to depart from traditional accountancy practices and to depreciate buildings and land, in order to better re#ect values in the recession hit UK commercial property markets, further reduced pro"ts. At much the same time, the grocery retailers were also forced to accept new government regulations relating to transport, land-use planning and retail development, * in the form of PPG13 and new PPG6s (PPG6 (revised 1993) and PPG6 (revised 1996)) * the latter of which placed additional restrictions on out-of-town development (Department of the Environment, 1996). These restrictions, while not representing a complete embargo (see Wrigley, 1998), further jeopardised the long-term viability of the hitherto chosen path of accumulation of the largest food retailers. Retailers soon reported increased di$culties in "nding new out-of-town sites where large food superstore development was permissible (Davis, 1996), and began to seek alternative means of generating pro"ts with more vigour. One alternative adopted by the large grocery retailers in order to combat combined competitive and regulatory pressures has been the diversi"cation of store formats. The largest grocery retailers have become more active in developing smaller stores, many in edge-of-town and market town locations, and have also turned their attention to the convenience sector with the development of high street and forecourt formats. A second, longer-term, option pursued by Tesco and Sainsbury is that of overseas investment. The potential of such international developments as a future engine of capital growth is, however, as yet unclear, although the perceived need for an international diversi"cation strategy remains great amongst leading "rms (see for instance Wrigley, 1999). Current contributions to group sales and pro"ts are clearly only modest (Hunt, 1997), and future strategies

 Tesco sold its French subsidiary Catteau in February 1998, but has developed store networks in the Republic of Ireland, Poland, the Czech Republic, Slovakia, Hungary and, most recently, Thailand. Sainsbury's sold its stake in the US chain Giant Food in May 1998 following Royal Ahold's successful bid for the controlling 50% voting stock in Giant not in Sainsbury's hands (Wrigley, 1999). It acquired the New England chain Star Markets in November 1998.

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A. Alexander, J. Pollard / Journal of Retailing and Consumer Services 7 (2000) 137}147

are likely to remain heavily contingent upon UK market performance at least in the medium term (Wrigley, 1997). A more immediate remedy is being sought through product diversi"cation in the home market (Hollinger, 1997). High-margin, non-food categories are seen as a particularly attractive opportunity for diversi"cation, especially so given the low forecasted volume growth in food and drink, and grocery retailers have recently made forays into the fashion clothing, pharmaceuticals and electrical goods sectors. With the retail banking sector showing returns on capital at their highest level since banks began declaring their pro"ts in the 1960s (Anon., 1997b) the grocers' expansion into this sector is, therefore, not surprising. Moreover, with their adoption of telephone banking retailers can o!er "nancial services with minimal intrusion on their valuable retail #oor space. 3.2. Brand extension and the use of market information The grocery retailers' choice of the highly pro"table "nancial services arena as a new vehicle for growth re#ects their con"dence in the retail store brand, and an understanding of the increasing synergies of how the two sectors collect, manage and use customer information. We now need to consider aspects of these two factors in more detail. Concentration in the UK grocery trade has changed the balance of power in retailer}manufacturer relations strongly in favour of the retailer. This has enabled leading "rms to expand own-label penetration in both fresh food and more innovative product groups (Doel, 1996) and to drive their own label products &up-market' as they have sought to di!erentiate themselves through quality and service (de Chernatony and McDonald, 1992). Manufacturers and service providers have been compelled to accept tightened product and cost speci"cations from retailers which, in the case of the big three, have invested heavily in promoting an umbrella brand with a quality image (IGD, 1995). This strategy has been largely successful, such that the retailer has become the brand (Wileman and Jary, 1997; de Chernatony and McDonald, 1992; Davies, 1992). One measure of the success of these retailers in positioning themselves as a quality brand is the comparatively high levels of con"dence which they have been able to generate amongst consumers (Steenkamp and Dekimpe, 1997). This con"dence has been translated into increased market share for retailers' brands, with penetration rates increased from 23% in 1977 to 36% by 1994 (IGD, 1995). Sainsbury, Tesco and Safeway own labels all achieve high market share, with, for instance, Tesco's own label brands accounting for 50% of sales (IGD, 1998). Grocery retailers have sought to utilise their store brands as weapons in the battle for customer loyalty and, in the case of the marketing of "nancial

services, many have been keen to attempt the extension of their brand into this new marketplace, seeking to build on awareness and quality associations. Equally important has been the retailers' appreciation of their brand's capacity in organizational marketing, not least in attracting experienced strategic partners in a market sector in which technical and regulatory obstacles might otherwise preclude expansion at the desired pace. High street banks have signed up to retailer's own-label projects in expensive alliances despite some inherent contradictions for their own business strategies. We consider these contradictions in the third section of this paper. The leading grocery retailers also see an opportunity for the application of their comparatively superior marketing skills to a sector in which existing players have been slow in breaking away from more traditional approaches. British grocery retailers have long operated in a competitive marketplace with high levels of customer exposure to, and high frequencies of customer experience of, their services and products (Quarmby, 1995). These "rms have consequently invested heavily in improving their customer service and marketing practices (see Mason, 1998). With estimates suggesting that the major grocery multiples have as much as 70% of sales turnover generated by their most loyal shoppers (IGD, 1998), it is unsurprising that recent years have seen particular attention given to relational approaches intended to promote customer retention, in opposition to some countervailing tendencies within the industry (including shorter product and service lifecycles, for example) and amongst consumers (such as repertoire buying, for example). The grocery sector, among others, has seen retailers develop extensive loyalty card schemes during the last few years in the battle to retain customers. Yet, the extent to which loyalty schemes are e!ective in promoting customer loyalty remains open to question. Mintel's 1998 Food Survey Report, for instance, suggests that only 22% of customers are in#uenced in their choice of retail outlet by loyalty cards (reported in IGD, 1998; see also, Uncles and Hammond, 1995). Nonetheless, the data gathered from such programmes is being put to increasingly detailed use by retailers seeking to better identify their existing customers, understand their shopping behaviour, and target them more e!ectively (see In-Store Marketing, June 1997). In building and managing such relational databases leading retailers have been quick to realise the potential value of the data for market segmentation, not least in relation to the selective provision of "nancial services (Anon., 1997c).

4. Some contradictions The accommodation between the large grocery retailers and banks is delivering more competition in retail "nancial markets (see Hunter and Jones, 1997) and may

A. Alexander, J. Pollard / Journal of Retailing and Consumer Services 7 (2000) 137}147

yet prove a pro"table &"x' for retailers keen to expand beyond grocery markets. Yet, the changing relationship between grocery retailers and banks is not without tension. Indeed, there are a number of contradictions, for banks, grocers and consumers, that are already becoming apparent. Four groups of issues can be identi"ed: those concerning the shifting geographies of "nancial services provision, the development and maintenance of brand leadership, the production and use of management knowledge, and the likely impact on consumers' access to di!erent types of "nancial services. 4.1. Shifting geographies of xnancial provision First, in looking at the development of strategic partnerships between banks and retailers it is instructive to consider the geographies of their market delivery. Both Tesco, with Royal Bank of Scotland (RBS), and Sainsbury, with Bank of Scotland (BoS), have teamed up with banks with whom they have relatively little overlap in terms of their market presence. RBS and BoS have comparatively limited presence in England and Wales while Sainsbury, as of 1998, had only eight of its 366 stores north of the border (see also Joyce, 1996). For RBS and BoS, partnership with the big retailers o!ers the potential of expanding their processing business in the larger English market, with little danger of losing existing accounts to the retailers (Anon., 1997a; Alexander and Colgate, 1998). Further, players like BoS have a track record of undertaking processing work for other retailers, including Marks and Spencer and Boots, and also possess one of the most e$cient telephone banking operations in the UK (Hollinger and Graham, 1996). For the grocery retailers, this lack of regional overlap helped to avoid the turf disputes which characterised the abortive relationship between Tesco and NatWest. Natwest spent "ve years, and an estimated C20 million (Brierley, 1997), working with Tesco on the development of its Clubcard Plus product only for their relationship to break down in February 1997. Among the reported causes of the breakdown were NatWest's concerns about cannibalising their own customer base in England, while at the same time not having any real control over the branding of the product which they were designing with Tesco (Brierley, 1997). Unlike RBS, NatWest is one of &the big four' south of the border, a candidate to lose market share to the large retailers, and anxious to develop its own and truly co-branded products (Anon., 1996). Further tension between the retailers and the &big four' banks is likely given Sainsbury's decision to remove its competitors' underperforming ATMs and replace them

 The link up between Midland Bank and Morrisons is another, less extreme, case in point; Morrisons' store network is heavily concentrated in the north west of England and the Midlands.

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with their own co-branded (with BoS) ATMs. This is bad news for the &big four' at a time when they are investing heavily in their ATM networks (Spooner, 1996). Thus, geographies of market presence appear to be critical to the likely success or failure of these joint ventures. This is especially so for the banks, given that in Britain it is the retailers, and not the banks, that are dictating the terms of these alliances. Such alliances also illustrate the evolving competition between di!erent groups of banks. The smaller niche players like Bank of Scotland have less to lose (at least in England and Wales) in alliances with retailers than the big four who are keen to maintain their market share and visibility in those regions. 4.2. The development and maintenance of brand leadership A second area of tension and potential contradiction for the di!erent players in these alliances involves their respective attempts to maintain brand visibility and reputation. The &big four' banks have been trying to make customers more brand aware since the early 1980s and thus any strategic partnerships in which they play second "ddle to retailers' brands poses something of a contradiction for them. This was a major factor in the break down of the relationship between Tesco and NatWest, with NatWest wanting to be an equal partner, but feeling like `a second class citizena (Brierley, 1997p. 48). While smaller banks like BoS are willing to undertake routine processing work for other retailers, NatWest's strategy is based upon their visibility as a retail bank, and not as a processing out"t for others. Similarly, Barclays have shunned links with retailers, fearful of eroding their customer base and weakening their brand (Anon., 1997a). Arguably, as competition in "nancial markets moves away from branch networks toward telephone banking and, increasingly, cyberspace, customers have fewer physical links to their bank and brand is becoming more important. For this reason, banks want their brands on access and deposit cards to foster customer awareness. A related issue is that while some British banks, notably Barclays and Abbey National, have sought to establish branded branches in retail stores, for the most part, the largest grocery retailers are increasingly dictating terms to the banks, and not the other way around. In the United States, the situation is rather di!erent with banks better able to negotiate space and brand visibility within leading supermarket chains. This re#ects the very di!erent histories of regulation in both industries in the US and Britain and the greater market power enjoyed by grocery retailers in Britain. These concerns over branding do not only a!ect the banks. Indeed it is perhaps the retailers that face the longer term dangers over branding. While retailers have been able to utilise their brand to attract potential customers, there are also a number of potential hazards

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entailed in exposing their brand to a new sector. First, there are a series of logistical problems that could damage the retailers' hard won reputations for customer service. Tesco Personal Finance, for example, has struggled to deal with its volumes of account applications and related enquiries, resulting in computer glitches, payment of compensation and poor publicity (Lumsden, 1997a,b; Bibby, 1997). Second, and more importantly, retailers cum-bankers are exposing their brand to the potential of damage given the very nature of "nancial services retailing. In moving into "nancial services, retailers are entering a very di!erent environment in which there are di!erent customer service expectations and in which they do not want to do business with all their potential customers. In retail banking, unlike grocery retailing, there is the need to distinguishing between &good' and &bad' customers for debt and investment products. The grocery retailers have no experience of managing the information asymmetries endemic to "nancial services retailing, wherein borrowers have more knowledge than lenders regarding their ability and willingness to service their debts (Stiglitz and Weiss, 1981), nor do they know how problems with "nancial services might a!ect the rest of their businesses or vice versa. Besides the broader issue of how retailers will fare when managing their credit card portfolios and the like through recession, retailers are also faced with the prospect of turning down loan applications, running at 50% of all applications for loans to Sainsbury (Hilton, 1997), as they try to balance customer service and risk management demands. Thus, the grocery retailers' ability to dictate terms to their banks and their consequent visibility in many of these strategic alliances with banks may yet generate problems for their brand if logistical or "nancial problems become serious. Asda, in their recent link up with Lloyds-TSB, are opting for a rather di!erent strategy, allowing Lloyds-TSB to open in-store branches. In the words of Asda's commercial director, `"nancial services will be made available to customers at no risk or cost to Asdaa (quoted in Miles, 1997). 4.3. The production and use of management knowledge Third, there are several issues surrounding how retailers will produce and use "nancial knowledge. The data collected through loyalty card initiatives and EPoS can provide the retailer with detailed information about individual consumers and their shopping habits. Grocery retailers have, arguably, worked more e!ectively than those in other sectors in using this data for strategic product association, despite some high-pro"le glitches in the management of loyalty-card generated data (Ryle, 1996). For example, Safeway has made a multi-million pound investment in computer systems and IT personnel to interrogate a 1.5 terabyte database of loyalty card data, keeping details of every transaction down to

product level (Ody, 1997). Interpreting this data, however, in order to make decisions on whether to o!er a customer a particular "nancial service is rather more involved than decisions over which money-o! coupons to include in the next loyalty mailing. In a similar vein, while retailers might like to o!er only simple products, the increasing number of both "nancial players and products together with the swiftly changing mores of regulation (witness recent debate on the selling of Individual Savings Accounts (ISAs)) mean that business in the sector is far from straightforward. Some grocery retailers have looked to their strategic partners for technical knowledge, for instance by adopting their creditscoring systems. Even in this case the &traditional' retail banks themselves have a patchy record when it comes to discriminating between retail customers. An additional consideration for retailers wishing to extend into the retailing of "nancial services is how to best retain focus on the core aspects of the business. The grocery retailers have entered the "nancial service sector as part of wider diversi"cation strategies aimed at boosting pro"ts and, of course, without expectations of market leadership. Indeed, it has been suggested that in some cases entry into "nancial services has been hastened by the desire to convince City analysts of dynamic business leadership (Brierley, 1997). While this has been successful in part, the dangers of adverse media coverage and its possible impact on share prices are, equally, never far away. The infamous case of US retailer Sears Roebuck's abortive attempt to establish a genuine one-stop shop environment is instructive here. Sears had a long track record in "nancial services (it began o!ering auto insurance in 1931), and increased its activity with the purchase of Dean Witter Reynolds (a discount brokerage) in 1981 and the introduction of the Discover credit card in 1986. By 1988, however, it was clear that the diversi"cation strategy was in trouble; shareholders blaming the "rm's declining pro"tability on a loss of focus and a misplacement of the retail vision which had made Sears a market leader (White and Rivera Brooks, 1992). There is little evidence, to date at least, of the largest British grocery retailers losing their focus, but such cases illustrate the dangers (real and imagined) of retailers running very diverse business operations (Anon., 1997d). 4.4. Consumers' access to xnancial services Finally, there may be a number of contradictions facing consumers in this rapidly changing environment. At "rst blush, consumers are the winners in the battleground that is now retail "nancial services. On closer examination, however, the picture is less clear. While retail "nancial markets are becoming increasingly populated and competitive, they are also becoming rather more exclusive. As one would expect, the grocery retailers can cherry pick banks' customers without needing

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to o!er the money-losing services * for example, the free cheque writing account * that banks have traditionally supplied (Anon., 1997d). Tesco and Sainsbury are not about to use their precious #oor space to service large numbers of customers looking to deposit small amounts of money in savings accounts (see Stuart, 1997). As Richard Hyman of Verdict Research puts it, `Tesco should not be attracting people who are not ordinarily Tesco customersa (Stuart, 1997, p. 40), especially those without the "nancial resources to buy su$cient goods to be deemed to be participating in developing the upmarket image of Tesco and its rivals. Thus, the grocery retailers' foray into "nancial services does raise issues concerning patterns of "nancial inclusion and exclusion. What will increased competition from retailers mean for banks' "nancial infrastructure and their product o!erings? For those groups less willing to bank with supermarkets * for example, the elderly (Mintel, 1996b)* Sainsbury and Tesco's entry into the market is likely, if anything, to hasten the reduction of bank infrastructure. Banks have closed more than 2800 branches since 1989 (BIFU, 1995) and competition from the retailers may help to accelerate the banks' moves to strip away costly, but important, services, such as the free cheque account. Such services have been an important point of access to the "nancial system for many groups, especially lower income consumers. Finally, the increased competition in retail "nancial services, illustrated by more providers, more product choice and greater use of at-a-distance customer information, is likely to widen the gap between those consumers able and willing to shop around and discriminate between di!erent "nancial products and those at the other end of the "nancial and information spectrum. High net worth individuals (HNWIs) and other higher socio-economic groups, for example, are more likely to shop around for "nancial services (i.e. less likely to &one-stopshop') than other socio-economic groups (Mintel, 1996b). These groups of consumers are more "nancially literate and more likely to prosper from the increased competition in "nancial markets. Marks and Spencer and Virgin, for example, are conspicuous in their desire to put responsibility for product choice onto the consumer (Miller, 1996), o!ering &execution-only' business in order to simplify delivery mechanisms and to reduce the likelihood of litigation stemming from bad "nancial advice. Similarly, at the other end of the "nancial spectrum, retail analysts have been quick to highlight the contradictions for retailers and consumers alike at the prospect of supermarkets allowing people to pay into the proposed ISAs at supermarket checkouts with swipe cards, given that the issue of "nancial advice was not even raised in the

 Even so, poor performance of a branded product would have implications for brand reputation.

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Paymaster's consultative document (Stuart, 1997). In essence, in an increasingly complex "nancial services market place, there is likely to be a growing gap between those willing and able to secure access to generic products *and the "nancial advice required to make those product choices * and the marginalised groups of consumers with limited credit histories labelled as &bad' customers.

5. Conclusions This paper has examined the entry of the largest grocery retailers into "nancial services and argued that a number of potential contradictions exist for retailers, banks and even consumers. The nature of "nancial services retailing in Britain is evolving as information technologies change the ways in which banks, and nonbanks, collect and use customer and market information. Banks are now adapting to a retail "nancial services market place populated with banks and non-banks which are able to use information technologies to separate the production of valuable information from its association with the physical infrastructure of banks' traditional distribution channels, bank branches. Shifts in information technologies have eroded some of the distinctiveness of retailing mass market "nancial products, and grocery retailers * already maintaining extensive relational databases hitched to their loyalty card schemes * are now able to move into "nancial services to exploit these growing similarities. High rates of return in banking, changes in the nature of competition and regulation in grocery retailing and the strength of the grocery retailers' brands and reputations for marketing and customer service have all helped to lure Britain's largest grocery retailers into retail "nancial markets. We have suggested that the #edgling alliances between grocery retailers and banks are rather uneasy, potentially contradictory a!airs. The grocery retailers have, arguably, the most to lose in these strategic alliances with banks. They are exposing their brand, and their hard won reputations for customer service, to a new sector in which they do not want to do business with all the customers that apply for accounts, loans, mortgages, insurance and so forth. Sears Roebuck and others have trodden this path in pursuit of a &one-stop-shop', only to retreat in order to re-focus on their core businesses. For banks, there is the fear of cannibalising their own customer bases in alliances with grocery retailers; there has already been con#ict with grocery retailers over the geography of grocery retailers' banking provision and its overlap in some cases with that of the banks. As customers have progressively fewer physical links with their "nancial services providers who are reliant, increasingly, on telephone systems, competition over branding and visibility is intense.

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Finally, although the increased levels of competition in "nancial services may be bene"cial for consumers, inured to poor quality customer service from banks, again, we suggest that the picture may be more complex. Although Tesco and Sainsbury are opening stores as the major banks are closing branches, this does not neatly equate with the notion that grocery retailers may o!er the way forward in terms of providing services for low income consumers who, it has been argued, are "nding it di$cult to maintain accounts with the &big four' as they become more `ruthless2unreasonable or intimidatorya (Eaglesham, 1997) about dealing with customers in "nancial hardship. It seems instead that increased competition in retail "nancial services is likely to widen the gap between those consumers able and willing to shop around and discriminate between di!erent "nancial products *a process Leyshon et al. (1998a) term &super inclusion' * and those at the other end of the "nancial and information spectrum. Acknowledgements We would like to thank Steve Baron, John Bryson, Peter Daniels, Andrew Leyshon and the anonymous referees for their insightful comments on an earlier draft. We also wish to thank Steve Worthington for drawing our attention to some key literatures. The usual disclaimers apply. References Alexander, N., Colgate, M., 1998. The evolution of retailer, banker and customer relationships: a conceptual framework. International Journal of Retail and Distribution Management 26 (6), 225}236. Anon., 1984. Technological change. Banking World November 43, 48}49. Anon., 1990. Plugging into databases. Banking World 8 (9), 37. Anon., 1996a. Focus: a "ght to the debt. Banks face an invasion as retailers move into "nancial sector. Sunday Express, 9 June, on FT McCarthy Database (CD ROM) Financial Times Information Ltd. Anon., 1997a. Supermarkets bank on customers. The Banker March, 5. Anon., 1997b. Boom boom banks. Financial Times, 2 August, on FT McCarthy Database (CD ROM) Financial Times Information Ltd. Anon., 1997c. Supermarkets jostle with banks to win new business. Cib News 20, 1}2. Anon., 1997d. Checkout accounts. The Economist 4 January, 70}72. BIFU, 1995. Killing Communities. BIFU, London. Bibby, A., 1997. Honey, Sainsbury's bank shrunk our C10,000 quid. The Observer 23 November, 16. Blackhurst, C., 1996. New barons of the food cupboard, The Independent, 18 September, on FT McCarthy Database (CD ROM) Financial Times Information Ltd. Brierley, S., 1997. Basic lesson for big bank. Marketing Week 21 February, 48}49. British Bankers Association, 1998. Annual Abstract of Banking Statistics. BBA, London. Burt, S., Sparks, L., 1994. Structural change in grocery retailing in Great Britain: a discount reorientation? The International Review of Retail, Distribution and Consumer Research 4 (2), 195}217.

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