Services Group gave credence to the notion that supermarkets had a strong
position from which to enter this market. They found that 32 per cent of
people would be happy to buy financial services from a supermarket and
that more people were likely to have a loyalty card than a credit card.
The high level of financial services activity in this sector continued.
Sainsbury announced the introduction of insurance services through
Homebase stores in a partnership with insurance brokers Willis Coroon.
Speculation then focused on Sainsbury’s rumoured plans to enter the mort-
gage market. Many saw a natural synergy between the Homebase brand
and a mortgage lending operation, although warning bells were sounded
by some that mortgage lending is very different to selling groceries or even
running current accounts. ‘Retailers have no experience of the segmenta-
tion and management of customers; they are not used to turning them
away.’
However, focus was to shift quickly from partnerships to performance
as Sainsbury’s were forced to issue a dramatic profits warning, causing
shares to fall sharply to 341p, their lowest for five years. The company said
that profits for 1996/97 would be around £640–650 million, well below
City expectations of £715 million. One large institutional shareholder said
the warning was particularly surprising as it came only a month after
Sainsbury’s management had visited investors with an upbeat message.
Others were less kind. Frank Davidson, an analyst at James Capel, was
quoted as saying, ‘This is not the bottom. I see nothing here to say that this
business has turned the corner.’
A spokesman for Sainsbury blamed the fall on high costs associated with
building sales through its loyalty card scheme as well as conversion costs
to change Texas stores to the Homebase brand. The warning came with an
announcement that sales in the eight-week run-up to Christmas were up
by 4.4 per cent but this offered little solace as Tesco’s were said to be 7.5 per
cent. The Reward Card was said to be contributing a 2 per cent uplift to
sales which, in the words of the spokesman, ‘were at the bottom end of
their pre-launch expectations and barely enough to cover the card’s cost’.
Analysts believed that Tesco’s performance not only eclipsed but was at
the expense of Sainsbury’s. When asked to comment, the Sainsbury press
office would only say that they ‘do not comment on competitors’.
The problems encountered by Sainsbury were likely to influence other
organizations within the sector. Asda, who since 1995 had tested various
loyalty schemes and had been involved most recently in rumours of a
banking partnership with the Royal Bank of Scotland, had still to decide on
its strategy. Having differentiated itself as the ‘value-for-money store’ with
a low price proposition, it was considered unlikely that the management
would lead the chain into banking unless it could offer a cut-price account
for customers and some predicted that this could lead to a price war with
the four high street banks. An Asda insider said that banking had long
The customer market domain: Managing relationships with buyers 93