Sainsbury’s Bank has recently announced a planned expansion into mortgage lending, its first foray into the sector since it withdrew its mortgage products in 2004. Next year will mark the 20th anniversary of Sainsbury’s Bank’s founding as a subsidiary of J Sainsbury’s plc, during which time Sainsbury’s Bank has seen strong performance and resilience in its lending products.
With five consecutive years of growth, Sainsbury’s Bank has decided to capitalise on this by expanding into larger long term loans. Mortgage products are set to be offered in 2017, and the lender has moved from a preliminary planning phase to arranging terms with mortgage brokers. With the buyout of Sainsbury’s Bank co-owners The Bank of Scotland in 2014 Sainsbury’s are well-placed to compete with their main rivals in the mortgage market, but what’s led the supermarket chain to begin offering mortgages again, after 12 years out of the market?
The supermarket giant that Sainsbury’s has become today is the product of a long history stretching back almost 150 years. In 1869, the first J. Sainsbury’s store was opened in London’s Drury Lane as a fresh foods retailer, run as a partnership between John James Sainsbury and his wife, Mary Ann. The business set itself apart from its competition by emphasising quality; the store featured marble counters and mosaic floors, whereas their competitors made do with wooden counters and sawdust floors.
Sainsbury’s were also pioneers of brand identity, with all shop fronts sharing the same J. Sainsbury’s signage and all employees in a uniform of plain white aprons. Unsurprisingly the business flourished, and by the time of John James Sainsbury’s death in 1928 there were 128 shops – his final words were said to be “keep the shops well lit”. The business remained fully family-owned until 1973, when it became the stock market’s largest ever floatation to that date. The floatation was handled in a remarkably restrained way, with the Sainsbury family retaining 85% of total shares and reserving £1 million worth of shares for employees to purchase. The intense publicity surrounding this move cemented the brand as a fresh, dynamic business with an emphasis on quality and reliability. Though the company hasn’t been fully owned by the family since it was floated on the stock exchange, the Sainsbury family still retains a major stake in the business: Lord Sainsbury holds 4.99% of shares whilst the Sainsbury family separately holds another 15%. A major investor is the Qatari Investment Authority, which currently holds 25.999% of shares in J Sainsbury’s plc.
The business has also developed a reputation for innovation: in the early 20th century every Sainsbury’s store had counter service; you would walk up and ask for a product, and the staff would fetch it for you. However, the modern self-service format had been developed in America during the 1950s, and the dynamic head of J Sainsbury’s plc at that time, Alan Sainsbury, began replacing small counter service stores with larger self-service stores, something that was unheard of in Britain. This quickly caught on and became the norm nationwide, though the final counter service branch of Sainsbury’s remained open in Peckham until 1982. This drive for progress did not stop there: Sainsbury’s Cannock store near Birmingham became the first UK supermarket to come off the National Grid in 2014, by providing its own renewable energy. By converting excess produce into energy at a local anaerobic digestion plant, the company is able to meet its own energy consumption demands without any connection to traditional coal or gas-fired power plants.
Sainsbury’s went on to develop a diverse portfolio of acquisitions and joint ventures during the 1970s and 80s, creating the SavaCentre chain of hypermarkets with British Home Stores and the DIY store HomeBase with Belgian firm GB-Inno- BM. These investments proved profitable, and J Sainsbury’s plc was able to boast a 12 year record of 20% dividend payment increases by 1991.
Sainsbury’s has also diversified the type of stores it offers, with Sainsbury’s Locals opening in cities around the UK to serve as convenient outlets for city dwellers. These shops are typically smaller than their edge of town businesses, almost always under 10,000sq ft in size, but perform well nonetheless; Sainsbury’s CEO Justin King asserted in 2013 that Sainsbury’s Locals will outnumber their larger siblings in the near future.
Fast forward to 1997 and Sainsbury’s is becoming the first supermarket retailer to expand into banking, with a joint venture between the retailer and the Bank of Scotland. J Sainsbury’s plc was the majority stakeholder with a 55% share in the new company, combining the Bank of Scotland’s financial expertise with Sainsbury’s huge customer base and brand recognition. Offering Gold and Silver VISA credit cards, a high-interest instant-access savings account and a Christmas Saver, Sainsbury’s Bank was well positioned to act as a day-to-day banker for customers, with cash machines in most of its branches. By using existing infrastructure and providing 24-hour banking support hotlines, Sainsbury’s Bank was able to offer very competitive interest rates on its products, attracting more than 100,000 customers within two months and combined deposits of over £100 million!
Sainsbury’s Bank then expanded into offering insurance, loans and mortgages to customers by 1998, and now has over 800,000 accounts with 10,000 more being opened each week. Total bank deposits are in excess of £1.6 billion, and average account balances are higher than its closest supermarket banking competitors. In 2004, however, Sainsbury’s Bank announced that it would be withdrawing its mortgage products, citing a lack of interest from customers. However, the lender was quick to assure current customers that their mortgages would continue to be serviced and that their terms would remain unaffected. Sainsbury’s Bank also stressed that it would be concentrating on other areas of its lending services, and that they would continue to offer a range of consumer credit and insurance to customers.
The simple answer is that it wasn’t profitable enough. Mortgages provide a very long-term return on investment which requires a great deal of capital to fund, so for a company like Sainsbury’s Bank to provide them necessitated a large upfront investment, requiring both a large initial outlay and a significant opportunity cost over the years whilst loans are being repaid. If they felt their investment wasn’t justified by consumer demand, as they explained in 2004’s press release, the most sensible course of action would be to withdraw their mortgages from sale and assign the loans to other lenders. This would then allow them to recoup their investment and apportion it to other areas of their business.
J Sainsbury’s plc bought out the Bank of Scotland’s share in Sainsbury’s Bank for almost £250 million in 2014, becoming the exclusive owner (though J Sainsbury’s plc initially had a majority stake of 55% in Sainsbury’s Bank, this split was refined to 50-50 in 2007 in an agreement with the renamed Halifax Bank of Scotland - later the Lloyd’s Banking Group).
In order to comply with Prudential Regulation Authority regulations, J Sainsbury’s plc is required to invest a further £40 million in capital between 2014 and 2017, to bring the Sainsbury’s Bank capital reserve ratios up to PRA mandated levels. At the time of the transaction, J Sainsbury’s plc stated their confidence in Sainsbury’s Bank and their belief in its potential for future growth:
“The Bank, launched in 1997, has delivered five consecutive years of profit growth, with proven opportunities to complement Sainsbury’s broader business. Profit before tax for the Bank as a whole was £59 million in 2012/13, with a three-year profit before tax compound annual growth rate of 40 per cent. The Bank has gross assets of circa £5 billion and no contingent liabilities”
Acquiring full ownership of Sainsbury’s Bank has two advantages for the Sainsbury’s group; it allows Sainsbury’s to exercise full control over Sainsbury’s Bank’s policies, and permits the bank to consolidate operations internally rather than relying on an external partner to provide services. By exercising full control over Sainsbury’s Bank policy, J Sainsbury’s plc is able to co-ordinate the Bank’s operations with the rest of its branches, and a stated benefit of this is closer integration with Sainsbury’s supermarket customers through the Nectar Rewards scheme:
“Full ownership will allow future products to be even more tailored to Sainsbury’s customers, leveraging Nectar data to drive sales uplifts in both financial services and the core supermarket business . . . after taking out a Bank product, Sainsbury’s shoppers become more loyal, spending more in-store”
By acquiring full control of Sainsbury’s Bank, J Sainsbury’s plc are able to bring their business entirely in-house, relying on their 20 years of expertise and strong ties to the financial sector to provide strong, consistent services to their customers.
In May 2016, Sainsbury’s Bank announced that it was planning to re-enter the mortgage sector in 2017, stating that initial planning had been completed and distribution was being established through a network of brokers. Though it might appear to be a sudden manoeuvre, Sainsbury’s Bank’s return to the mortgage sector has been a long time in the planning.
Sainsbury’s Bank hired the ex-Wave Mortgages Chief Executive Colin Snowdon as a consultant in April 2015 to help plan their return to the mortgage market, using his expertise to inform their strategic vision. After establishing the viability of their products and laying out a framework for expansion, the bank has begun discussions with brokers about distribution. Sainsbury’s Bank plans to begin offering mortgages in 2017, though an exact date has not yet been offered.
Sainsbury’s Bank has continued to offer financial products to consumers during the past 12 years, and has seen strong returns from lending in recent history. With this robust performance and the assurance of leading market experts, the bank has decided that the time is right to enter the mortgage marketplace. When Sainsbury’s Bank launched in 1997, it would have been unthinkable to offer financial services without the backing of a major nationwide bank like the Bank of Scotland, but after nearly 20 years of trading the supermarket bank has enough expertise and has built enough trust to compete on its own. Customers whose homes and pets are insured with Sainsbury’s, whose food is bought at Sainsbury’s with a Sainsbury’s credit card and whose holidays are discounted with points on their Nectar card wouldn’t find the idea of funding their mortgage with Sainsbury’s particularly surprising either.
Offering mortgages is a sign that Sainsbury’s Bank is confident in its position as a major lender, as mortgage funding requires a great deal of capital to be invested, and though returns are great, they take several years to fully realise. Sainsbury’s Bank has also recruited financial specialists from across the industry in recent years to top up its’ expertise for this new venture, with the appointment of David Jones, the Managing Director of MoneySuperMarket.com, as Chief Customer Officer in 2016.
Mortgages are a particularly competitive market sector, with high street retail banks constantly outdoing each other in bids to secure new customers. Sainsbury’s have an edge over most mortgage providers in that they’re a household name, and have an enormous amount of current customers who trust their brand, so success for them will rely on maintaining and expanding their market share rather than constructing a brand identity.
Sainsbury’s aren’t the only supermarket to offer mortgages though; several other big name brands also offer long-term loans in addition to other financial products. These businesses will be Sainsbury’s biggest competitors, as Sainsbury’s main strengths lie in their brand identity and large customer base, traits they share with these supermarket competitors.
Most mortgages have a variable interest rate which the provider can increase or decrease to remain competitive. It’s likely that Sainsbury’s Bank will structure their mortgages in a similar way, with the option for borrowers to have the interest rates remain fixed or tied to the Bank of England base rate for a length of time. There’s no saying for certain what products Sainsbury’s Bank will choose to offer, though, as there are many different types of specialised mortgages on offer to meet different borrowers’ requirements.
Like all lenders, Sainsbury’s Bank is regulated by the Financial Conduct Authority, the Bank of England subsidiary that is responsible for ensuring the UK’s financial markets are stable and ethically run. Just like high street lenders, Sainsbury’s Bank will need to comply with FCA-mandated best practises and legal requirements to continue trading. As mentioned above, they’re also required by the Prudential Regulation Authority to maintain a level of capital as protection against bad debt. As with all mortgages, Sainsbury’s mortgage customers will be protected by the Financial Services Compensation Scheme if they should lose money through the mis-selling of a mortgage plan – compensation is available in the event that a borrower loses money through deliberate or accidental provision of an inappropriate mortgage.
Sainsbury’s Bank quickly established itself in 1997 as a “fresh” bank, emphasising ease of use and accessibility as well as competitive rates, a reputation established through their use of 24-hour telephone helpdesks and “information points” to guide borrowers in choosing a product. Products are designed to echo the Sainsbury’s supermarket brand position within consumer’s lives as a one-stop shop for everyday use; rewards for using their banking products are often tied to Nectar points, which allow customers to save money in-branch on products like petrol, clothing and food. If they extend their engagement with customers into their mortgage products, it’s possible that Sainsbury’s Bank will integrate their mortgage products with Nectar points to further engage customers with the Sainsbury’s brand.
J Sainsbury’s plc prides itself on its commitment to helping shoppers and producing high quality products at an affordable price. The brand is positioned as trustworthy and reliable, with their company vision stating:
“Our vision is to be the most trusted retailer where people love to work and shop”
It seems natural, therefore, that Sainsbury’s Bank would offer mortgages to home buyers and provide all-round services for families; home insurance, clothes, food and finance can all be obtained through J Sainsbury’s plc, with the whole group tied together through the use of the Nectar reward system.
Sainsbury’s Bank has positioned itself as a trustworthy and reliable provider of consumer credit in the past 20 years, and its expansion into the mortgage market in 2017 has been well thought out and planned. By leveraging its brand image and identity, and combining the strengths of the J Sainsbury’s plc group to further consolidate its appeal to borrowers, Sainsbury’s Bank will be able to provide a viable source of funding for home buyers.
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