Tesco looks to cash in on the mortgage crisis

Article source: Hamish Rutherford - www.business.scotsman.com

tesco looks to cash in on the mortgage crisis

Tesco, the mutli channel retailer has announced as part of plans to expand it’s financial services business that it is considering a range of new products. The retailer which started out life as a market stall, has grown in to one of the most successful food retailers, even most successful business on the planet. Off the back of this success Tesco has used its brand name and successfully entered other business arenas such as telecommunications, electricals, catalogue retailing (Tesco Direct) and as well as Tesco’s Personal Finance.

Tesco Personal Finance, which is a joint venture with Royal Bank of Scotland (RBS) currently deals with a range of financial products including insurance and has its own insurance comparison website (tescocompare.co.uk).

Whilst difficulties, including a lack of liquidity in the global banking system have driven up the cost of mortgage interest rates for borrowers, Tesco Finance Director, Andrew Higginson said yesterday that:

“the credit crunch appeared to have created an opportunity.”

The idea is to begin offering current accounts, which, although will operate at a loss, will help to create and build a relationship with the customer which will enable them then to resell other products on to them such as home mortgages.

Tesco’s yesterday shrugged off the credit crisis by reporting an 11.3 percent rise in pre-tax profits and claimed that it was “at its best” in difficult trading conditions. Tesco previously looked away from the mortgage market and put it down to poor profit margins but the retailer now believes that it has seen the “return of rational pricing in mortgages,” and that the opportunity may now be right for Tesco to enter the market.

Although Tesco has reported a healthy profit level, it has admitted, understandably, that customers have become more price conscious and it has had to respond accordingly. Group Chief Executive, Sir Terry Leahy commented that “the group had responded by offering new discount lines and cut price deals.” A move which clearly seems to have worked, judging by the groups latest financial operating results.

He also admitted that certain lines like the finest and organic ranges had seen little growth, adding that “the business shouldn't rely on customers having more money to spend every year."

Tesco’s is a company which is expanding in oversees markets such as the USA and Asia and plans to expand it’s total floor space by 25 percent this year. Sainsbury’s, Tesco’s arch rival in the UK market, were also operating overseas but pulled out to concentrate on it’s UK business.

In July of this year Tesco announced plans to buy our the Royal Bank of Scotland from it’s join venture, Tesco Personal Finance. This will give Tesco greater control of the direction of Tesco Personal Finance. The deal is worth a reported £950 million, is expected to be finalised this November. The entrance of Tesco into the mortgage market can only be a positive move in light of its success in the insurance market and other channels it operates in such as the catalogue business (Tesco Direct).