Banking, energy and car servicing are just some of the services retailers are extending their brands into - but it’s not without risks, says Liz Morrell
Earlier this month comedian Tim Minchin took to the stage at the Oracle Retail Week Awards to sing a parody entitled “Anything goes now Tesco is a bank”.
He joked about Waitrose branching into psychology, Marks & Spencer into space exploration and Argos into funeral services. While his mission may have been to elicit a few laughs from the cream of retail, his satire hit home. For many retailers, branching out into services is a way to mitigate minimal store sales growth. But is it a sure bet for success?
Tesco has its financial services arm, Halfords is expanding its car servicing business and Boots offers various healthcare services. Meanwhile M&S has leveraged its brand and the environmental pedigree it is building through Plan A with home energy, and more recently home energy services such as insulation installation. At the Retail Week Conference executive chairman Sir Stuart Rose said he saw its future as an “umbrella brand” offering a much wider range of goods and services.
Retailers are using their brands, customer bases and customer loyalty to delve into entirely new service-based markets to attempt to create lucrative untapped revenue streams. And when they do, the first choice they have to make is whether to go for organic growth, rebadge an existing business or buy an existing player.
Halfords chose the third of those options in February when it bought Nationwide Autocentres. The 224-site MOT, service and repair centre business will be rebranded and expanded under the Halfords name with 80 stores opening in the next three years alone, and the first of the rebranded pilots likely to open in June.
Halfords chief executive David Wild believes services offer the point of difference for retailers and should be treated as part of the product offer rather than being thought of simply as value add-ons. In today’s retail model of low prices, wide choice and price transparency he says retailers must innovate and differentiate their service in order to survive.
For Wild, buying an existing business took away the growing pains of organic development and also ensured the retailer did not repeat the mistakes of its previous foray into the market under its Boots ownership. “We have not gone into this with our eyes closed but we have bought a proven enterprise. Just because we are good at running shops doesn’t mean we will be good at running services, which is why the front customer-facing piece of Nationwide will stay as it was,” he says.
Retail consultant Paul Smiddy says the skills base is not an area where retailers can under invest. “Buy in the right skills and pay up for them - since you probably don’t possess them yet,” he says.
Wild says control is vital. “Training and customer feedback is very important for us. It has to be very carefully controlled, which is why we went down the route of thinking: ‘Is this an organic diversification, a franchise or something we should own ourselves?’ We felt we would be more confident if we owned it ourselves,” he says. But though the deal is done, Wild isn’t complacent. “We have done, and are continuing to do, research to ensure that at every step of the way it sits comfortably within the Halfords family,” he says.
As Wild points out, getting into the services business can be win-win for both sides. For the retailer, services offer extra sales and good margins while for the customer it can bring an enhanced enjoyment of products sold by that retailer. “We see the aftercare market as a huge opportunity in which our brand resonates strongly and also see the opportunity to create growth for our shareholders,” says Wild.
Indeed over the past three to four months Wild says Halford’s existing services business - Wefit - has been the fastest growing division in the company with the levels of fitting up 60% year on year.“This is an integral part of our shop proposition,” he says.
The move has been well received. Clive Vaughan, independent consultant at NV Consulting, says: “I admire it. It is a complementary business and it has bought the skills of an established player in this sector and so are not moving into a new area.” Vaughan agrees with Wild that acquisition often works as the best route into such new markets. “That is key. If you want to do it you really do need to select a good partner,” he says.
Last month M&S launched a home energy services division to complement its Energy offer.
M&S senior account manager for new business Richard Livings says planning is vital for success in the services market. “It is crucial that, when looking at whether or not to move into a services market, the retailer must research the market, consumer demand and its own capabilities extensively before making the move. It must be clear to the customer what added value the retailer will contribute to the service being offered,” he says.
However, like Tesco, M&S has chosen to rebadge an existing offer by working with a partner and white labelling a product. “For M&S Energy, we have partnered with Scottish and Southern Energy where there is close affinity, and shared goals and values,” says Livings.
But this is where there is a risk, according to Retail Knowledge Bank consultant director Robert Clark. “The danger of going to a third-party provider is that they fall out or use the partner and then dump them and think they can do it themselves,” he warns.
Livings says the key is ensuring that the brand values that customers have come to expect are embedded into whatever new services you are offering as a retailer. “This is achieved by working closely with your suppliers and partners continuously, training them in your brand values and culture, and creating an offer and service to the customers that they would expect from your brand,” he says.
Livings believes this has led to M&S’s existing success in services. “If it is well researched, well managed, well marketed and backed by high-quality systems and expertise, then we believe it can be successful. Our financial services arm has been serving customers for more than 25 years and M&S Energy, which launched in October 2008, has already signed up more than 250,000 electricity and gas customers. These businesses have worked for us because they have delivered M&S brand values to its customers,” he says.
Tesco has done the same - looking for growth from services as it approaches UK saturation in its retail business.
Speaking at the company’s Retailing Services Seminar last November, Tesco chief executive of retailing services Andrew Higginson said services already generated about £460m of profit. Tesco Bank accounts for half of that and is seen as a major growth driver for the group. It is targeting £1bn profit for the division. “Retailing services are popular with our customers and help us to build brand loyalty,” he said.
The retailer has a Telecoms and Mobile Division and Tesco Bank offer - both of which are to be extended into higher-margin, more complex relationship-based services such as contract mobiles, current accounts and mortgages. It is also working on a technical support service.
At DSGi the retailer’s Tech Guys services division also provides important growth opportunities, but DSGi operations director Sebastian James agrees that control is vital. “We have very good metrics and we track those fanatically,” he says. “It is a relentless struggle to improve quality.”
And he admits the services market brings more risk than traditional retailing. “When you are repairing a customer’s laptop, for example, you have got to be incredibly careful because you could lose someone’s whole life,” he says.
But while the advantages of a ready-made customer base and built-in customer loyalty coupled with the opportunity for higher margins and returns can be enough to tempt a retailer into adding services, such ventures can fail dramatically with the danger of harming the main brand in the process.
In the 1980s a venture into selling cars ended disastrously for Asda because it chose the wrong partner; while in 1999 Boots took brand diversification a step too far when it launched its Wellbeing division, opening everything from laser-eye surgery to dentistry and chiropody services, claiming the retailer would become “centres of expertise in health”.
Although in theory the move seemed a natural extension of the brand, poor implementation meant the venture failed and in 2004 it was announced they would close a year after it had closed a similar complementary health clinic business. “Boots’ move into Wellbeing services was perfectly logical - and arguably ahead of its time - the problem was the execution was so feeble,” says Nick Bubb, research director and retailing analyst at Arden Partners.
With its valuable opportunity for growth, diversification into services can prove hard to resist. But it also brings its own hazards because its more personal nature means that customer expectations are higher in services and so the risk of disappointment is greater. “The biggest problem is you are moving into a new area you don’t really understand and there is a danger you can damage your brand by putting out an offer that is flawed,” says Vaughan.
Control, though vital, can also be difficult. “The likes of B&Q have always shied away from branding tradespeople because of the risk of reputational damage. The risk of something catastrophic going wrong is much higher in services so it is about how do you control the business in such a way that your brand is not compromised,” says Vaughan.
“Retailers that are trusted by the consumer should be able to stretch that trust into allied areas but much depends on the type of service and how much technical expertise is required,” says Bubb.
If they do move into services, retailers must be clear about their offer and manage it appropriately. “It is down to management and micro management,” says Clark.
Indeed the success of a move into services seems to rely on three factors. “Does it enhance your core brand, does it have relevance and can you manage it in some way that it does not hurt your main brand?” says Vaughan. Get those right and services could just provide the growth stream you are looking for. Get it wrong and you could risk harming the retail brand you have worked so hard over the years to establish.
Getting Services Right
- Ensure the offer enhances your brand and is logical
- Pick a good partner and ideally acquire them to gain control
- Ensure your standards are maintained Manage, manage and manage
- Do not take your eye off your retail business
- Be prepared to offer greater customer service than you may have been delivering in-store
6m: Tesco Bank customer accounts in 2009
1.7m: Halfords Wefit/Werepair jobs in 2009
£25m: M&S 2009 operating profit contribution from M&S Money