Why do retailers offer financial services?

Transcription

1 Why do retailers offer financial services? NOVEMBER 2013 Making financial markets work for the poor

2 Agenda Project objectives and scope Mapping the financial services landscape Overview of case study retailers Primary motivation for offering financial services

3 Agenda Project objectives and scope Mapping the financial services landscape Overview of case study retailers Primary motivation for offering financial services

4 The research aims to understand more fully retailers motivation for providing financial services OBJECTIVES OF THE RESEARCH To map the landscape of financial products and services offered by retailers in South Africa Build an understanding of the business case for retailers to provide financial services Unpack the evolution of the product offering and its relative position within the wider area of value added services provided by these retailers Four retailer types were identified based on two dimensions: Industry FMCG retailers Cash-based clothing retailers Tender type (cash versus credit*) Credit-based clothing retailers Furniture retailers Note*: For the purposes of this analysis credit retailers are those where credit sales account for 40% or more of total merchandise sales

5 Agenda Project objectives and scope Mapping the financial services landscape Overview of case study retailers Primary motivation for offering financial services

6 As a first step, large retailers in South Africa were identified. FMCG retailers with more than customers in LSM 1-7 were included in the market map 60% TOP FMCG RETAILERS* Not included in market map Included in market map Size of bubble: number of customers 50% 40% 30% 20% MAKRO ( ) CHECKERS (6.3 m) PICK N PAY (13.5 m) TOWNSHIP SUPERMARKET (4.1 m) SPAR (13.2 m) SHOPRITE (20.1 m) U SAVE ( ) BOXER STORES (3.5 m) SPAZA (12.1 m) 10% WOOLWORTHS (1.1 m) DISCHEM ( ) CLICKS (2.8 m) POP IN ( ) 7 ELEVEN ( ) 20% 40% 60% 80% 100% Source: AMPS 2012A. Note: Total Pick n Pay Group customers (Pick n Pay and Boxer): 16.4 million. Total Shoprite Holdings customers (Shoprite, Checkers, OK and Usave): 24.7 million Note*: From which store or stores do you usually do your food and grocery shopping? % LSM 1-7

7 Clothing retailers with more than customers in LSM 1-7 were included in the market map 60% TOP CLOTHING AND SHOE RETAILERS* Not included in market map Included in market map Size of bubble: number of customers 50% 40% SPITZ ( ) IDENTITY ( ) MR PRICE (4.6 m) STUDIO 88 ( ) LEGIT ( ) PEP STORES (2.9 m) 30% TOTALSPORTS ( ) EDGARS (4.2 m) DUNNS ( ) JET/ JET MART (5.6 m) 20% SPORTSCENE ( ) MR PRICE SPORT ( ) EXACT! ( ) ACKERMANS (3.1 m) 10% WOOLWORTHS (2.7 m) MILADY S ( ) FOSCHINI ( ) MARKHAM (1.1 m) TRUWORTHS (2.0 m) FASHION EXPRESS! ( ) 0% 0% 20% 40% 60% 80% 100% % LSM 1-7 Source: AMPS 2012A. Note: Total Edcon customers (Edgars, Jet and Legit): 8.9 million. Total Foschini Group customers (Foschini, Exact!, Fashion Express, Markham, Sportscene, Totalsports and Due South): 3.1 million. Total Truworths Group customers (Truworths and Identity): 2.5 million Note*: Bought clothing or shoes from this store in the past 3 months

8 Furniture retailers with more than customers in LSM 1-7 were included in the market map 60% TOP FURNITURE RETAILERS* Not included in market map Included in market map Size of bubble: number of customers 50% 40% 30% FURNITURE CITY ( ) GAME (2.2 m) RUSSELS ( ) BEARES ( ) FURN CITY ( ) LEWIS ( ) ELLERINES ( ) BARNETTS ( ) OK FURNITURE ( ) 20% 10% HIFI CORP ( ) HOUSE AND HOME ( ) GEEN AND RICHARDS ( ) MAKRO ( ) JOSHUA DOORE ( ) MORKELS ( ) 0% 0% 20% 40% 60% 80% 100% PRICE N PRIDE ( ) Source: AMPS 2012A Note: Total JD Group furniture retail customers (Russells, Barnetts, Joshua Doore, Morkels, Price n Pride, Electric Express and Bradlows): 1.3 million. Note*: Bought furniture or appliances or household accessories from this store in the past 12 months % LSM 1-7

9 In total 25 retailers were included in the market map including six FMCG retailers, three cash-based clothing retailers, nine credit-based clothing retailers and seven furniture retailers FMCG RETAILERS CLOTHING RETAILERS FURNITURE RETAILERS Shoprite Checkers Pick n Pay Boxer Spar Clicks CASH BASED Pep Ackermans Mr Price CREDIT BASED Truworths Identity Foschini Markham Legit Woolworths Dunns Edgars Jet Joshua Doore Barnetts Price n Pride Russells Lewis Ellerines Game

10 There is a clear clustering around dominant payment mechanism (cash versus credit) and purchase frequency PAYMENT TENDER CREDIT CASH Lewis (71%) JD Group (64%) Ellerines (63%) Identity (55%) OK furniture (31%) Game Edcon (51%) Dunns Ackermans Mr Price (19%) Truworths (76%) Foschini (61%) Woolworths (clothing) Pep FOCUS ON CREDIT AND INSURANCE Strong customer relationships Rich internal customer databases Monthly instalment collections platforms Boxer Checkers Clicks Shoprite Pick n Pay Spar FOCUS ON TRANSACTIONAL Payments switches Retail servicing activities (such as scanning barcodes) (BI) ANNUALLY CALENDAR SEASONALLY DAILY/MONTHLY CALENDAR FREQUENCY OF CLIENT INTERACTION

11 Agenda Project objectives and scope Mapping the financial services landscape Overview of case study retailers Primary motivation for offering financial services

12 Five retailers were selected for more detailed case studies FMCG RETAILERS CASH-BASED CLOTHING RETAILER CREDIT-BASED CLOTHING RETAILER FURNITURE RETAILER

13 Source: AMPS 2012A According to AMPS 2012, Pick n Pay has 13.5 million customers. Over one fifth are unbanked and 55% are in LSMs 1-7 FINANCIAL SERVICES STORES CUSTOMERS 174 corporate 282 franchise 13.5 million Cash withdrawal Bill payments SASSA grant pay-outs SERVICING MODEL % UNBANKED 22% Till point Mobile Money Bank Account % LSM % Retail Savings Bonds JOIN! CLUB Smart Shopper Go Banking credit card MEMBERSHIP Anyone can join (7.1 million members as at September 2013)

14 According to AMPS 2012, 37% of Shoprite s customers are unbanked and the vast majority (85%) are in LSMs 1-7 FINANCIAL SERVICES STORES CUSTOMERS SERVICING MODEL % UNBANKED % LSM Checkers 28 Checkers Hyper 20.1 million 6.3 million Money Market counter 37% 18% 85% 43% Money Market counter Cash withdrawal Bill payments SASSA grant pay-outs Money transfer Savings book Funeral insurance Accident insurance JOIN! CLUB N/A N/A Checkers Business Card (niche product) MEMBERSHIP N/A N/A Source: AMPS 2012A. Note: Total number of customers that shop at Shoprite or Checkers: 23.9 million

15 Source: AMPS 2012A Pep stores has the widest physical footprint of the case study retailers with approximately stores FINANCIAL SERVICES STORES CUSTOMERS +/ million Cash withdrawal Bill payments Money transfer Cross-border money transfer SERVICING MODEL Till point % UNBANKED 40% Lay-bye % LSM % Funeral insurance (off the shelf) Free funeral cover with Pep Club JOIN! CLUB Pep Club Personal loan MEMBERSHIP Must purchase a sim card at Pep

16 Edcon is the largest non-food retailer in South Africa. The Group s two largest retail brands are Edgars and Jet STORES 175 (additional 55 Edgars Active stores) 318 (additional 121 Jet Mart stores) CUSTOMERS % UNBANKED 4.2 million 5.6 million 19% 30% % LSM % 84% JOIN! CLUB Edgars Club (Over 1 million members) Jet Club (Over 1 million members) MEMBERSHIP FEE R29.00 R49.50 R22.50 CLUB MAGAZINE 1.6 million readers 4.25 million readers Source: Edcon Annual Report 2012, AMPS 2012A. Note: total customers that shop at Edgars or Jet: 8.6 million

17 Edcon is the largest provider of credit in South Africa by number of customers with 3.8 million credit accounts FINANCIAL SERVICES Store credit 3.8 million credit accounts Funeral Travel Accident Home owners Household contents Vehicle Hospital cash plans Credit life Legal Dental accident In FY 2012 the credit and financial services business generated R1 311 million profit (R541 million from the insurance joint-venture) 25% OF TOTAL PROFITS 5.6 million insurance policies

18 The JD Group is made up of 7 South African furniture retail brands serving a total of 1.3 million customers STORES CUSTOMERS % UNBANKED % LSM % 94% % 42% % 68% % 77% % 57% % 91% % 66% Source: AMPS 2012A million 24% 72%

19 The JD Group offers customers both secured and unsecured credit as well as a range of insurance products. JD Financial Services accounts for over half of the Group s operating profit FINANCIAL SERVICES CONTRIBUTION TO PROFIT Secured fixed term credit Unsecured personal loans Credit life Asset insurance Funeral insurance In FY 2012 the JD Group generated an operating profit of R million JD Financial Services contributed R760 million Lay-bye Furniture retail 21% Financial services The JD Group also offers long term vehicle rentals and other credit products sold through its Cash Retail and Automotive Retail divisions Other 26% 53%

20 Agenda Project objectives and scope Mapping the financial services landscape Overview of case study retailers Primary motivation for offering financial services

21 Aside from the direct profitability, there are three primary drivers for retailers to offer financial services PRIMARY MOTIVES FOR OFFERING FINANCIAL SERVICES $ $ $ INCREASING FOOTFALL Attracting new customers into the store Increasing the number of interactions with existing customers DRIVING MORE PROFITABLE BEHAVIOUR Encouraging customers to increase basket size Incorporating higher margin products into baskets LEVERAGING EXISTING INVESTMENT Retailers can leverage their physical store networks, payments infrastructure, brand name and client data to sell financial services

22 PRIMARY MOTIVES FOR OFFERING FINANCIAL SERVICES $ $ $ INCREASING FOOTFALL Attracting new customers into the store Increasing the number of interactions with existing customers DRIVING MORE PROFITABLE BEHAVIOUR Encouraging customers to increase basket size Incorporating higher margin products into baskets LEVERAGING EXISTING INVESTMENT Retailers can leverage their physical store networks, payments infrastructure, brand name and client data to sell financial services

23 Retailers can increase footfall by increasing client acquisition or by increasing the number of interactions with existing customers INCREASE FOOTFALL 1. Increase client acquisition STORE Retailers offer financial services that are in demand within their target markets in order to draw more customers into the retail environment more frequently Transactional services offered by FMCG retailers and Pep 2. Increase the number of interactions with clients STORE Retailers offer financial services that require customers to come into store monthly to pay premiums and instalments Credit and insurance products that require customers to go in-store monthly to pay premiums

24 Money Market forms part of the Group s non-core value-added strategy aimed at increasing consumer traffic in its stores. The main focus of the services offered is adding value to consumers shopping experience by providing convenience and saving the consumer time, so turning outlets into destination stores - Shoprite Annual Report (2007)

25 In-store servicing models for convenience-based services differ. There is a clear trade-off between delivering high convenience to the financial services client by offering services at till point, and negatively impacting the shopping experience of the next in line customer CONVENIENCE AND IN-STORE SERVICING MODELS Retailers offer services at the till point (Pick n Pay and Pep, or at a separate financial services counter (Shoprite) Negatively impact on the shopping experience of other customers Offering high convenience for financial services

26 Increasing footfall: When being a destination store backfires

27 Facilitating SASSA grant pay-outs ensures feet in-store; Pick n Pay capitalises on this by offering direct incentives for grant recipients to spend in store

28 Facilitating SASSA grant pay-outs ensures feet in-store; Pick n Pay capitalises on this by offering direct incentives for grant recipients to spend in store

29 PRIMARY MOTIVES FOR OFFERING FINANCIAL SERVICES $ $ $ INCREASING FOOTFALL Attracting new customers into the store Increasing the number of interactions with existing customers DRIVING MORE PROFITABLE BEHAVIOUR Encouraging customers to increase basket size Incorporating higher margin products into baskets LEVERAGING EXISTING INVESTMENT Retailers can leverage their physical store networks, payments infrastructure, brand name and client data to sell financial services

30 Retailers have adopted various approaches to drive behaviour using financial services DRIVE MORE PROFITABLE BEHAVIOUR 1. Increase basket size 2. Sale of higher margin products The provision of credit allows customers to purchase goods and pay back over time Furniture and credit-based clothing retailers facilitate sales through credit Retailers incorporate thresholds that customers must meet before they can use financial services Pep customers must spend R50 instore to withdraw cash from the till Access to financial services is conditional on purchase of a specific good Pep Club s free funeral cover is dependent on air time usage

31 Example: Pep Club Pep Club s free funeral cover is specifically linked to the customer s purchase of airtime and the length of time that the sim card has been active To join the Pep Club customers must purchase a sim card at Pep To encourage take up of the club only club members are able to make use of the money transfer services CLUB

32 Example: Pep Club Pep Club s free funeral cover is specifically linked to the customer s purchase of airtime and the length of time that the sim card has been active Months sim activated 0-6 months Average airtime usage To encourage take up of the club only club Accident cover members of R500 only are able to make use of the money transfer services R0-R50 R50-R75 R75-R150 R150-R500 R500+ Accident cover of R500 only Accident cover of R500 only Drives Accident persistency cover and of R500 only higher spend 7-12 months R0 R750 R1 000 R1 250 R months R0 R1 500 R2 000 R2 500 R months R0 R2 500 R3 00 R3 500 R months + R0 R3 500 R4 500 R5 500 R6 500 Accident cover of R500 only

33 PRIMARY MOTIVES FOR OFFERING FINANCIAL SERVICES $ $ $ INCREASING FOOTFALL Attracting new customers into the store Increasing the number of interactions with existing customers DRIVING MORE PROFITABLE BEHAVIOUR Encouraging customers to increase basket size Incorporating higher margin products into baskets LEVERAGING EXISTING INVESTMENT Retailers can leverage their physical store networks, payments infrastructure, brand name and client data to sell financial services

34 Retailers can generate revenues at low marginal cost by leveraging existing infrastructure LEVERAGE EXISTING INVESTMENT Trusted brand Physical store networks Existing payments infrastructure Communication platform Client data Retail chains that have been operating for many years have trusted brands that they can leverage when selling financial services The physical footprint of a retail chain enables delivery of financial services such as money transfers Payment and collection platforms used in the core retail business can be leveraged to offer financial services to clients Retailers often have existing lines of communication with customers through club newsletters and magazines Client data collected through application for credit or loyalty programmes facilitates the onselling of additional credit and insurance products

35 Retailers can generate revenues at low marginal cost by leveraging existing infrastructure LEVERAGE EXISTING INVESTMENT Client Data Generates Informs Client data Merchandise Informs Client Data Financial services Generates Client data collected through application for credit or loyalty programmes facilitates the onselling of additional credit and insurance products

36 Examples: PICK N PAY Pick n Pay was the first retailer in South Africa to introduce secure, PIN-based Electronic Funds Transfer at Point-of-Sale (POS) in 1989 This enabled customers to use their debit cards to purchase groceries This technology has been leveraged to offer cash withdrawals at POS and SASSA withdrawals PEP Pep uses its extensive physical footprint to facilitate its money transfer service Many Pep stores are located in rural areas with limited access to banking infrastructure

37 Edcon has utilised client data and credit infrastructure to offer a wide range of insurance products. The Edgars and Jet Club magazines are the perfect communications platforms to advertise these insurance products EDCON Client data Edcon has 3.8 million credit accounts Existing payments infrastructure as well as payment and collections platforms required for credit Communication platform Source*: AMPS 2012 The Edgars and Jet Club magazines have a combined readership of 5.4 million* 10 insurance products 5.6 million active policies R541 million in profits

38 Questions?

39 Thank you Making financial markets work for the poor