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  1. 1. 20 RepoRt oF tHe DiRectoRs 6m Tesco Personal Finance customer accounts Andrew Higginson Chief Executive of Retailing Services and Group Strategy Director Can Tesco really offer the same value as my bank? We believe in creating value for all our customers because that is how we earn their loyalty. Over time customers have come to trust Tesco to deliver value whether they are buying their weekly shop or opening a savings account. Their trust is very important to us. So we take the same approach to financial services as we do to all other parts of our business and that means offering competitive, straightforward products with no confusing small print and hidden charges. Unlike many of the high street banks TPF is well funded – we never got involved in any of the complicated financial products and toxic debt that has caused so many problems for the banking sector. So while many banks now have to grow their margins and rebuild their balance sheets, we can concentrate on offering competitive rates across our savings, loans, credit cards and insurance products. We are aiming to add more value by rewarding our loyal customers with Clubcard points, which is of course unique to Tesco. Looking further ahead, it’s clear that customers want us to provide a real alternative to other banks and that means a broader product range, including a current account.
  2. 2. RepoRt oF tHe DiRectoRs 21 Retailing Services It has been a big year for Retailing Services, which includes our online shopping channels, tesco.com and Tesco Direct; Telecoms; Tesco Personal Finance (TPF) and dunnhumby – our consumer research business. Developing Retailing services has been part of our strategy for over a decade – with the aim of bringing value and simplicity to customers through services such as telecoms and financial products. after ten years of success, we have given it a renewed focus and in July we announced that andrew Higginson would relinquish his role as group Finance Director to take on the role of chief executive of Retailing services. He has assembled an experienced team to really drive forward this part of the strategy, which we believe has the potential to deliver £1 billion of annual profit in the next few years. the aim is to develop our services business to offer customers the same convenience we have brought to food shopping, to all the other products and services we offer. our dotcom grocery business and now our online non-food offer, tesco Direct, have already added more convenient options for customers to shop – particularly those with tesco.com very busy lives or limited access to transport. the growing power of is the world’s most successful the internet means increasingly that people look to this channel to online grocery retailer. buy everyday services and goods. However, many people still like the reassurance of being able to talk to someone knowledgeable about the products and services they buy. in December we completed the acquisition of the remaining 50% We believe in offering customers the choice – to shop in the way which of tpF from Royal Bank of scotland group plc (RBsg). this was an most suits their needs whether that is online, in store or by phone. important move for tesco, allowing us to build on the success of tpF that is why we now have 40 phone shops in our stores, and we plan and eventually offer customers the products you would expect from to have around 100 open by the end of this year. this means more a full-service retail bank. this will mean growing our existing customer customers than ever can access our popular telecoms offer. We remain base across the 28 simple products we offer from home insurance to one of the fastest growing providers for pre-pay mobiles and we are credit cards, but also attracting new customers at a time when many now attracting more customers through our new contract mobile deals. have lost trust in their high street bank. all our current financial products are available to buy online and at present over 50% of our customers choose to buy this way. However, in the same way as customers value the service offered by our telecoms centres, we understand that many would like to discuss their financial needs with someone knowledgeable. We plan to increase our presence for tpF by extending the trial of our in-store branches which offer customers the opportunity to talk to our specially trained finance advisors in a convenient location. 100,000 new savings account customers. Tesco PLC annual Report and Financial statements 2009
  3. 3. 22 RepoRt oF tHe DiRectoRs Retailing Services continued this year has seen an increased focus on our strategy for growth in Retailing services – profit contribution retailing services – where we now have substantial, profitable businesses with long-term potential both in the UK and internationally. at the time of our announcement last July of our acquisition from RBsg of its Tesco Personal Finance* 50% shareholding in tpF, we set a target to grow the profitability of 10% the services businesses from a little under £400 million in 2007/8 to tesco.com £1 billion during the next few years. We are committing more capital, 15% management and other resources to support this growth. Telecoms Tesco Personal Finance. We completed the acquisition of tpF on 19 December 2008, for cash consideration of around £950m. the business is profitable and well-capitalised, which is a strong platform 25% dunnhumby from which to pursue our plans to develop tpF from a successful, popular collection of financial products to a full-service retail bank in the years ahead. the new team, combining experienced management 50% from tesco and from the banking industry, is coming together well. their focus for the time being is on migrating systems and customer support over to our own platforms, beginning the development of * assumes tpF is fully consolidated for the year. a branch network in tesco stores and growing the business, both through existing and new products. overall tpF has delivered a good performance, despite the challenging conditions in its markets and the protracted period between the announcement of the acquisition and its completion. the following commentary on the performance of the business relates to the tpF pro-forma income statement and actual balance sheet, which can be found in our preliminary Results statement (appendix 1) at www.tesco.com/investorcentre, covering the year to 28 February 2009. • rofit. Underlying profit before tax, which excludes the amortisation P of intangible assets linked to the acquisition, was £244 million. this performance was achieved against the background of an increase in bad debts, particularly during the second half of the year, although tpF’s bad debt experience remains significantly better than the banking industry average. profit before tax and minority interest was £212 million, which was also a pleasing performance in the context of the broader economic conditions. Under iFRs, we are required to amortise intangible assets arising on acquisition. this non-cash charge for the period was £32 million and we expect this to increase 1.5m to approximately £130 million in 2009/10 and reduce thereafter. total revenue was £949 million – generated by a combination of interest income and fees. the key products generating interest income (savings, loans and credit cards) all held up well in the current climate. Tesco Personal Finance has over 1.5 million in fee income, there was good growth from both credit cards and the car and home insurance customers. atm estate. Underlying costs included an increased investment in tesco compare and the planned rise in overhead cost as the business prepares for a faster rate of growth. impairment losses on the cards and loans portfolios increased in the second half against the background of deteriorating market conditions. Tesco PLC annual Report and Financial statements 2009
  4. 4. RepoRt oF tHe DiRectoRs 23 To find out more go to www.tesco.com/annualreport09 • apital and Liquidity. tpF’s core tier 1 capital ratio is 12%. looking C Telecoms had a good year, with particularly robust growth in tesco forward, tpF has strong earnings retention to support planned mobile. mobile saw double-digit growth in customer numbers in a flat business growth and the funding and liquidity position of the business pre-pay phone market and an encouraging early performance from our has also improved as a result of the successful re-launch of tpF as a new pay-monthly tariffs, which were launched during the year. tesco savings brand. this is demonstrated by the near-doubling of balances mobile retained its status as the best service in the market for overall from £2.5 billion in mid-october to in excess of £4.5 billion by the customer satisfaction. year-end. combined with securing long-term wholesale funding, this has transformed tpF’s liquidity position – providing high quality liquid assets and net short-term wholesale cash over £2 billion as at year-end. • ommercial. average lending balances grew slightly in the year, C even after tightening lending criteria to reflect the deteriorating economic conditions. good growth has been maintained in the customer base with total accounts and policies increasing by 8%. the atm network continues to grow with over 2,700 now located across the tesco store portfolio, which account for 12% of total market volumes. the insurance business continues to be a significant contributor to the overall profits, accounting for over 65% of the underlying profit. new asset quality has remained stable over 2008 and portfolio performance remains favourable to the industry. tpF continues to monitor closely portfolio and new business quality. However, the challenging economic conditions throughout the year have resulted in some increase in bad debt levels and fraud. the 1.8m reduction in bank rates in recent months has, however, helped lending margins, a trend which has continued into 2009/10. tpF uses a range of techniques to ensure that risk and reward is balanced and remains committed to responsible lending. Tesco Mobile customers. tesco.com delivered another excellent performance, with our online businesses achieving a 20% increase in sales to £1.9bn, with profits after initial start-up losses on tesco Direct, rising to £109m. We are continuing to see robust growth in customer and order numbers and operationally the business made further progress, with improved product availability, and strong productivity. growth in the international businesses – in south Korea and ireland – was very strong. Tesco PLC annual Report and Financial statements 2009