BANKING ON BANKS

AL HELLER

Supermarkets and banks are clearly warming to each other again, as demonstrated by a series of promotions and expanded location agreements that underscore their mutual interests.

The effectiveness of supermarket bank branches has been debated in the banking trade for years, and reached a low point in early 2002 when Canadian Imperial Bank of Commerce, Toronto, halted its ambitious Amicus program with Safeway and Winn-Dixie. However, by the end of 2003, several major bank branch expansions were under way -- Safeway included -- and 2004 looks to be a year of continued growth. More than a third of all supermarkets will have bank branches by 2005, up from 26% four years ago, according to one expert.

For example, Giant Eagle, Pittsburgh, spent much of 2003 promoting the 47 Citizens Bank branches inside its stores. This convenience was the centerpiece of a television, billboard and chain circular campaign. Saturday and Sunday hours of 10 a.m. to 3 p.m. and weekday hours that extend to 8 p.m. enable these in-store branches to reach working families.

Such advertising and promotions are typically done on a market scale, and don't conflict with the multiple banking partners the chains often have. Depending on the market, Giant Eagle has in-store banks from Citizens Bank, U.S. Bank and Charter One Financial. "In-store banks present a strategic fit to our business model, and play a key role in the Giant Eagle shopping experience and store format," noted Brian Frey, spokesman for Giant Eagle. "We're continuously examining opportunities to incorporate banking facilities into remodeled and new stores...[so customers can] perform a wide variety of their daily and weekly tasks in one location."

While Stop & Shop Supermarket Co., Quincy, Mass., has Citizens Bank branches in 101 of its Massachusetts and Rhode Island stores, its recently relocated site in Woodbury, Long Island, uses another bank partner and different promotions to generate excitement. In the former Pathmark store, New York Community Bank offers more than 60 high-end gifts such as a Sony plasma television, Movado watches, or a Cadillac XLR convertible for the right level of deposits.

Safeway, Pleasanton, Calif., has agreed to house 163 new full-service, in-store branches over the next two years in Safeway and Vons stores across California, Arizona and Nevada with U.S. Bank, which currently operates six branches inside of Seattle-area Safeways. Once the expansion is complete, the subsidiary of U.S. Bancorp will operate 446 in-store branches in 19 states with Safeway.

"We are constantly looking for ways to give our customers added value and convenience," noted Donald Kingsborough, president of Safeway marketing services. The branches will be open seven days a week.

Kroger Co., Cincinnati, has contracted with Charter One Financial to open 22 new in-store banks within the Greater Indianapolis market, which Charter One entered this past August. "Charter One Bank is a natural addition to Kroger's one-stop-shopping strategy. This is a great way to reach out to busy people who like the convenience," said Lisa Holsclaw, president, Kroger Central Marketing Area.

By the end of the second quarter of 2004, Charter One will operate 48 banking centers within the area, including at least five with a Starbucks coffee location as part of their floor plan.

Food 4 Less, a Kroger-owned warehouse operator, has added its first of four planned in-store banks in the Chicago area using Charter One.

Convenience may be the common trait that links banks with supermarkets, but to truly cash in on the opportunity, food stores need to "own the relationship," said Richard Bishop, president, Richard Bishop Consulting, Sparta, N.J. "This will protect their lucrative ATM, check-cashing and money-wiring fees, as well as bring them rental income for the up-front bank space, added customer traffic, and potentially an enhanced image as a provider of professional services."

Bishop has helped regional food stores develop their arrangements with banks. "The financial services fees which supermarkets charge customers can account for 4% to 12% of their gross profit in bad times, and 30% to 40% in good times. However, no one is as good as banks at extracting fees for services. A $2 ATM fee may make a food store happy, but that pales next to banks charging $25 for a returned check only because they take their time collecting the funds that would cover the check," he added.

Grocers who serve as landlords for banks can charge $20 to $60 per square foot in rent, and use those tens of thousands dollars to help offset their annual costs of running the store, according to Bishop.

Moreover, in-store banking can be linked to shopper loyalty cards, provide customers with access to cash, and serve as another destination purpose.

"Supermarkets need to find more things to sell, both services and products, because consumers shift to where they obtain different things," said Bill Bishop, president, Willard Bishop Consulting, Barrington, Ill. "The synergy between retailers and banks is pretty unique [because] they already share a trade-area orientation in whom they service; brands like Tide or Colgate aren't defined in the same way. Adding banks successfully becomes a store-by-store location strategy."

Advantages for the banks include expanding their market presence for a fraction of the $2 to $3 million it might cost to open a freestanding brick-and-mortar branch, and capturing some of a food store's 25,000-plus shoppers per week, said Richard Bishop.

Already half of the nation's supermarket operators have in-store banks, according to Food Marketing Institute, Washington. This trend is led by food chains that post $100.1 million or more in annual sales -- all have at least some banks among their sites. Also, every food chain operating 101 or more stores has at least some bank branches, and the same is true for 89.5% of supermarkets operating between 11 and 100 stores. Banks appear far less frequently in smaller chains: 26.7% in operators of two to 10 stores, and 17.9% in single-store operators.

The number of supermarket branches in the United States will grow to 11,800 in 2005, up from 8,700 in 2001 and 6,440 in 1997, said Gwenn Bezard, senior analyst, Celent Communications, Boston, presenting at last year's Retail & In-Store Banking Conference.

Citing figures from International Banking Technologies, Atlanta, Bezard noted how these sites will account for 16.2% of total commercial bank branches in 2005, up from 12.6% in 2001 and 10.6% in 1997.

By 2005, an aggregate 34% of food stores in the United States will have an in-store bank, up from 26% in 2000, Bezard added.

This steady rise is attributable to the appeal of low-risk start-ups and the presence of a steady customer base -- even though supermarket bank customers typically keep smaller amounts on deposit than conventional branch customers, and some banks have left food store locations because of disappointing profits. Bezard noted that combined retail customer deposits at a three-year-old in-store branch averages just $5.5 million, compared with conventional branch averages of $66.1 million at Bank of America, $46.8 million at U.S. Bancorp, and $31.3 million at Wells Fargo & Co.

Although in-store banks run independently of the supermarket, Willard Bishop suggests that its staff act as goodwill ambassadors of the store, and provide customers with a more seamless experience.

However, Richard Bishop looks to the recent past where banks' commitment to supermarkets wavered because of inconsistent performance and some inherent limitations on the services in-store branches could provide. He openly wonders about the appropriateness of the fit between supermarkets and banks. "Customer expectation in a supermarket means they'll stand still for less than 60 seconds. But loans, credit applications and other services require lengthier processes and time intervals. It's hard to squeeze that in."