Tesco raises stakes in supermarket banking battle

Tesco yesterday increased the pressure on the high street banks with the launch of a high-interest account which will allow shoppers to make transactions at the check-out. It is also gaining market share in groceries and fighting selective distribution agreements which prevent it from selling cut price jeans, branded sportswear and perfumes. Nigel Cope, City Correspondent, reports on the growing dominance of the big supermarkets.

Tesco's new instant access savings account, launched by the supermarket group yesterday, will offer an interest rate of 6.5 per cent on deposits of over pounds 1. Though the rate exactly matches that offered by Sainsbury's Bank, which was launched earlier this year, Tesco denied it was escalating the supermarket battle with its arch-rival.

The company said that though it competed head-to-head with Sainsbury's and other supermarkets in the grocery arena, its real target in financial services is the high street banks. "It isn't about Tesco versus Sainsbury's here," said Tesco deputy chairman David Reid. "It is about the wider market and how a simple product offer can give customers good service."

Tesco's bank account will enable customers to pay in or withdraw cash at check-outs, or at branches of Royal Bank of Scotland, Tesco's joint venture partner in financial services. Mr Reid admitted that the service could lead to longer queues at check-outs but said this would be monitored carefully. The bulk of transactions are expected to be conducted over the phone.

The launch is the latest in a series of moves into financial services by the supermarket giants. Tesco already operates a ClubCard Plus budget account which has 200,000 customers. Sainsbury's Bank, launched in the spring, now has 500,000 customers for its range of financial products which include a telephone based bank account, two credit cards and a range of mortgages. Safeway would not disclose how many customers had taken up the offer of its ABC bonus account which also pays 5 per cent interest. Tesco is considering further expansion into financial services with mortgages a possibility.

Banking analysts said the savings rates offered by the supermarkets groups were clearly better than those offered by rival banks but that the impact on the banking sector was difficult to assess. "There is clearly a market here for the supermarkets," one said. "What is not clear is how large that market is and how committed to it the supermarkets are. For example, how long will these interest rates be offered? It is easy to offer high interest rates on balances when your balances are low."

Tesco's announcement came as the group announced a 9 per cent increase in first half profits to pounds 350m. In addition to its expansion into financial services, Tesco said it was keen to expand its non-food interests in areas such as newspapers and magazines, books and videos and health and beauty products.

Tesco chief executive Terry Leahy said Tesco was keen to stock products such as fragrances and branded sportswear if it could secure supplies. Tesco has already offered a limited stock of cut-priced Levi jeans and Adidas sportswear. This was against the wishes of the manufacturers who said supermarkets are not the right environment for their products.

Mr Leahy said Tesco would attack selective distribution agreements and had made submissions to the UK government and the European Commission to outlaw the practice. "It is wrong that there are selective agreements which seem to be aimed at keeping prices high," he said.

In the six months to 9 August Tesco recorded a 15.2 per cent increase in group sales to pounds 7.7bn. Same store sales increased by 6 per cent pushing Tesco's market share in UK groceries from 14.2 per cent to 15 per cent. Tesco will expand further in central Europe and recently sent a marketing team to China to explore the possibility of opening stores there.

The home delivery trial which enables customers to order via the Internet is going well in six areas. Tesco will announce an extension to the trial shortly.

The Irish stores acquired for pounds 641m from Associated British Foods in May contributed pounds 14m to operating profits in the 14 weeks since the deal.

The dividend was increased by 9 per cent to 3.55p.

Tesco shares closed 5.5p higher at 441.5p.